kuwait real estate outlook (jul-2011)

Kuwait Financial Centre “Markaz” MENA REAL ESTATE RESEARCH

Kuwait Real Estate Outlook – 2011-12

Segment Price Trend (Extent)

Key trend determinants

Investment

Properties

(8-15%)

Economic growth, Expat growth,

Rental growth and Cap rate contraction

Commercial:

Office

(13%)

Forthcoming supply, Rental

contraction (marked by lack of transactions to validate)

Commercial:

Retail

(5%)

Establishment growth trend,

demand potential, short supply

Investment Properties Segment

We expect rentals to grow by 5%-6% during 2011-12 reflecting overall inflation and we expect prices to increase by 8-15% during this

period backed by cap rate contraction. We expect the growth in expat

population to result in 10k-12k housing units demand per annum during the coming five years. Trends in supply at 5,557 units1 for 2011

and the mature state of the market with low vacancy rate (6%1) indicate that the market would be safe from the oversupply zone in its

current structure.

Commercial - Office Segment

We expect the rentals to decline further by c.14% to KD 6/sqm/month

on an average while we expect Class-A offices would command a premium of c. KD 1 to the above levels. We believe that investors

would be willing to buy at KD 1,280 per rentable sqm of a typical Class – A office space, for the above rental rates – basing our estimates

from three different valuation methods.

Our estimates indicate that the organic demand for office space is c. 60,000 sqm for the period 2011-12. For the organic demand to absorb

the oversupply, we estimate that it would take a minimum of 7 years. We thus expect that the near term market trends would be driven by

shift to quality impacting Class C buildings heavily.

The economic rent for the government to rent private sector office space is 3 KD/sqm/month, 50% of the expected market rent, mainly

due to the zero cost of land for the government. However, land always carries an opportunity cost and thus it makes economic sense for the

government to rent private sector office space.

We believe that buying interest is low currently due to market

awareness of the oversupply and institutional investors with a long

term approach, with efficient property selection and acquisition could benefit from the alternative demand trends.

Commercial - Retail Segment

We expect rentals and values to grow by c.5% during 2011-12 backed

by stable demand and a relative shortage of mall space supply.

Measured at per capita levels, mall space supply in Kuwait stands at 46% of its GCC peers, ex-Dubai. This latent demand potential and the

demand for space from entertainment offerings would facilitate the absorption of the forecasted1 72% increase in mall space supply

during 2011-13.

July 2011

Research Highlights: A study to analyze the trends

and to provide with an update on

the key segments of Kuwait real estate market

Markaz Research is available on:

Bloomberg - Type “MRKZ” <Go>

Thomson Research, Reuters Knowledge

Nooz Zawya Investor

ISI Emerging markets

Venkat Ramadoss ACA, CFA

Assistant Manager +965 2224 8000 ext 1144

[email protected]

Bassam N. Al-Othman Executive Vice President

+965 2224 8011

[email protected]

Kuwait Financial Centre “Markaz”

P.O. Box 23444, Safat 13095,

Kuwait

Tel: +965 2224 8000 Fax: +965 2242 5828

markaz.com

MENA REAL ESTATE RESEARCH

July 2011

Kuwait Financial Centre “Markaz” 2

Investment Properties Segment Outlook

Growth in expat population - key source of demand

Investment property segment (Apartments) is a mature market both

among other real estate segments in Kuwait and also within the region, marked by market information sophistication. This segment is

primarily driven by growth in the expatriate population, in turn driven

by expatriate employment. Statistics provided by Public Authority of Civil Information (PACI) indicate that expat population grew by c.2.9%

during the year 2010 as against the 2% growth we estimated in our Dec-2009 report2.

Exhibit-1 : Economic and expat population growth trends

Source: PACI, IMF, IIF, Markaz estimates

Exhibit-1 above depicts our expectation for the expat population

growth for the forthcoming five years based on the prevailing expectations of the underlying drivers. Growth in expat population is a

function of total labor force demand (inclusive of domestic workers), Kuwaiti population & labor force and the government’s targets for

demographic composition and total labor force demand in turn is a function of economic growth in line with trends discussed earlier. Our

analysis of PACI statistics indicate that the Kuwaiti population grew by

3% during the past five years in line with its long term average. However, the Kuwaiti labor force grew by 4.7% per annum during the

same period and is expected to maintain the growth rate during the coming five years backed by the high composition of younger

population.

This growth in Kuwait labor force necessitate a lower growth in expat labor force, depending on the extent of its skill set levels.

Government’s target for demographic composition aims to increase the percentage of Kuwaiti nationals to the total population from 31%

in Dec-2008 to 34% by 2014, and the growth in Kuwaiti labor force would have been one of the primary factors behind the target.

However, we estimate the level to be at 31-32% during the

forthcoming years depending on the extent of economic growth. Considering these factors, we discounted the statistical estimate for

expat population growth by 30% and arrived at the average growth rate of 3% per annum during the forthcoming five years.

Apartment segment

driven primarily by expatriate population

growth

Expat population expected to grow at

c.3% per annum on

average

Growth in expat population a function

of labor force demand, growth in Kuwaiti labor

force and government’s

demographic plans


July 2011


We believe that 50% of the incremental population constitute the demand for apartments, discounting mainly for domestic workers, and

with an average household size of 3.5, this translates into a demand

of 10,000 units to 12,000 units per annum in the coming five years. Exhibit-2 depicts the sensitivity analysis of our estimate for apartment

units demand depending on the extent of growth in expat population.

Exhibit-2 : Apartment units demand sensitivity

Source: PACI, Markaz estimates

Balanced supply scenario – a positive

Official statistics indicates a total supply of c.264,000 apartment units

as of Dec-2009 in c.11,000 buildings, majority of which is located in Capital and Hawally governorate. Farwaniya and Ahmadi are the other

major governorates where apartment buildings are located. Construction permit statistics are not easily available and hence the

forthcoming supply is hard to measure. Real Estate Union1 estimates

that 182 apartment buildings are currently under construction adding 5,557 units to the total supply during 2010-11 with current vacancy as

low as 6%.

Exhibit-3 : Investment properties supply scenario

Source: PACI, Real Estate Union, Markaz analysis; U/c – Under Construction

Demand of 10k-12k units per annum in the

coming five years

Balanced supply with

low vacancies is a positive

Under construction units account for c.2%

of total stock and low vacancies at 6%


July 2011


The industry is very much aware of the stable and predictable demand and any excessive supply would immediately be reflected in the rental

trends and thereby on cap rates. Hence there is no incentive for

developers to construct in excess of demand and the mature and informational efficient market ensures quick supply adjustments.

It is also worth mentioning that the construction standards of typical apartment buildings are not of highest quality levels and cannot be

considered luxury segment. Significant change in tastes and

preferences could alter the supply scenario, but it is not reasonably expected to occur to an extent to change the current market

landscape. Hence, we expect the market to be free from the risk of an oversupply scenario in the medium term .

Rentals growth to reflect overall inflation

We expect the rentals to grow moderately by 4-5% during 2011-12. This primarily reflects the overall inflation levels which stood at 4%

during 2010 and is expected to be around 5-6% during 2011-12 with longer term levels projected at around 3%. While the rental growth

would be reflected in new rental contracts, there could be a lag between inflation and growth in overall realized rental as contractual

rents can be increased only after a period of five years.

We expected the rentals to remain stable during the year 2010 with a possibility of marginal contraction3. As Exhibit-4 indicates below,

trends in rentals, depicted based on the analysis of available market data, remained broadly stable throughout the year 2010. Rentals level

range increased by 7-8% during the latter part of the year and during

Q1-11, except for 1 BHK apartments. Rental trends in other governorates is depicted in Appendix-1.

Exhibit-4 : Rental trends in Capital and Hawalli

Source: Kuwait Finance House; 2BBHKM – 2 Bed-Bath-Hall-Kitchen-Maid room

Low risk of oversupply

as information efficient market ensures quick

supply adjustments

4-5% rental growth during 2011-12

reflecting overall

inflation levels

Broadly stable trends in

rentals during 2010

with 7-8% increase early 2011

Height of the bars indicates the range of property rentals from min to max;

colors to differentiate the unit size.


July 2011


Price growth from cap rate contraction

We expect the cap rates to contract further to 7-8% during 2011-12

and this would lead to an 8-15% increase in price levels. The yield

from investment properties, at an attractive premium compared to other investment alternatives with relatively lower risk, attracts

continued individual and institutional investment interest which would lead to further improvement in the liquidity condition for investment

properties thereby having a positive impact on cap-rates and prices.

Exhibit-5 depicts the trends in cap rates which highlights the extent of contraction materialized during 2010. An analysis of the cap rate data

we obtain from Markaz Real Estate Fund (MREF) along with the market data on rental trends indicates that investment property prices

increased by c.11% on an average during 2010 for prime properties.

Properties that are attractively located with better placed building requirements pertaining to convenience such as access, parking etc.

and also with few violations to the approved municipal plans and requirements are categorized as prime properties. For non-prime

properties, the above analysis indicate that prices increased by c.5% during the year. This is very much in line with our expectation of a 5-

15% rise in prices for the year2.

Exhibit-5: Trends in cap rates

Source: MREF, Markaz analysis; * Levels before financial crisis

Cap rates to contract further backed by

individual and institutional investment

interest

11% average price

growth during 2010 was in line with our

earlier expectations

Difference in cap rates

for prime and non-prime properties


July 2011


Office Segment Outlook

Market Landscape

Exhibit-6 below identifies the five major informal classification of the

CBD office market landscape along with a mention of a zone where some of government owned and occupied areas are located in Kuwait

City. The accompanied table identifies commonalities between these

sub-markets and the rationale behind their classification apart from the locational proximity, and also lists a prominent non-CBD zone. It

should be noted that the classification is not suggestive of the zoning as per the municipal building regulations.

Exhibit-6 : CBD Office Market Landscape

Source : Kuwait Municipality (for the map), MREF, Markaz analysis

Facilitative classification of CBD office market

landscape

Classification not suggestive of municipal

zoning

Commonalities to note

apart from the locational proximity


July 2011


Organic demand – min. 7 years to absorb the oversupply

Demand for office space is a function of office based employment

generation which again is based on overall economic growth. For the

forthcoming period, we estimate the annual demand for office would be c.147,000 sqm during 2011-14, averaging c.37,000 sqm per

annum. Appendix-2 has the rationale that derived the above demand estimate. DTZ estimates the historical office space take up to be c.

289,000 sqm during 2004-09, averaging c.48,000 sqm per annum. As

against this, the current estimate of vacancies and forthcoming supply of prime office space as mentioned in a survey by Real Estate Union1

adds up to c.358,000 sqm. This clearly indicates that the market remains highly oversupplied. Our estimates of forthcoming supply of

office space under construction for letting, as listed in Appendix-3

works out to 527,000 sqm in total and adding up office space under construction for self-occupation increases this by c.20%, noting that

such buildings would increase spare capacity to the market in their current locations, discounting for possible demolishing. Given the

above estimates, for the organic demand to absorb the forthcoming supply, it would take a minimum of 7 years before the market needs

new office space development.

Exhibit-7 : Office space demand and supply

Source: DTZ (2004-2009 demand), Real Estate Union ( excess supply) , Markaz

Alternative Demand trend - Shift to quality

While it is clear from the above that organic demand could take a

minimum of 7 years to absorb the current oversupply and the forthcoming supply, demand for office space would arise from “shift to

quality” from buildings that are relatively old and placed inferior in

terms of access, parking, finishing etc. to the new and relatively superior buildings. We categorized the prominent existing buildings

and forthcoming developments in each of the zones identified in Exhibit-7 above to Class-A, B and C based on a subjective analysis of

the buildings taking into consideration the building class definitions

and explanations provided by organizations such as Urban Land Institute (ULI) and Building Owners and Managers Association

International (BOMA) given in Appendix-4. In general, tenants would have a tendency to move from Classes (B to A or C to B) depending

on the changes in their financial/business conditions and in an

Organic demand

average c.37,000 sqm per annum during

2011-14

c. 527,000 sqm of office space supply

forthcoming

Shift to quality from inferiorly placed

buildings to superior

ones imminent


July 2011


oversupplied market with depressed rentals such as Kuwait, the incentive to move arise from the declining rentals and due to the new

supply being more modern than the existing.

As Exhibit-8 below illustrates, more Class A buildings came into the market and more is expected in the short term and these buildings

would attract tenants from Class B and C buildings. The size of the Class A buildings in Exhibit-8 would be different if measured by

rentable area (sqm) as a typical Class-A building would have a larger

floor plate and built up area than other classes. Difference in rental levels and premium for Class-A office space would depend on the

critical factors such as access, services, building quality and parking. We estimate that the premium for parking alone would cost 0.5 KD /

rentable sqm/ month and this indicates that the ability of Class-A to

attract would not lead to a complete shift from other classes, mainly due to the associated rental premium.

However, Class-C buildings would be the most affected as increasingly the rental premium would be negligible and would make better sense

to move to Class-B. Accordingly we expect the forthcoming supply to influence and keep Class-B rentals under check, which in turn would

attract demand from Class-C buildings and we expect stiff competition

between peer Class-A buildings to attract tenants based on the quality and cost parameters.

Exhibit-8 : Class distribution of CBD office space

Source: Markaz; FAS-Fahd Al Salem; FD-Financial District; KH-Khalijia Hamra

Alternative Demand trend – Government renting

Government organizations and departments in Kuwait function in

owner occupied buildings in general. Some of these buildings are aged

and can be comparable to Class C buildings in private owned office space. In addition to the demand from the incremental net addition to

office based government employment, which we estimate to be c. 10,000 sqm per annum, the replacement need of such government

organizations and departments constitute the total demand. The cost

of land for government is “zero” and we estimate that the equilibrium rent for government to rent private sector office space would be 3 KD/

sqm/month, c.50% of the current market rentals and hence not economical to rent at the first glance. However, land always carries an

opportunity cost for the economy at large, and even for the government and from that perspective, it makes economic sense for

More Class-A buildings

in the market to attract tenants from other

classes

Class-C buildings would be most affected

Demand from

government renting

another possible alternative source of

demand


July 2011


the government to rent or acquire the private sector office space and utilize the surplus land for other uses which are more productive.

Rentals to decline to KD 6 per sqm/month

Given the above supply tilted scale, it is natural for the rentals to decline, as is captured in Exhibit-9. The magnitude of the decline is

more in Kuwait City owing to the concentration of the existing oversupply and the forthcoming supply. We expect the rentals to

decline further to KD 6/sqm/month during 2011-12 for an average

office property before settling and could continue to remain depressed during the forthcoming years. The magnitude and extent of decline

depends on the type of building, its Class due to factors discussed earlier and location, access, parking and service quality between

buildings in the same class. We believe that Class-A offices would

command a minimum premium of c.KD 1/sqm/month compared to the above levels.

Exhibit-9 : Trends in average office rentals

Source: KFH, Markaz analysis

Prices awaiting transactions

Given our expectations for rental declines and assuming unchanged cap-rates, the prices are to decline by c.13%. However, there are not

many transactions being reported for the office space and hence

analysis of prices is essentially an exercise of valuation.

We believe that buyers would be willing to pay KD 1,280 per rentable

sqm of a typical Class-A office space based on three different valuation methodologies. Based on the economic valuation and taking

into account the current market scenario, we believe that investors

would be willing to buy office space at KD 1,191 – KD 1,337 per rentable square meter of office space, expecting an IRR of 8% at the

above expected rentals between 6 and 7 KD per sqm/month for average and typical Class-A offices respectively. Exhibit-10 below

provides the window of value given the rentals and the required return for an investor based on the assumptions laid out in Appendix-5.

Using yield capitalization method of valuation, the price stand at KD

900 and KD 1,050 per rentable sqm for average and Class A offices with a cap rate of 8%.

Rentals for average

office building to reach KD 6/sqm/month

Magnitude and extent

of the decline depends

on building specific features

Lack of transaction

limits analysis of price trends

We believe buyers

would be willing to pay KD 1,280 per rentable

sqm for a typical Class-

A office space


July 2011


Replacement cost based valuation, taking current cost of land, yields a price of KD 1,421 and KD 1,458 per rentable sqm for average and

Class A offices. These estimates are market level averages and values

for specific properties could vary depending on the location of property, its zoning and the extent of permitted/acquired floor area

ratio.

Exhibit-10 : Economic price per rentable sqm of office space

Source: Markaz

Buying interest is low currently due to the market awareness of the

forthcoming supply amidst weak demand and the willingness and ability of the buyer to adopt a patient and long term approach is

critical. Assessing the class of buyers and their current positioning, corporate sector, which continue to remain weak financially, would not

be the likely potential buyers of office space. Individual investors (HNIs) typically focus on investment properties and their interest could

be limited to small scale office space. However, the number of such

willing buyers with a long term approach would be few and they might adopt a wait and watch approach till there is positive developments on

the demand side. Institutional investors, backed mainly by the announcement of KD 1 Bn portfolio by KIA would likely be the main

buyers of office space. The ability and willingness to adopt a long term

approach is higher with institutional investors than other type of buyers and they could even take advantage of the demand from

alternative trends discussed earlier if backed by an efficient property selection and acquisition strategy and process.

We adopt three

different valuation methodologies for price

estimation

Economic valuation

method indicates a price range of KD

1,191 – KD 1,337 per

sqm

Oversupplied markets

wanes buying interest

Institutional investors

the likely buyers to benefit from alternative

demand trends


July 2011


Retail Segment Outlook

Stable demand conditions

Retail segment is driven by growth in consumption activity and the

consequent demand for retail space from newly formed establishments. We refer to the trends in trailing twelve month (TTM)

total of monthly number of new establishments that gets registered

with the Kuwait Chamber of Commerce, to infer consumption activity and it indicates a stable growth trend following the recovery from the

crisis induced by the financial crisis (Exhibit-12).

Exhibit-12 : Trends in establishment formation

Source: Kuwait Chamber of Commerce, Markaz

We also refer to the commercial license statistics provided by the

Ministry of Commerce and Industry, which portrays a similar picture as

well with stable year on year growth albeit the likely seasonal declines during July to October-2010. Market data reflects these trends with

property values and rentals remained predominantly unchanged during the year 2010 and cap rates yielding 8-9% based on market

rental rates.

Exhibit-13 : Trends in new commercial licenses issued

Source: Ministry of Commerce and Industry, Markaz

Consumption activity

the main driver for

retail space demand

Demand for retail

space can be inferred from formation of new

establishments

Trends in establishment

formation indicative of

a stable demand trend

Trends in new commercial licenses

issued indicate similar stability in demand

Stable cap rate trends reflects the trends in

underlying drivers


July 2011


Forthcoming mall space supply – a positive

Real Estate Union1 indicates a 72% increase in total supply of mall

space in the coming three years from 425, 371 sqm as of 2010 to

730,871 sqm during 2013. It might appear that unless the growth in population and economy and therefore in consumption grows in

tandem with the supply, the extent of the forthcoming supply could lead to an oversupply scenario with consequent impact on real rental

rate.

Exhibit-14 : Mall based retail space supply

Source: Real Estate Union, Markaz

However, retail mall space per capita would be at 0.18 sqm as of 2013, among the lowest in the region currently indicating potential for

further growth. Even after the above supply, retail mall space per capita stands at 46% of its GCC peers (ex-Dubai) as of 2013 and thus

indicates that the sector is not facing an oversupply scenario.

Exhibit-15 : Shortage of supply compared to GCC peers

Source: JLL, Real Estate Union, Markaz Analysis

Organized retail market landscape is located across main population centers of Kuwait and can be broadly categorized into major malls

(The Avenues, Marina Mall), Hypermarkets (City Centre, The Sultan

Centre, Lulu Hypermarket), Co-operative Stores, F&B outlets and other specialty retail outlets. After completion of Avenues Phase IV during

2014 , the mall alone is expected to account for c.40% of the total mall space supply in Kuwait.

72% increase in forthcoming mall space

supply estimated

during 2011-12

Mall space per capita at

0.18 sqm as of 2013 the lowest in the region

Retail mall space per

capita stands at 46% of the level of peer

GCC markets (ex-Dubai)

The Avenues alone is expected to account for

40% of the total mall space supply in Kuwait


July 2011


Stable price and rental growth

Apart from the low per capita discussed above, malls in Kuwait fall

short in entertainment offerings relative to their peers in the region

and hence we expect the future supply to be absorbed by such offerings as well. As Exhibit-16 indicates, mall space rentals in Kuwait

is comparable to the levels in GCC and we expect the rental rates to sustain and grow by 5% during 2011-12 and in line with the growth in

population and the economy in the longer run.

However, in terms of liquidity, corporates are the major investors in mall space and since the segment of investors are not completely out

of the impact of the slowdown and the financial crisis, we expect a stable growth in values, at c.5% during 2011-12.

Exhibit-16 : MENA Retail space rental rates

Source: Colliers International, KFH, Markaz

Potential for demand

from mall space entertainment offering

another source of demand

Stable 5% growth in prices and rentals

during 2011-12

Mall space rental levels

comparable to peer GCC markets


July 2011


Real Estate Activity Outlook

We analyse the real estate transacation statistics provided by the Ministry of Justice on a TTM summation basis in order to smooth the

seasonal fluctuations caused by summer and Ramadan slowdown and the sudden growth in activity levels immediately after these periods.

Exhibit-17 captures the trend as we analyze it and as is clear from the

chart, activity levels sustained its uptrend both in terms of the number and value of transactions during 2010-11. TTM value transacted grew

by 18% Y-o-Y during 2010 (-32 % during 2009) and 24% Y-o-Y as of Q1-11 (-15% as of Q1-10) and TTM number of transactions grew by

41% Y-o-Y (-30% during 2009) and 30% Y-o-Y as of Q1-11 (4% as of Q1-10).

Exhibit-17 : Sustained uptrend in transactions (TTM basis)

Source: MOJ-Kuwait, Markaz analysis

The causal factor behind the sustenance in activity levels is the recovery in overall economic activity during 2010. IMF estimates that

the Real GDP grew by 3.3% during 2010 (-5.2% during 2009) and Real Non-oil GDP grew by 3.4% during 2010 (0% during 2009). This

growth in economy positively impacted real estate demand, lowered

risk aversion and increased the price attractiveness thereby improving transactions. IMF estimates the economic activity to grow at 5% on an

average for the coming 5 years citing growth in government spending and an increase in private sector activity as part of the implementation

of the Development Plan. For 2011, IMF projects 5.2% growth in real GDP (6.1% non-oil) and a 5.5% growth for 2012. This would

positively contribute to the sector if it materialized as expected and

lead to further improvement in transaction activity. Citing factors posing downside risk to the forecasts, IMF identifies the political

gridlock, red tape and bureaucratic hurdles as the internal risk factors, regional political environment and its financial implications as regional risk factors and the possibility of oil price contraction in the absence of

sustenance in the current global economic recovery as the international risk factors. As it stands now, these factors can be

ranked in the same order in terms of its criticality in affecting the forecasted growth and it would be prudent to discount the growth rate

by 1-2 percentage points from the levels expected by IMF. To compare, IIF forecasts 4.6% real GDP growth for 2011 (4.7% non-oil)

and 4.7% for 2012 (5.5% non-oil).

TTM summation

analysis to smooth

seasonal fluctuations

18% Y-o-Y growth in value transacted during

2010

Recovery in overall

economic activity the

causal factor

5% average growth in

economy expected for the coming 5 years to

improve activity levels

It would be prudent to

discount growth estimates by 1-2

percentage points to

factor risks involved


July 2011


Another factor that drives transaction activity, by facilitating both the demand and the supply side, is the liquidity which can be mainly

measured from bank lending to real estate sector. During the year

2010, we observed the breakdown of the close correlation between the real estate value transacted and the growth in real estate lending.

This was mainly due to the dire scenario that banks in Kuwait were in as a fall out of the financial crisis which curtailed the funding source

and eroded the value of the collaterals.

As a result of this, the M-o-M growth in total real estate credit extended experienced a sustained decline from Feb-08 till Dec-10

(Exhibit-18) and the total real estate credit extended declined by 2% Y-o-Y during 2010, down from an average growth of 34% during the

preceding 5 years. As of the end of Q1-11 and after continuous

decline for eight months, total extended real estate credit grew marginally (1% Y-o-Y). Nevertheless, we do not expect credit

extended to the real estate sector to grow significantly due to bank’s reluctance in general. However, a moderate growth in credit would

positively impact the transaction activity if economic growth materializes as forecasted.

Exhibit-18 : Trends in real estate financing vis-à-vis activity

Source: MOJ-Kuwait, CBK, Markaz analysis

Another source of liquidity, apart from bank credit is the capital markets and the renowned announcement by KIA of its plans to invest

KD 1Bn in the real estate market would provide necessary liquidity for the market. Exhibit-19 charts the trends in the equity market activity

in the real estate sector as per the data provided by the Kuwait Stock

Exchange, which clearly indicates the lack of liquidity and transaction in the equities of real estate companies in Kuwait despite relative price

stability. It should also be noted that the project/investment portfolios of real estate companies in Kuwait are regional and hence this trend is

not directly representative of the market’s assessment of the local real estate market alone.

In summary, we expect the transaction levels to sustain its growth

during 2011-12, backed by economic growth with the possibility of further growth from the improvement in the liquidity condition from

improved lending by banks and liquidity from other capital providers in the medium term (2012-14).

Another factor driving

transactions is the liquidity

Net real estate credit extended by banks

declined during 2010

Bank credit to real

estate not expected to

growth significantly

Moderate growth in credit would positively

impact transaction

activity

Liquidity from capital markets – like KIA’s

announce plans to invest KD 1 Bn would

boost liquidity


July 2011


Exhibit-19 : Real Estate equities market liquidity trends

Source: Kuwait Stock Exchange, Markaz analysis

Limited liquidity from equities market

We expect transactions to sustain its growth


July 2011


Appendix-1: Rental trends- Farwaniya, Ahmadi, Mubarak Al Kabeer & Jahra

Source: Kuwait Finance House; 2BBHKM – 2 Bed-Bath-Hall-Kitchen-Maid room

Appendix-2: Office space demand estimation rationale

Demand for office space is a function of office based employment generation which again is primarily

based on overall non-oil economic growth. The average real non-oil GDP growth rate before the crisis

during the period 2004-2008 was 9.7% and the successful execution of the development plan is expected to result in a 7.5% annual growth rate in the non-oil economic activity. Hence, we assume

that there would not be huge change on the upside in the trends in office based employment compared to the past cycle.

The age distribution of Kuwaiti population indicates the average number of young people reaching

their graduation years stood at c. 25,000 during the period between 2003-2010 and we expect this average to remain at the same level during the coming five years as well. Assuming that 60% of such

people seek graduation and 75% of those as graduating , we reach an average of c.13,000 Kuwaiti graduates per year. Government sector employment statistics indicate an average net addition of

c.9,200 employees per year in the government sector. This indicates that the private sector has to

absorb the c.8,300 graduates every year and net of unemployment, we assume that c.2,000 employees are absorbed by the private sector, of which we assume 30% to be office based

employment, equivalent of c.10,000 sqm of office space demand.

The growth in private sector employment is a function of economic growth and Exhibit-A below maps

the trend for the past 12 years for the total labor force and expatriate labor force in private sector. The trough to trough average yearly growth rate for the period between 2002-2008, i.e., before the crisis,

stood at 7.5%. We assume a lower growth rate for the forthcoming five year period and expect an

average yearly growth rate of 5%. This is to account for the possibility of lower pace in economic growth during the forecast period compared to the previous cycle. The lower proportion of expatriate

supervisory employees to workers and the Kuwaitization initiative would lead to a lower growth rate of office based expatriate employees and hence we assume an average annual growth rate of 2.5% -

3.0% during the forecast period. This results in an average office space demand of c.25,000 to 50,000

sqm per annum, taking the total office space demand to c.35,000 to c.60,000 sqm per annum. Although, this estimate is based on many assumptions that are considered reasonable, it still need not

be precisely accurate.

Height of the bars indicates the range of property rentals from min to max;

colors to differentiate the unit size.


July 2011


Exhibit-A : Trends in labor force

Source: PACI, MOP, Markaz analysis Appendix-3: Office space supply estimate

Source: Multiple Sources, Markaz Analysis


July 2011


Appendix-4: Building Class Definitions

Appendix-5: Assumptions for economic value model Method – I: Economic Valuation

Starting rent (KD/sqm/month) 7

Maintenance Cost (% of rental income) 10%

Occupancy trends Year – 1 50%

Year – 2 60%

Year – 3 80%

Year – 4 to 10 100%

Cost of Capital/ Required return 8.0%

Rental inflation 2.5%

Investment period 10 Years Method – II: Economic Valuation

Starting rent (KD/sqm/month) 7

Cap rate 8%

Method – III: Replacement Cost Method

Land Area (sqm) 1,000

Land Cost *(KD/sqm) 6,000

Permitted FAR 520%

Construction cost (KD/sqm) 350.00

Basement Cost (KD/sqm) 120.00

Building Class Definition - BOMA

Class A - Most prestigious buildings competing for premier office users with rents above average for the area. Buildings have high quality standard finishes, state of the

art systems, exceptional accessibility and a definite market presence.

Class B - Buildings competing for a wide range of users with rents in the average range for the area. Building finishes are fair to good for the area. Building finishes are

fair to good for the area and systems are adequate, but the building does not compete with Class A at the same price.

Class C - Buildings competing for tenants requiring functional space at rents below the

average for the area. Building Class Definition - ULI

Class A space can be characterized as buildings that have excellent location and

access, attract high quality tenants, and are managed professionally. Building materials are high quality and rents are competitive with other new buildings.

Class B buildings have good locations, management, and construction, and tenant standards are high. Buildings should have very little functional obsolescence and

deterioration.

Class C buildings are typically 15 to 25 years old but are maintaining steady occupancy.


July 2011


Notes 1. Sourced from Real Estate Union’s Al Murshid Al Aqari - Issue Dec 2010 issue by Al Murshid Al Aqari by Liases Foras Middle

East WLL- www.lfmeglobal.com

2. Kuwait Real Estate Outlook (Dec-09)

http://www.lfmeglobal.com/

http://www.markaz.com/DesktopModules/CRD/Attachments/KuwaitRealEstateOutlook2010(Dec-2009).pdf


July 2011


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