backed by structural triggers that are sustainable– Markaz Study Kuwait Financial Centre ‘Markaz’ in its Kuwait real estate report anticipates further growth potential in the real estate and construction sectors in Kuwait, as rising oil prices continue to propel strong economic growth. This growth has been driven by factors such as: a) Strong increase in expatriate population; b) young demographic profile; c) increasing disposable incomes; and d) growing private sector participation.
Besides the buoyant oil scenario, Kuwait’s diversification program to lower the economy’s dependence on oil and gas revenues further enhances our expectations of economic outlook. Kuwait’s real estate and construction industry is likely to benefit from $8bn worth of private investments and $3bn in government investments over the next five years. Currently, demand is outstripping supply in all segments of the Kuwait real estate market, except hospitality and tourism segments. High land prices in Kuwait have contributed towards curbing development and thus negatively impacting demand and rendering new projects financially unfeasible. Going forward, we believe Kuwait’s economy is heavily dependent on the oil & gas sector. A sudden drop in the oil price could negatively impact the country’s economic outlook. This coupled with instability in the region’s geopolitical situation could pose threat to Kuwait’s real estate sector. Residential segment In the residential segment private housing sub-segment has been witnessing a significant growth in demand during the last few years. On average, around 7,000 applicants for private housing per year have been added over the period 2000-2006. On the supply side, according to Ministry of Housing figures, between 1994 and 2005 only 19,000 state private housing units were built. Furthermore, the waiting list rate with PAHW has increased to 81.7% in 2006, compared to 33.5% and 47.8% in 2004 and 2005, respectively. This indicates an undersupply situation in Kuwait’s private housing sub-segment. We believe that Kuwait’s residential private housing market would continue to experience an undersupply situation in the medium term. We expect demand for private housing units to reach approximately 100,000 in 2010. On the other hand, according to ministry of Public Works, over 70,000 units are expected to enter the market in the medium-term. The growth in demand for private housing units along the scarce availability of land in major governorates has been reflected in the prices. Average private housing price in Kuwait grew at a CAGR of 24.0% between 2001-2007. In the Istithmari sub-segment, sudden influx of expatriates following year 2003 has soared demand. On the other hand, supply of new Istithmari units between 2002 and 2005 was limited and did not meet such demand. However, with accelerated construction activities, 2006 witnessed a slight oversupply situation. While the demand for new Istithmari was approximately 10,125 units, supply stood at 13,100. Majority of the supply was absorbed due to the pile-up of unmet demand over the period 2002-2005. The scenario of demand outstripping supply over the last five years has pushed rentals higher. Average Istithmari rentals have gone up at a CAGR of 22.5% over the period 2002-2007. Going forward, Istithmari properties in outer city areas of Kuwait (such as Fahaheel, Jahra, Kheitan, Mahboola, and Mangaf), presents greater potential for returns. Soon, high growth in population and rentals will drive demand for Istithmari units towards outer city areas. Cumulative population growth between 1995 and 2005 was 47% in the outer city areas compared to 30% in the inner city areas. In addition, outer city areas have been witnessing lower growth in land value appreciation compared to inner cities. Cumulative growth in (Istithmari) land values in inner city areas has exceeded 216% over the past 10 years compared to 167% for outer land areas. Due to this high rental growth and lower land value appreciation, Istithmari cap rates are higher in outer city locations, compared to inner city ones. Outer city istithmari properties are expected to provide stable returns, going forward. This is primarily led by higher potential for rental growth and attractive land valuations compared to inner city areas. This, in turn, would drive cap rates downwards in the coming years to levels close to those of inner city areas. Commercial Segment In the office segment, Kuwait’s strong economic growth has contributed towards a positive business environment in the country. This in turn has attracted more foreign companies to participate in different sectors of the country. Due to the shortage in supply of office space, rents and prices have risen significantly in the office segment. The average office land rates in Kuwait expanded at a CAGR of 17% over the period 2001-2006. Office land rates continued to soar during the second and third quarter of 2007, primarily due to increasing demand from local companies. Going forward, we expect rentals for class A office space to increase at lower rates in the medium term (3-4 years) and start decreasing in the long term (5 years and above). As for class B and C office space, our assessment tends to stay bullish for this sub-segment of the office market. We expect trends in the outer city office property to mirror those of Istithmari properties, providing higher returns compared to inner city areas. Retail Segment Rising number of expatriates and growing purchasing power are fuelling retail consumption, thereby shaping the retail real estate market in Kuwait. There has been shifting trend towards development of large malls. Going forward, several mega malls are planned to be developed including, the Marina Mall extension (20,000 sqm GLA, opening 2008), and the Mall of Kuwait (130,000 sqm GLA, opening 2008). Total retail space in Kuwait was estimated at 345,000 sqm at the end of 2006. Approximately 349,000 sqm of retail space is in the construction /planning phase and expected to be delivered by 2008. According to Colliers International, total offering of retail space in Kuwait is expected to reach 1.15 Mn sqm of GLA by the end of 2010, representing an increase of 233% over 2006. Kuwait will be the third largest provider of retail space, accounting for 10% of the total supply coming online by 2010 in the GCC region. Furthermore, the retail space per capita in Kuwait is expected to increase to 0.32 sqm compared to 0.66 sqm for the GCC region by 2010 placing Kuwait on the map as a leading shopping destination in the region. The boom in Kuwait’s retail segment has also pushed prices and rentals higher. Average retail rental rates in Kuwait increased by approximately 17% y-o-y in 2006. Kuwait features the highest retail rentals in the GCC region. The average annual rent in the prime shopping malls in Kuwait stood at $635-$1,140 per sqm in 2006. Currently, strong demand is sustainable and is expected to continue pushing retail rentals upward. However, as majority of the retail supply is likely to be ready by the next three-four years, retail rentals for malls (high-end) will stabilize or slightly decline in the long term. For conventional retail properties, our assessment tends to stay bullish even in the long term. Going forward, retail rental growth in outer city areas will be higher than inner city areas due to high growth in population and demand from unskilled and semi-skilled labor residing in these areas. We expect outer city retail properties to provide higher returns, going forward. Hospitality/tourism segment Kuwait’s Tourism and Leisure industry is characterized by sluggish growth owd to limited tourist facilities. This is largely due to the delay in enacting the B.O.T law, which is limiting private sector participation. However, the government has been increasing its focus on reviving tourism where Kuwait has recently seen an improvement in the number of tourist arrivals. Majority of hotel room supply is expected to come online by the end of 2008. This increase is bound to create an over-capacity situation in the market. Consequently, we believe that Kuwait may see lower occupancy rates and increased pressure on average room rates until the absorption of supply growth. Industrial segment The industrial segment in Kuwait has benefited from higher hydrocarbon prices and rich availability of oil reserves. This has led to higher expenditures by the government in various industrial infrastructure projects within the oil & gas and energy sectors. Kuwait is planning to invest nearly $64 Bn in its hydrocarbon sector over the next 15 years as it seeks to ramp up both oil production and refining capacity. Approximately $26 Bn will be invested in upstream operations as the country aims to achieve its goal of producing 4 Mn barrels a day (b/d) of crudeoil by 2020, while $17 Bn will be invested in downstream projects. This is likely to fuel demand for industrial property. Industrial sector has also benefited from the government’s efforts to diversify the economy and increase investments in other sectors. Furthermore, Kuwait government established the Free Trade Zone in 1995 to boost activities in the industrial segment. KFTZ offers several benefits such as guaranteed tax exemptions, freedom in repatriation of capital and profits, and zero customs on import duties or taxes on imports into or exports out of the KFTZ. In addition, Kuwait’s new FTZ located in Shuwaikh allows 100% foreign ownership of businesses within the zone. We expect demand for industrial space in Kuwait to pick up as the government continues to open up for foreign investments, and provide several incentives to the sector. This, in turn, will boost the demand for industrial properties, leading to increase in prices and rentals of industrial land. ### About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.3 billion as of December 31, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was recently awarded a BBB+ corporate rating by Capital Intelligence Ltd.