Kuwait Real Estate Sector Update

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1 March 2012 Industry Research Kuwait Real Estate Sector Update Report Contents Summary Industry Overview GCC Real Estate Sector Kuwait Real Estate Sector - Government regulations and initiatives - Performance of Key Segments - Private Residential Real Estate Segment - Commercial Real Estate Segment - Investment Real Estate Segment Real Estate Players in Kuwait Declining margins Increase in Leverage Top 5 listed players by revenues Conclusion Sources Analyst Contacts: Kishore Karthikeyan Sr. Analyst [email protected] ext.513 Badriah F. Abdulsalam Analyst [email protected] ext.516 Summary The GCC real estate is reflecting a mix trend of performance varying in commercial, residential and investment sector across geographies. The residential real estate is considered as one of the key active sectors in the region characterized by high demand and low supply, except in the UAE. Furthermore the Arab spring has resulted in the governments focusing on providing housing as a key benefit to its citizens. Kuwait although not affected by the situations has historically witnessed high demand for residential real estate. The low supply of housing is attributed to the fact that Kuwait is only utilizing approximately 5% of its total land area. The commercial real estate sector in Kuwait is however facing weak demands and low occupancy rates, a reflection of oversupply and weak economic prospects for private companies. However the commercial properties in areas other than Kuwait city are showing signs of improvement. The government is aiding the real estate sector through KIA s investment of KWD 1 bn, managed by KFH, in commercial real estate. This is expected to provide influx of liquidity to the sector, and would reflect positively in a psychological manner on the commercial real estate property prices and the companies that operate in this sector. The latest parliament election and appointment of the new government following parliament dissolution has impacted the trading activity in the real estate sector. With the political uncertainty investors view the development plans to slow down further, which could further hinder supply of units to the residential sector. However, a positive sign for the sector is the new law that allows divorced and widowed Kuwaiti women to apply for the housing loan, which is expected to increase investments in the residential real estate segment. Capital Standards (CSR) Al Nassar Tower, 11th Floor, Fahad Al-Salem St., Kuwait City P.O.Box 26620, Safat, Kuwait Office: [email protected] Website: Kuwait Real Estate Sector P a g e 1

2 GCC Real Estate Sector The GCC real estate outlook weighs negatively, due to oversupply in the region and weak economic prospects for the non-oil sector. The oversupply in Dubai and Abu Dhabi market caused rents to decline, which in turn impacted real estate companies. The UAE government took measures in aiding the real estate sector, by encouraging foreign investment in the area. Qatar, one of the world s wealthiest countries, is rapidly growing which helped it gain hosting the FIFA World Cup Event in The country is expected to witness a boom in many sectors, including the real estate sector, in preparation for the event. The country is developing its infrastructure, including expansion of the international airport. However, currently the segment remains weak and the future prospects are largely dependent on the infrastructure development plans. On the other hand, the demand for residential real estate properties in Saudi Arabia and Kuwait are likely to remain buoyant due to increasing demand from the growing population. Hospitality sector leads the way.. The hospitality sector in the GCC region is growing with governments taking measures to revive the tourism sector, mainly in countries like UAE and Oman. Saudi Arabia also plans to develop affordable hotels for its religious tourists to Mecca and Medina. On the contrary Bahrain s tourism segment has been impacted due to the political unrest and the cancellation of Formula 1 Grand Prix in New projects under the hospitality segment are being planned across the GCC region to benefit from the prospective growth in demand once the global economic scenario improves. The governments in the GCC region are developing a host of projects including state of the art engineering marvels such as the Kingdom tower slated to be the world s tallest tower in Jeddah, Saudi Arabia and also the partly submerged hotel complex in Qatar in order to attract travelers from around the world. Contrary to the oversupplied residential UAE market, Saudi Arabia and Kuwait shows good prospects.. The residential real estate segment in the GCC is shifting its focus towards low cost housing catering to the needs of the young, growing and urbanizing population in the region. The supply of residential properties in the UAE is currently high and has in turn affected their rental incomes. The property values in Bahrain have declined significantly due to the political unrest whereas the same has benefited in some secure areas. Oman faces a shift in its residential segment due to topographical constraints with people moving away from the city towards low cost areas. Qatar currently faces oversupply in its residential real estate segment however the double digit economic growth rate would benefit them in overcoming this impediment. On the other hand there is high demand for residential properties in Saudi Arabia, due to their growing young population. King Abdullah s initiative of spending approximately USD 130 bn for development activities out of which USD 67 bn will be intended for the construction of 500,000 new houses will reflect positively on the Saudi Arabian real estate sector. The prospect for the residential segment in Kuwait also remains high with increasing demand from the citizens coupled with an undersupply. Kuwait Real Estate Sector P a g e 2

3 Weak commercial segment due to low business activity.. The commercial real estate segment is the laggard in the region, with the slowing business activities creating an oversupply and the risk of additional properties to be supplied in the market during the coming year. Though the vacancy rates are declining throughout the GCC region there is still a host of projects which are under construction, the completion of which would create further oversupply. However the benefits of diversification have helped countries such as Saudi Arabia and Qatar whose commercial properties segment remains buoyant. Buoyant retail segment The demand for retail malls segment has remained at the peak, given the high per capita income of the GCC citizens backed by higher oil revenues. The high-end malls segment has always been an attraction to tourists and citizens. The high standard of living of the local people is also a driving factor behind the demand growth. The occupancy rates of most malls are nearly full but there is supposedly a new influx of retail space to be delivered in the current year which is likely to create an oversupply in the short term. Kuwait Real Estate Sector Key Initiatives and their impact To limit the monopolization of land, Kuwait passed a law in 2008 which states that if a party owns over 5000 square meters of land for 3 years which is held for trading purposes, then any additional square meter above 5000 will be imposed with a KWD 10 fee. However, banks, such as Kuwait Finance House (KFH) has requested to be excluded from the payment of these fees. KFH states that the lands they hold are collaterals and not for trading purposes, which according to their argument should be excluded from fees. On the other hand the recent abstention of the Ministry of Justice and Finance from registering such properties which are over 5000 sq. meters has further led to the fall in the number of transactions and has resulted in prices of the residential properties to increase. Kuwait Savings and Credit Bank will start receiving applications for housing loans from widows who are not above 40 years and not less than 21 years of age. The person should also not have a private property that exceeds 200 sq. meters. In addition the applicants will also be eligible for low cost housing. This is likely to improve the demand for housing, promote liquidity and in turn increase the trading activity. The benefits are also applicable to Kuwaiti women married to expats. The Ministry of Public Works (MPW) intends to establish three new residential cities at a cost of KWD 40 mn each. The project would be able to house 25,000 expatriates. The project would comprise a total area of 100,000 square meters including mosques, administrative building, medical centers etc. This is expected to stabilize the prices of investment properties. The new two laws 8 and 9, also prohibits companies to own land in residential areas. This was implemented to minimize speculation on residential properties; however it has resulted in higher prices, due to lower supply. However, the exemption of Islamic banks from this law has improved the trading activity in the residential segment. KIA has created an executive committee for the portfolio Real Estate Investment Authority. The committee consists of members from KIA and KFH. Such signs of advancements in the plan could quicken the deployment of the KWD 1 bn real estate fund which is likely to revive the prospects for the commercial real estate segment. Kuwait Real Estate Sector P a g e 3

4 Recently, the Ministry of Commerce has set out guidelines to improve the real estate agent job. The profit they can charge is capped at 1% of the transaction value. Also, the agent has to be registered and licensed to work. This set of guidelines is to protect buyers from any uncertainty and fraud, due to many cases of transaction fraud in the past. Performance of Key Segments Exhibit 1: Real estate transaction values in Kuwait facing steep decline during the holiday season 600, , , , , ,000 KWD mn. - 4Q2009 1Q2010 2Q2010 3Q2010 4Q2010 1Q2011 2Q2011 3Q2011 Private residential Investment Commercial Source: Kuwait Finance House, CSR Private Residential Real Estate Segment The private residential segment has recorded a steep fall during 3Q 2011 primarily on account of the Ramadan season which is usually characterized by low activity in the real estate market and also the uncertainty in the political scenario. The Adha holidays in November also lead to a further fall in the trading activity. The significant increase in the trading activity during 2Q 2011 was on account of the exemption of Islamic banks from the ban to trade in residential real estate properties. The year 2011 began with a surplus liquidity in the form of grant of KWD 1000 to every citizen on account of the National Day. The government also granted free food supplies to every citizen for 14 months starting February The government is planning to develop 70,000 housing units by the end of 2015 as the pending applications for housing have run over 92,000 with an increase of 8,250 applications per year. According to Savings and Credit bank there was a 26% YOY increase in 2011 in the amount of loans granted, a significant 50% of which will be used for construction of new homes, and 31% would be used for purchasing existing houses. The recent move by the government to establish a company to execute the KWD 100 mn low cost housing plan is expected to reduce the undersupply in the residential segment. However the demand in the residential real estate segment is expected to remain buoyant during the medium term. Commercial Real Estate Segment The commercial real estate segment is expected to receive a positive boost subject to implementation of KIA s KWD 1 bn local real estate fund. On the other hand KIA plans to invest only in prime properties. However a KWD 1 bn additional liquidity in the market is likely to stabilize the commercial property prices. The commercial real estate property vacancy rates in Kuwait city were hovering at 30% and at an overall country level of 10-15% in H as per BMI (Business Monitor International) data. The oversupply resulted from a shortfall in demand due to slow pace of economic growth. A report on commercial real estate properties in Kuwait city published in Al-Qabas newspaper on 19 th March 2012 suggest that the vacancy rate has gone up and is presently within the range of 70% in the city area. According to local sources, most firms are also not renting their high end commercial properties to small Kuwait Real Estate Sector P a g e 4

5 establishments as they want multinationals to occupy such properties. The rentals for Kuwait city office space has stabilized within a range of KWD 5.5 to KWD 6.5 per square meter as per research. However this is much below than what was estimated at the feasibility study phase of these projects. The properties remain vacant in spite of a significant fall in the rental values. The KIA fund for the commercial real estate could support the price of such properties over the medium term. On the other side there are new towers to be delivered to the market in the current year which would further stall the recovery in the segment. Investment Real Estate Segment Despite a slump in the demand in the commercial real estate sector and the stock market, the investment real estate sector provides an alternate promising investment opportunity. Most investors have considered investment real estate as a safe avenue for parking their funds given the weak performance of the stock market. The prices of investment properties that involve residential buildings remain intact due to a high 95% occupancy rates. The areas in Salmiya and Hawalli have high demand and hence the prices of these properties remain at peak. The Investment real estate sector is expected to experience high demand until a significant influx of properties is delivered in the market. Declining margins.. Exhibit 2: Average Net Profit Margin analysis for Kuwait vs. GCC real estate sector 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% M M % -30.0% Source: Zawya, CSR Net Margin (Kuwait) Net Margin (GCC ex. Kuwait) The Kuwaiti real estate market though stabilizing is hampered by a lack of growth in demand from the commercial segment combined with oversupply, resulting in declining profits. The rules preventing non-kuwaitis from holding real estate land is another prevalent factor that leads to limited growth opportunities for the sector. The government being the key player controlling the supply of land allotted for residential development activities restricts higher activity in the segment. The profitability of the companies operating in the real estate sector has been on decline due to a lack of business opportunities to drive the growth in the market. This is also partly due to the lack of diversification within the economy. The government is taking various measures to invite overseas companies to set up their branches in Kuwait by offering them tax incentives. Though this can be considered as a positive move to revive the commercial properties segment, a lack of adequate planning as well as a high cost of establishing business in Kuwait compared to the limited business opportunities weakens such an initiative. However the proper implementation of the KDP could help in reviving the economy with more growth opportunities. The aggregate unrealized losses for real estate companies listed on Kuwait Stock exchange has declined by 73.20% from Dec 2010 to Sep 2011 which shows that the asset values have almost bottomed out. The profits of the real estate companies in Kuwait have been comparatively on the lower end compared to that of other GCC regions. This is Kuwait Real Estate Sector P a g e 5

6 because of the lack of business opportunities locally which has subsequently resulted in an oversupply in the commercial real estate sector bringing down their rentals as well as property values. The diversification strategies adopted by the governments in other GCC countries is heeding the recovery of their commercial/hospitality segments. The profitability of the real estate firms in Kuwait is likely to be supported by the demand from the investment properties segment which still derives strong demand. Increase in Leverage Kuwaiti real estate companies leverage as measured by debt to equity has increased from % to % for the period Dec 2010 to Sep A number of companies have rescheduled their debt and some have taken additional financing to complete their existing projects. The increase in leverage for the sector can also be attributed to the decline in equity value due to unrealized losses and further intake of debt given the absence of alternative funding options such as equity. The local real estate companies levels of debt in Saudi Arabia are comparatively much lower, given the marginal effect of crisis and on improving market conditions. Most real estate companies are in the process of trimming the debt on their balance sheet. Exhibit 3: Debt Analysis for Kuwait vs. GCC real estate sector 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% M 2011 Net Debt/Equity (Kuwait) Net Debt/Equity (GCC ex. Kuwait) Total Debt/Total Assets (Kuwait) Total Debt/Total Assets (GCC ex. Kuwait) Source: Zawya, CSR A number of real estate companies including the top players have rescheduled their debt, which has partly led to an increase in their debt level. Moreover firms are exiting their investments at current low prices in order to service their debt repayments. Some of the major developments are: 1. Abyaar Real Estate Development Co. has reduced its debt by 23% in H and is planning to reduce it further. Previously the group had written off KWD mn in losses and also increased its share capital to KWD mn through a rights issue. 2. Kuwait s Safat Real Estate was also in discussions with KFH and CBK to reschedule KWD 41 mn in debt with options including liquidating some of their mortgaged assets. 3. Mazaya was also in talks with its creditors to reschedule KWD 20 mn in debt. The company had previously rescheduled a debt worth KWD 30.5 mn over the next 5 years with a grace period of one year. The group is also planning to exit properties to restructure the balance sheet. 4. National Ranges Co. or Mayadeen has defaulted on the repayment of installments on a loan, and the company is currently in talks with its creditors to reschedule the loan. Kuwait Real Estate Sector P a g e 6

7 5. NREC has plans to issue bonds in order to tackle its KWD 200 mn of debt. The company also plans to sell its non strategic assets and properties as part of this initiative. 6. Salhia Real Estate s 99.7% owned subsidiary, Al Asima Real Estate Company, has signed a KWD 53 mn longterm Tawarruq (Islamic Facility) with one of the local banks to refinance its existing debts. Top 5 Revenue earners The top 5 performers as per operating revenues over the last twelve months ending Sep-2011 are the following. Exhibit 4: Summary financials of the top 5 companies as per revenue (9M 2011 fig. in KWD mn) Assets Revenue Operating Net Profit RoAA (%) EBIT / Interest (x) Debt / Equity (x) Commercial Real Estate Company Salhia Real Estate Company Mabanee Real Estate Company Abyaar Real Estate Company United Real Estate Company Source: Zawya, CSR The Commercial Real Estate Co. (CREC) The main activities of CREC include purchase, leasing and sale of real estate property, construction of buildings & roads and establishment of real estate funds and portfolios, in a Sharia a compliant manner. The geographic diversification is limited with ~100% coming from Kuwait. However, revenue sources by business activity are well diversified. CREC had sold a land in Mahboola realizing a profit of KWD 29.24mn. This enabled the firm to be the highest revenue grosser in the sector. The gross revenue for 9M 2011 stood at KWD 40.14mn. The net profit margin for the same period was 30%. CREC enjoys the advantage of being one of the least leveraged companies in Kuwait fairly below the peer average. Salhia Real Estate Co (SRE) SRE the second highest revenue grosser in Kuwaiti real estate industry has a long operating history dating back to SRE is engaged in development, leasing and management of real estate properties, hotel and care home operations. The company was well protected from the economic downturn owing to diversification across unrelated markets and reliance on stable lines of revenue. The effect of volatility in the broader real estate market on SRE s profitability was minimal, as the company has absolutely no trading activities. ~55% of the gross profit is derived from the fairly stable segments of the real estate market rental operations, another 17% comes from care home operations, which involves managing nursing/care homes for the elderly; the segment is considered defensive by nature. However the company is currently increasing debt levels which is close to 108% of equity. The company has also signed for additional facility of KWD 25 mn from two local banks to restructure the debt maturities from short term to long term. Salhia s strategy of relying on stable revenue sources such as rental income makes it less risky than its peers who rely on revenue from trading properties. Mabanee Real Estate Mabanee is a prominent real estate player in the state of Kuwait whose revenues are concentrated over one property viz. the Avenues Mall in Kuwait. Being an early entrant in the retail malls segment Mabanee has been able to tap the higher rentals arising from an undersupply of such properties within the Kuwaiti market. Demand for high end retail space is growing in Kuwait with an increase in the expatriate population as well as growing young generation who prefer such experience. The completion of the third phase of the Avenues Mall is likely to generate a significant Kuwait Real Estate Sector P a g e 7

8 increase in rental income for Mabanee. The revenues for the period ending 9M 2011 has grown by 6.21% compared to the same period in the previous year. The occupancy rates have reached as high as 95%. There are only a handful of high end malls in Kuwait which results in a significant increase in demand for them. Abyaar Real Estate Development Co Established in 2002, Abyaar focuses on buying, selling and owning of property and lands. Most of its developments are in Dubai. The company faced losses of KWD 29 mn in 2009 which reduced to KWD 4.3 mn in However during the current year the company had sold some of their properties which resulted in revenue of KWD mn for the 9M The sale has resulted in a profit of KWD 0.82 mn. The company is currently in the process of repaying its debt through sale of properties. Abyaar does not have any new projects planned for the current year. The revenues are highly volatile due to the nature of trading in properties and lack of rental income. However a decrease in debt and an increase in capital through rights issue are considered positive. The company had written off losses amounting to KWD 28.5 mn in June However a declining trend in the Dubai real estate market is likely to pressurize their revenues. The company plans to reduce its debt by 25% in 2012 which is currently at KWD 67mn. United Real Estate Co URC the real estate arm of KIPCO has improved its revenues by 50% for the period ending 9M 2011 from the same period last year. This is not commensurate with their growth in assets of 60% for the same period. However an increase in capital through a rights issue as well as a bond placement has bolstered their financial strength and improved their debt maturity profile. In 2010, half of the proceeds of the bond issue were held in cash and deposits which had improved their liquidity profile. The company plans to sell their property in Lebanon which is expected to be a profitable divestment by the management. Though the company has maintained a stable profit margin over a period their margins are likely to remain under pressure going forward due to the ongoing development projects. Conclusion The sector had witnessed various initiatives from the government during The real estate sector is likely to see better prospects fueled by demand for retail, residential and investment properties by the end of The government has approved various mixed use projects which is likely to offset any risks related to that of concentration on single purpose project. This involves development of new cities or townships for accommodating residents and expats which comprise of residential, retail and commercial units. The BOT (Built Operate and Transfer) nature of these projects to be implemented under the development plans would be a participation of private real estate firms and the government which would take off the risks involved in the same for the former by promising stable cash flows. However, the sector is still affected by the financial crisis as well as the provisions of the laws 8 & 9 and the high supply of commercial units which stalls the recovery. Kuwait Real Estate Sector P a g e 8

9 Sources: Zawya ( Ventures Middle East ( Kuwait Finance House Local Real Estate Sector Reports Business Monitor International Real Estate Sector Report H Al Qabas Newspaper ( Kuwait Real Estate Sector P a g e 9

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