BMI View: Over the long term the Kuwaiti real estate sector continues to provide enticing opportunities. The country enjoys immense oil wealth and high GDP per capita, while government initiatives are supporting an increasingly dynamic private sector. H owever , we believe that forecast growth in the sector will be pushed back several years due to developments in 2014. The drop in the price of oil and political instability in the region surrounding Kuwait has meant that the Kuwaiti economy is not growing as quickly as previously forecast, and thus supply continues to outpace demand in the real estate sector.
Demand for commercial real estate is set to grow in Kuwait, as the country has a stable government and generally offers a supportive business environment to investors. Due to the country's vast oil wealth, the populace enjoyed a per capita GDP of USD54,341 in 2014. This provides consumers with ample purchasing power to support the rapidly developing retail sector. However, this also means that recent declines in the price of oil will have a particularly great impact on the Kuwaiti economy, as exports, overwhelmingly dominated by oil, amount to 68.8% of GDP. The price of oil fell by over 20% in the four months after peaking in mid June 2014. In the past the government of Kuwait has made efforts to diversify the economy, such as 2010's USD102bn plan to expand the private sector, however benefits have been slow to materialise, a fact which many blame on the country's bloated bureaucracy.
Additionally, although Kuwait itself is politically stable and is considered one of the most democratic states in the GCC, business in the country is nevertheless put at risk by the region's less stable states. In 2014 Iraq has been ravaged by its internal conflict with the Islamic State (IS), while Syria remains in a state of civil war. If the conflict with IS shows signs of spreading beyond Iraq's borers, it could pose serious risks to the economy of the wider region.
BMI estimates that the Kuwaiti economy grew by 2.9%, and we are now forecasting growth of 2.7% for 2015. We expect the economy to continue to grow at a moderate pace between 2.5% and 2.7% for the next several years, supported by the many advantages that Kuwait continues to possess, but held back by instability in the wider region and lower demand for oil internationally. In terms of commercial real estate, this will mean that supply will continue to exceed demand for the next several years as projects currently under development reach completion, and we are forecasting rents to remain constant through 2016 before beginning to rise again in 2017.
Declining oil revenues pose the greatest risk to the retail real estate sector. Although we are projecting rising incomes to support a buoyant retail sector over the long term, the short term outlook is quite different. If falling government revenues result in declines in transfer payments and other benefits to Kuwaitiu citizens, they will be forced to make corresponding reductions in their spending habits. Regional instability and violence may also deter a portion of the expats who make up 80 per cent of Kuwait's workforce, also driving down consumer spending, although it is worth noting that roughly one third of them come from other countries within the region and thus may not have any safer alternatives.
Demand for office real estate in Kuwait is primarily driven by the growing financial industry. As a centre for financial services in the heart of a region economically dominated by oil production, the industry will surely suffer some knock-on effects from declines in the price of oil. On the other hand, Kuwait has one of the lowest break-even prices in the world for its oil production, at USD60.5 per barrel, and the government has over the years accumulated a substantial sovereign wealth fund, leaving the country in a sound financial position even in the case of prolonged low oil prices. Lower oil prices will encourage the government to further expand its initiatives to develop the private sector beyond extractive industries, with the financial services industry a likely beneficiary.
Industrial activity within Kuwait benefits from the abundant supply of petroleum products available within the country. Companies will benefit greatly from declining oil prices, and particularly the effects that US shale gas production is having on various hydrocarbon based industrial inputs. However, as energy was already heavily subsidized in Kuwait for both Kuwaiti nationals and expats, companies located there stand to gain less from falling oil prices than do their international competitors, and as such, relatively speaking Kuwait may become a less attractive location.
The Gate Mall, still under construction, is set to be completed late 2014/early 2015. It will be Kuwait's second largest shopping area with 275 shops, and as of September 2013 was already over 70% leased.
The 4 th phase expansion of The Avenues is nearing the end of the design stage. It will include two five star hotels, additional shopping space, and a ballroom.
Kuwait opened its largest hypermarket to date, the 21400 sq m Lulu Hypermarket, in Dajeej in Q1 2014.
Key BMI Forecasts
We forecast rents for office space to remain flat over the period of October 2014 to March 2015
We forecast rents for retail space to stay the same over the period of October 2014 to March 2015
We forecast rents for industrial space in all 3 cities to remain the same over the period of October 2014 to March 2015
We forecast yields for office space to reach 9-10% in Kuwait City in 2015
We forecast yields for all 3 cities to remain constant in the industrial and retail segments in 2015