Kuwait real estate prices correct in 2016

NBK ECONOMIC REPORT

KUWAIT: Sluggish performance and orderly correction in prices best describe the real estate market in 2016. Commercial sales were strong however, and there were some early signs of stabilization toward the end of the year. The beginning of 2016 was marked by uncertainty in global equity markets, oil prices and the geopolitical environment. Locally, investors were unsure of the government’s fiscal stance and the fate of its capital spending program. As a result, sales activity was the lowest in six years. Activity in the residential and investment sectors continued to trend downward for the second consecutive year. The commercial sector was the exception; it saw sales soar in 2016 following a weak performance the previous year. The overall weakness put pressure on prices, which have seen a gradual correction since the end of 2013. NBK’s real estate indices were all down in 2016, despite some gains during the first quarter of the year.

The real estate market saw activity reduced by a quarter from the previous year. Total sales during 2016 amounted to KD 2.3 billion on 4,246 transactions, down 23 percent and 22 percent, respectively, from the year before; activity was almost halved from its peak year in 2014.

The weaker market coincided with a rise in oil market volatility. The Crude Oil Volatility Index (OVX) of the Chicago Board Options Exchange (CBOE) shows a clear increase in volatility since 2014. When oil volatility was in the low 20’s between the end of 2011 and September 2014, expectations of a sudden change in the environment were low and real estate sales were recording double-digit growth. From October 2014 to April 2016, oil volatility almost doubled and real estate activity slowed. More recently, with efforts by OPEC and non-OPEC oil producers to reduce output, oil volatility eased towards the last quarter of the year and real estate sales started improving.

Residential sector

Residential sector sales were generally weak throughout 2016, for the second consecutive year. Sector sales totaled KD 944 million on 2,847 transactions, down 31 percent and 27 percent y/y, respectively. The majority of the land sales occurred in three main areas: Sabah Al-Ahmad Sea City, Fnaitees and Abu Fatira. As for the residential homes, sales were more or less evenly distributed across multiple residential areas. Saad Al-Abdullah, Salwa, Firdous, Sabah Al-Ahmad and Jabriya were among the most popular areas.

The softness in this sector was exacerbated by the surge in distribution of residential land plots by the housing authority. The Public Authority of Housing Welfare (PAHW) distributed more than 12,000 plots in 2016, in addition to 15,240 plots, homes and apartments distributed in 2015. This added significant supply to the market, from much slower distributions prior to 2015. PAHW has committed to significantly reducing the backlog of applications in the coming years through new housing projects like South Saad Al-Abdallah and Sabah Al-Ahmad in 2018, and Khairan in 2019.

As a result of the decline in residential sales since 2014, the NBK residential real estate price indices have come down from their peaks. The NBK residential home price index stood at 152.4 points in December 2016, retreating by 12 percent y/y. The index has been trending downward since the beginning of 2015, when it peaked at 186 in January 2015. It is now down 18 percent from the peak. Meanwhile, the residential land price index slid to 176 points in December 2016.

The index has been logging declines since June 2016, bottoming at -10 percent y/y in October. It has improved slightly since, to end the year at -7.3 percent y/y. The retreat in residential prices in Kuwait appears to follow a similar regional pattern. The Bank of International Settlement (BIS) Dubai residential property index was the first index to peak in October 2014 and the fastest one to correct, losing 12 percent from its peak, over a period of 12 months. Simultaneously, the BIS Abu Dhabi residential property index peaked in November 2014 and remained stable and very close to that level since, shedding only 4 percent from its peak. The Qatari residential index was the last index to peak and correct. The index, published by the Qatar Central Bank, hit a maximum on November 2015, a year after its regional peers. The index is currently going through a quick correction, having lost 14 percent from peak to September 2016 (last published data point).

Investment sector

Kuwait’s investment sector also registered a weak 2016. Sales totaled KD 817 million, down 33 percent from 2015; 1,300 transactions were recorded, down 10 percent y/y. The year saw an increased appetite for small ticket investments (apartments) that represented 40 percent of the sector’s transactions compared to 30 percent in 2015. Sales were mostly concentrated in Mahboula, Hawally and Salmiya.

An influx of investment apartments and buildings into the market coupled with moderate growth in the expat labor force took its toll on the investment sector in 2016. In fact, the real estate market witnessed an increase in vacant apartments in the wake of the 2008 financial crisis, as a result of a slowdown in expat labor force growth. The latter translated into declining investment building prices. As the market became tighter and vacant apartments became scarce between 2013 and 2014, the index peaked. Since then, vacant apartments are on the rise, exercising downward pressure on the prices of investment buildings. The NBK investment building index retreated throughout most of 2016 and appears to be stabilizing late in 2016. In December the index stood at 188.6 points, down 10 percent y/y. The investment sector may be further pressured by higher utility prices which are expected by the second half of 2017. Depending on implementation, investment apartments may see their utility bills increase by 7-10 percent of the rental value on average. This could impose additional pressure on demand at a time when supply is increasing, and vacancies are on the rise. Nonetheless, we expect that the impact of the higher charges will be limited especially if users reduce consumption considerably to accommodate for the higher rates.

The commercial sector presented a stellar performance in 2016, despite the visible slowdown in the household sector. Commercial sales soared to KD 575 million, the highest on record, rising by 26 percent y/y. Transactions were almost unchanged from last year at 99 transactions. Almost half of the KD sales were for eight large transactions, out of which: three plots in Sabah Al-Ahmad Sea City sold for a total value of KD 104 million and two complexes in Salmiya sold for a total value of KD 105 million.

Utility price hikes could also affect interest in commercial properties. The new utility prices will be applied first on the commercial sector starting in May 2017. As per the new law, the electricity tariff on companies will rise from two fils per kilowatt hour (kWh) to 25 fils, irrespective of the level of consumption. To date, the final executive regulations’ list has yet to be published by the Ministry of Electricity and Water. That list might include discounts on the utility prices published in the new law. Some pressure on activity and prices is possible; however the extent is still to be assessed after more implementation details are forthcoming.