Kuwait’s market activity remains soft in October

KUWAIT: As we enter the last quarter of the year, weakness in the real estate market persists despite a pick-up in the commercial sector. As of October 2015, total real estate sales reached KD 2.5 billion thus far in 2015, down 29 percent from the same period last year. Most of the real estate price indices logged weak positive annual growth; the exception was the residential home price index which continued to show a retreat from a year ago.

Total residential sales reached KD 1,138 million in 2015 and KD 73.2 million in October. KD volumes and number of units sold year-to-date (ytd) were both down 26 percent and 31 percent, respectively, compared to the same period last year. Year-to-date, only 1,579 residential plots were sold compared to 3,056 at the same time last year. Sabah Al-Ahmd Sea City, Abu Fatira and Khairan witnessed the sharpest declines in residential plot transactions so far in 2015.

This recent drop in plot sales is likely, in part, the result of earlier speculative activity in the residential land sector. This has been highlighted as well by the Real Estate Union annual report published recently, that states that around 21 percent of the residential properties are sold for speculative purposes.

Sales in the investment sector (mostly apartment buildings) are the lowest in two years. Total KD volumes reached KD 1,027 million ytd, a 35 percent decline from the same period last year. In terms of transactions, 1,168 sale contracts were executed ytd, 22 percent lower than last year. For the investment sector, 2014 was an exceptionally good year with real estate prices and transactions soaring. In fact, compared to 2013, KD volumes are largely flat in 2015 though transactions are down 18 percent. The commercial sector remains active with sector transactions up year-to-date. KD volumes totalled KD 331 million ytd, a slowdown of 15 percent from the same period last year, while ytd transactions increased 8 percent from the same period last year. In September, the sector recorded nine transactions worth KD 34.5 million. The largest transaction was recorded for a 2,000 sqm plot of land in Farwaniya for KD 12 million.

Over the last few years, the Central Bank of Kuwait (CBK) has taken some macro-prudential measures that may have helped calm the real estate market. In particular in November 2013, the CBK introduced new regulations regarding real estate loans. Also, in 2014, and as part of Basel III, the CBK began phasing out the use of real estate collateral in calculating the regulatory capital charge on bank loans, a decision that is likely to have dampened real estate lending.

The rule was originally introduced in the wake of the financial crisis to prevent severe real estate price declines. The phasing-out of the collateral use of real estate over five years is not expected to have a disruptive impact on the real estate market. Real estate collateral is expected to continue to play an important role in backing and securing credit, but it can no longer be used to reduce the capital requirements.

With oil prices still under pressure and tighter credit regulations, the growth rates of the real estate indices continue to slow in October, struggling to maintain positive year-on-year growth. The investment building price index remains in the lead up 8.4 percent, followed by residential-land as the residential-home price index resides in negative territory.

The residential home index continues to trend downward as growth retracts for the third consecutive month. In October, the NBK residential-home index stood at 176.0 points, 3.6 percent lower y/y. The growth in residential home prices has been cooling off since September 2013, when the index logged a historical high annual growth of 28 percent.

The residential land index is struggling to remain in positive territory. The index, at 197.1 points, is up 1.6 percent for the year, the lowest since Aug-15 and was down slightly for the month. Out of the 16 areas included in the index, only two areas exhibited a price increase this month whereas nine out of the 16 areas included in the index were inactive.

The investment building index was up 8 percent for the year, almost half the growth recorded throughout the last six months. The investment building price index stood at 208.5 points, 3 percent lower than in September. Four out of the eleven areas included in the index were inactive. The remaining active areas mostly logged positive monthly and annual growth.