Real Estate Guidance 2017 1 Index Brief on Real Estate Union 4 Executive Summary 6 Investment Properties Segment 8 Freehold Apartments Segment 62 Office Space Segment 67 Retail Space Segment 72 Industrial Segment 74 Appendix 1: Definition of Terms Used in the Report 76 Appendix 2: Methodology of Grading of Investment Properties 78 2 3 BRIEF ON REAL ESTATE UNION Real Estate Association was established in 1990 by a distinguished group headed by late Sheikh Nasser Saud Al-Sabahwho exerted a lot of efforts to establish the Association. Bright visionary objectives were the motives to establishthe Association. The Association works to sustainably fulfil these objectives through institutional mechanisms, whichprovide the essential guidelines and controls. The Association seeks to act as an umbrella gathering the real estateowners and represent their common interests in the business community, overseeing the rights of the real estateprofessionals and further playing a prominent role in developing the real estate sector to be a major and influentialplayer in the economic decision-making in Kuwait. The Association also offers advisory services that improve the real estate market in Kuwait and enhance the safety ofthe real estate investments, which result in increasing the market attractiveness for more investment. The Association considers as a priority keeping the investment interests of its members and increase the membershipbase to include all owners segments of the commercial and investment real estate. This publication is supported by kfas and Wafra real estate 4 Executive Summary Investment Property Segment • For the analysis of the investment properties market, we have covered 162,576 apartments that are spread over 5,695 properties across 19 locations in Kuwait. We found 21,529 vacant apartments thereby, giving a market occupancy of 86.8%. The average monthly rent is now KD 278.9 and after adjusting for the occupancy ratio, the effective monthly rental is KD 242.0. • The sharp decline in occupancy ratio from the level of around 95% in last 5-6 years to 86.8% now is a result of several factors. • We also tracked 875 under construction properties with 26,466 apartments across all locations. Compared to the total stock of 13,353 investment properties, the under construction supply is 6.6% addition. • Given that this supply will be introduced in the market over the next two years, the market stock is expected to increase by 3.3% per year. This is a very significant pace of inventory addition and is one of the key reasons for the sharp decline in the occupancy ratio. • We have shown that during 2013-15 period, 50,066 new units were constructed in the market and 44,280 units were occupied. The market demand – supply was more or less balanced during this period. • During 2015-17 period, 67,636 units were constructed but only 35,798 units were occupied. This is the period when the market supply went far ahead of market demand. Thus, the occupancy declined sharply from around 95% till 2015 to 86.8% in 2017. • The average annual supply of new units between 2013 and 2017 has been around 29,426 while the annual absorption over the same period has been around 20,019. • We have also analyzed that the growth rate expat population, which is the primary driver of demand for investment apartments. The growth rate has been always around 3-4% with the 2016 growth reaching as high as 4.8%. Come 2017 and the growth rate has declined to just 2%. • While it is clear that there is no absolute reduction in expat population, the growth rate has come to a significant slowdown in 2017. We expect that the next 3-5 years, the expat population growth rate will remain just around 1.5-2.0%. • With the decline in expat population growth, we believe the annual rate of apartments absorption in the market may below 15,000. • We have currently 49,130 apartments vacant and further 26,466 apartments are under construction. This means the market is expected to have more than 75,000 apartments to absorb. With the reduced absorption pace of 15,000 per annum, this might take good 4-5 years before the market occupancy improves much. • Qebla has recorded the highest occupancy ratio in our current survey followed by Jahra and Murqab. On the other hand, the lowest occupancy ratios are observed at Sabah Al Salem and Mahboula areas. Freehold Apartments Segment We have tracked several thousand transactions of freehold apartments in Kuwait over the last eight years. • The number of transactions were more than one thousand in the years 2007 and 2008.Post the financial crisis, the transactions dropped and the lowest point was reached in the year 2012. • The market recovered after that to register a high of 973 transactions in 2015. However, the transactions declined in 2017 as the full year recorded total 671 transactions. • Bneid al Qar prices moved from KD 603 per sq.m. in 2007 to KD 1,237 per sq.m. in 2015 and then declined to KD 1,071 in 2017 – a CAGR of 5.9% over this period. It is one of the lowest rate of appreciation anywhere in Kuwait. • Coastal Shaab area has given 6.4% CAGR to the investors and Shaab area have given 5.2% appreciation. • In Hawalli Governorate, Salmiya and Jabriya recorded low growth rates of 4.9% and 3.9% per annum respectively and Hawalli registered a higher growth at 6.5% per annum over 10 years. • Farwania recorded 6.9% growth rate but Sabah Al Salem registered the highest growth rate amongst all areas at 10.8% appreciation per annum despite considerable price correction in 2017. We believe the prices may decline further in Sabah AL Salem area due to weakness in the rental market. • In Ahmadi Governorate, most areas have given higher rate of appreciation compared to areas in other governorates. Abu Halifa has given 6.0% annual appreciation to the investors, Fintas at 6.8%, Mangaf at 7.2% and Mahboula is at 7.9%. • Overall, the rate of appreciation is 7.6% for all areas combined. 6 Office Space Segment The office space segment has done well in last few years and it is expected to continue this way for the next couple of years. • The occupancy ratios of office space is now 95.6% for the existing stock. This is the highest occupancy ratio attained in last 7-8 years (maybe first time since 2008). • In 2011, the occupancy ratio was quite low at 59.4%. From that level the segment has staged a very smart recovery with 95.6% occupancy in 2017. • The lease rates have shown consistent growth during this period. It currently stands at KD 7.8 per m2. We note that the lease rate doesn’t include any common area charges (CAM charges) because there are no market wide conventions for CAM charges. Some high quality properties charge KD 1-2 per m2 CAM charges and for some others, no charges are taken. • Based on the occupancy and the average lease rate, all these 415 properties generate KD 127.7 million of yearly rental income. If we assume a basic cap rate of 7%, the combined value of all these properties is KD 1.82 billion. Retail Space Segment The occupancy ratio for all the retail mall space put together in Kuwait is 84.0%, including the occupancy of the under construction supply. This is a drop from the previous reading of 94.6% in 2015. • The occupancy ratio of the existing stock is not really an issue with a high reading of 98.7%. However, the real cause for worry is that the under construction supply has expanded very sharply to 346,046 m2 and the occupancy here is very low at just around 50%. • The prevailing lease rates have shown general decline. With a substantial chunk of retail supply hitting the market over the next few years, the lease rates are likely to remain under pressure. Industrial Segment • For the industrial properties, we have surveyed warehousing stock across 8 locations in Kuwait. Warehousing supply is limited to very industrial few areas in Kuwait. • Since the lease rates are shown in ranges, the exact percentage change between Q2 2015 and Q4 2017 cannot be estimated but it has been observed that the lease rates have increased somewhat in select locations. • In Shuwaikh industrial area, which is the main industrial area, the Average Lease Rate (per sq.m.) range for 4 mts high warehouse has increased at the lower end. As we have maintained consistently this area is increasingly evolving as a commercial area with retail shops for car parts, workshops, furniture, etc. where the lease rates can go up to even KD 40 per sq.m. in select areas. • The Average Lease Rate in Al Dhajeej has increased from KD 2.5 – 5.5 in Q2 2015 to KD 2.5 – 5.8 in Q4 2017. The warehouses here are 9 to 11 mts height. In Al Rai, the Average Lease Rate reaches KD 9.5 for 7 mts high warehouses that have chillers for frozen food. 7 INVESTMENT PROPERTIES SEGMENT 8 INVESTMENT PROPERTIES SEGMENT 9 Investment Properties Segment The investment properties segment has grown rapidly over the last couple of years. Data from Public Authority of Civil Information (PACI) shows that there are now more than 13,353 properties in this segment across Kuwait. Table 1 shows our field survey coverage for all different areas of Kuwait. In total, we have covered 5,695 properties for our latest survey. This represents 42.6% coverage ratio, which is the highest coverage ratio achieved so far.