While sales continue to be slow in the real estate sector, prices seem to be holding up relatively well so far, notwithstanding pockets of softness. For the first eight months of the year, total real estate sales reached KD 2.1 billion, down 23 percent from the same period last year. Following a strong run in 2010-2014, the low oil price environment and the geopolitical tensions in the region finally dampened real estate market activity. For the month of August, activity slowed across the residential and investment sector year-on-year (y/y) but was relatively stronger in the commercial sector.
To date, total residential sales in 2015 reached KD 983 million, and were KD 81 million in August. KD volumes and number of units sold year-to-date (ytd) were both down 22 percent compared to the same period last year. Prices were up slightly for land following a correction in recent months, and about unchanged y/y for homes (see below).
Between 2008 and 2014, vacant plots were the properties of choice for buyers. However, we might see a change in trend in 2015, as more residential homes are getting sold than land plots. In terms of square footage, there is a preference for homes ranging between 300- 400 square meters (sqm) and plots of 400-500 sqm. The sustained low oil price environment has taken its toll on the investment sector so far (primarily apartment buildings). There, total sales reached KD 893 million ytd, a 27 percent decline from the same period last year.
There is a visible shift from investment buildings and vacant plots toward investment apartments that are relatively small-ticket purchases but still with a somewhat higher return than the stock market or bank deposits. On the other hand, commercial sector sales activity also slowed though less severely. KD sales volumes were down 14 percent to KD 251 million ytd. In August, the sector recorded eight transactions with the highest being for one complex in Farwaniya and another showroom in Dajij worth KD 5 million each. Real estate prices have actually weathered the low oil price environment relatively well thus far in 2015.
This is also reflected in our newly developed NBK real estate price indices. Based on Ministry of Justice data, NBK has constructed three price indices:
■ The real estate residential-home index
■ The real estate residential-land index
■ The real estate investment-building index.
All three indices (Charts 2 & 4) have exhibited a positive upward trend since 2005, with a downturn along the timing of the 2008 financial crisis. The real estate indices all rallied strongly between 2009 and 2014, with prices almost doubling during the period. Price growth was strongest for residential land and “investment” buildings. The rally was supported by a recovering economy and a sustained period of high oil prices, above $100/bbl.
Record low interest rates and a lackluster equity market further directed liquidity to the real estate market. In fact, as soon as oil prices hit the $100/bbl back in 2011, the Kuwaiti real estate sector witnessed double digit growth for two consecutive years. More recently, real estate price indices appear to have cooled off in Kuwait following the 5-year rally that started in 2009. The frothy market (like in other GCC markets) began showing signs of cooling off towards the second half of 2014, not coincidentally after international oil prices tumbled by over 50 percent. Prices of residential land were the first to correct around December 2014, somewhat at odds with the conventional wisdom that residential land properties are less volatile than investment properties. Focus was really on properties generating income it would seem. Residential home prices have cooled off from last year’s highs, showing a mild correction thus far in 2015.
In August, the NBK residential- home index stood at 176 points, 1.5 percent lower y/y. The index’s annual growth is still oscillating between positive and negative territory, signaling some resistance from prices. On the other hand, the NBK residential-land index went into a correction during the first five months of the year and appears now to be stabilizing. (Chart 6). At one point earlier in the year, the residential- land index was down over 10 percent on y/y basis; it now seems to be stabilizing as the index logged a 4 percent y/y increase in August.
Prices in the investment building sector held up better, with growth slowing but remaining in positive territory. NBK’s investment-building index stood at 222 points, locking a double digit growth of 22.6 percent y/y. The elevated prices of investment buildings might be the reason behind investors’ change of appetite away from investment buildings and towards investment apartments.
By National Bank of Kuwait