Prices of investment properties in Kuwait expected to rise

15/12/2009

Prices of investment properties, which refers to the apartments sub-segment, is expected to grow by 5-15% in 2010 from its current levels says the new real estate report from Kuwait Financial Centre S.A.K “Markaz” on the Kuwait Real Estate sector. The authors of the report also expect the prices of office properties to contract by 15-20% on account of a possible rental contraction due to the forthcoming supply while they expect an abatement in the extent of price contraction experienced so far in the commercial segment and expects a moderate 10% contraction in prices and rentals during H1-10.

Transactions: The report studies the trends in the real estate transaction activity and notes that the smoothed total measure indicates that the level of activity turned around in Nov-09 from the downturn started from the peak levels in Apr-08. The report notes that activity levels contracted 65% from its peak in terms of number of transactions and 62% in terms of value transacted before the turnaround. While the control on lending and the ban on real estate investment companies to trade  in private residential properties with the enactment of Law no. 8 and no. 9 of 2008 was the primary reason for the contraction in activity, aggravated contraction in lending growth as a result of the financial crisis and economic slowdown lead to a protracted contraction in transactions. The report forecasts sustained revival in the transaction trends during 2010 backed by economic growth and lending growth.

Private Residential: The report studies the trends in Kuwaiti marriages and pending housing applications and forecasts that by 2015, demand for 64,000 more houses would be added to the pending housing applications which stands at 92,223 units as of now. Demand would arise from affluent Kuwaitis who would prefer to buy properties from owners of land plots already available in the market as the economy bounces back during 2010. Various residential projects are under different stages of construction and more such projects could as well be announced to cater to this demand. The price levels in the secondary market for land plots indicate that prices are recovering from the trough by 15-20% on an average after contracting by 20-30%. For 2010, the report expects a 5-10% price recovery backed by demand from the affluent and the progress in development of new locations.

Investment properties (Apartments): Growth in expat population, which again depends on the growth in economic activity is the key determinant of the prospects of this segment. Cap rates expanded by 2-3% during the crisis which lead to a halt in the growth in expat population. However, cap rates have contracted by 50 bps from Q2-09, which indicates a positive price movement and the spread between cap rate and bank lending rates remains at 4% levels. Although it would be hard for someone to borrow from banks and tap the differential given the current lending conditions, the spread suggests the extent of risk premium that is being accounted for in the current prices. As the vacancy has not reached alarming levels, the report expects the spread to contract to 2-3% during 2010 depending on the movement of lending rates and cap rates. A scenario analysis suggests that this contraction would lead to a 5-15 % growth in price levels and the report expects a 5% contraction in rentals on an average during H1-10.

Office:  Office based sector’s contribution to nominal non-oil GDP rose from 28% during 2002 to 39% during 2008 leading to a spurt in demand. This spurt in demand halted with the onset of the economic slowdown in 2008 which would again start growing during 2010 . The non-oil economy is expected to bounce back by 4% by IMF in 2010, double the growth expected in oil-GDP, although much lower than the historical levels. As the crisis unfolded, office prices contracted by 30-50% in Kuwait City and by 25-40% in other areas, by far the biggest of contractions among real estate sub segments which is comparable to the average price fall reported for Dubai. Rentals too contracted by 45% in Kuwait City and 20-25% in other areas, expanding cap rates by 2-3.5% which currently stands at 9%. The report expects that the forthcoming supply would drive the rentals down by 1-2 KD per sqm per month thereby causing prices to contract by 15-20%.  It also notes that the price contraction would be more in secondary locations due to the concentration of the forthcoming Class A supply in Kuwait City.

Retail: The report notes similar trends in this segment with 15-30% rental contractions and a 2-3% expansion in cap rates. However, the trends in establishment formation indicates that it bottomed out during Q1-09 , which would lead to a halt in demand contraction which should result in an abatement in the extent of price contraction experienced so far.  The report expects the rentals and prices to contract by a much lower 10% during 2010.

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About Markaz

Kuwait Financial Centre 'Markaz', with total assets under management of over KD 960 million as of September 30, 2009, 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.