KUWAIT: Real estate sales increased further in 3Q21, building on the full recovery seen in the first half of the year. Sales during the quarter totaled KD 1.1 billion (+ 16% q / q; + 63% y / y), with a robust average of KD 360 million per month, thanks to strong activity in the residential sector and a significant increase in door-to-door sales. and land prices. The third quarter was also marked by improved sales in the commercial and investment sector (i.e. apartments), although both remain below pre-pandemic levels and the The investment sector continues to face weaker fundamentals (falling demand and increasing vacancy rate).
The divergence in performance between the residential and investment sectors can be explained in part by a shift in investor preference for residential properties, which further accelerated in 2017 following the increase in utility tariffs on investment properties. The coronavirus pandemic has also been a factor, putting pressure on the income and employment of expatriates, who are major drivers of the apartment rental market. For the future, residential activity should benefit from healthier demand and a still limited supply of new housing.
The mortgage bill, if passed, has the potential to stimulate the residential market, but should be accompanied by measures to prevent excessive price increases. At the same time, economic growth is back and business activity is gradually picking up, which should be positive for both the business sector and for investment. Without a more significant shift in Kuwaitis’ preference for apartment rentals, the fortunes of the investment sector are likely to remain tied to expat demand.
Residential sector activity
Residential sales reached KD 810 million in 3Q21 (+ 87% yoy), driven by a combination of higher volumes (+ 35% yoy) and a strong general increase in land and house prices . The NBK home and residential land price indexes were up 27 percent year-on-year and 14 percent year-on-year, respectively, in September. Strong fundamentals (limited supply and strong demand) continue to support gains in the residential sector, with demand partly driven by a young and growing population, in addition to increased investor interest due to stable returns: occupancy rates are higher than in the investment sector.
The divergence between sectors is also due in part to several policy factors that have indirectly favored the residential sector. These include the exemption from higher utility tariffs since 2017, which has resulted in lower operating costs and therefore higher rental yield margins in the residential sector and the absence of measures to curb rising prices and speculation, such as a tax on second homes or charges on long-standing vacant land.
The above factors, coupled with the pre-existing weakness of the alternative apartment sector, continue to contribute to the significant increases in residential prices observed since 2018. Going forward, in the absence of reforms and an increase in supply housing, residential prices are expected to remain high. Given the significant gains seen this year, however, it would be surprising if prices continued to rise at recent rates and may even slow down somewhat in the future.
The residential market is expected to gain further momentum with the likely approval by Parliament of the government’s mortgage bill that was submitted last May. The legislation could arrive as early as 2022/23. This will facilitate financing and will likely give a new boost to residential activity and prices. Affordability is of concern, however, with house prices rising dramatically relative to the increase in the income of the average citizen.
While the Public Housing Assistance Authority has successfully planned and implemented, in partnership with the private sector, a number of large housing projects in recent years, the increase in the stock of available housing is insufficient to significantly reduce the backlog of housing requests, estimated at around 91,500 as of 2020 (this is before taking into account future demand). Therefore, the housing shortage is likely to remain a challenge and will require other initiatives to be addressed.
Sales in the investment sector (i.e. apartments) amounted to KD 235 million in 3Q21 (+ 47% q / q; + 70% y / y). This compares to a quarterly average before the pandemic of KD 279 million in 2019, reflecting a partial recovery. The increase in sales was driven by a marked recovery in volumes (+ 83% yoy), likely encouraged by lower prices (construction prices fell 9% yoy) as the market declined. adapts to lower demand and a declining number of expatriate population due to the pandemic.
This had added to the sector’s pre-existing weaknesses – falling rents, falling prices and rising vacant homes – even before the pandemic due to oversupply and slower economic growth. We expect a full recovery to take some time given the gradual pace of economic recovery and the government’s efforts to promote Kuwaitization and address the demographic imbalance by proposing to cap the number of expatriates (Bill proposed end of 2020). Policy reforms aimed at curbing house purchases while boosting the demand for apartments would help restore the balance between the two sectors.
Commercial sector sales
Commercial sector sales in 3Q21 amounted to KD 36 million (-60% year-on-year), which remains well below pre-pandemic levels. Volumes were down 40% year-on-year. As the economy and business environment recover, supported by progress on the vaccine front, a gradual recovery is expected for the sector. It may take some time, however, for the negative impact of the pandemic on SMEs, expatriate jobs and the labor market to subside and demand for retail space to rebound.