Kuwait: Real estate sales fell in Q2 2023, in a further sign of a market slowdown amid high residential valuations and rising borrowing costs. Sales dropped across all segments on a year-on-year basis, and we expect activity to remain soft during the remainder of 2023. Meanwhile, the government’s recent efforts in resolving the housing crisis could help in reducing the number of outstanding applicants over the medium-to-long term. Overall sales declined for the second consecutive quarter, reaching KD 672 million (-5.8 percent q/q) and the lowest level since Q3 2020.

There were also signs of a slowdown in other indicators, with our real estate price index (incorporating both residential and investment segments) showing price gains decelerating to just 1.4 percent y/y which is the slowest since Q3 2018. In addition, central bank data show real estate-related lending slowing significantly so far this year. Admittedly however, weak sales figures in Q2 2023 may have been impacted by seasonal factors, with activity dropping sharply in April which coincided with the typically slow Ramadan/Eid period. In terms of market segments, residential sector sales saw only a modest decline in the quarter though still fell to their lowest since Q3 2020.

Home sales remained concentrated in Kuwait City and Al-Ahmadi governorates, accounting for nearly half of total homesales, while plot sales in Kuwait City accounted for around a third of total plot sales during the quarter, some of which may be related to the KD 55 million Mubarakiya development project. Residential sales have been trending lower for the past two years with several factors potentially at play. These include a normalization following exceptional strength during the pandemic period, weaker speculative pressures due to elevated valuations, and higher borrowing costs. Meanwhile, the residential price index saw its third consecutive quarterly decline, resulting in the first year-on-year drop since Q1 2018 (-0.3 percent y/y).

Home prices (as opposed to land) were still up (+2.2 percent y/y), reflecting a rise in prices in Kuwait City, Hawalli, and Farwaniya governorates. Ahmadi and Mubarak Al-Kabeer saw a decline in y/y prices, while Jahra saw no change. Investment sales (which includes individual units and apartment buildings), declined a steeper 21 percent in the quarter to their lowest since Q2 2021. Nearly half of the apartment unit sales were concentrated in Al-Ahmadi governorate (101 units), while 54 percent of apartment building sales were in Hawally governorate (59 buildings).Price trends in the investment segment are currently holding up somewhat better than in the residential market, up 3.5 percent y/y in Q2 2023.

We attribute this to two key factors: prices rose much less through the pandemic than in the residential sector, meaning that valuations are lower; and demand has been supported by the post-pandemic increase in expatriate workers, the main demographic driving demand. The past year has also seen apartment rents picking up in the Consumer Price Index figures, following a multi-year period of stagnation/contraction. This said, activity in the segment is still well below pre-pandemic levels. The potential re-opening of dependent visas could support demand for apartment property over coming quarters. Finally, commercial sales rose 18.6 percent q/q in Q2 2023, though was still down sharply on a year-on-year basis.

The quarterly increase came mainly on a KD 21 million transaction in Kuwait City. Excluding this item, sales would have been broadly stable compared to Q1 2023. Loans disbursed by Kuwait Credit Bank (KCB), the public organization in charge of providing residents with home loans, fell by -13 percent q/q (-1.0 percent y/y) to KD 111 million in Q2 2023. Again, the weaker figures could reflect seasonal factors during the quarter. However, we expect that disbursed loans could pick up in H2 2023 and 2024 as the Public Authority for Housing Welfare (PAHW) is accelerating plot distributions, the rise in the demand for construction permits, the recent announcement of the availability of 30,593 plots for distribution in South Abdullah Al-Mubarak project, Khaitan, and Mutla city suburbs (N1,3,4,5,12), and projects to develop the Al-Sabriya and Nawaf Al Ahmad areas, which could make around 52,000 units available for future distributions.

Moreover, the government’s recently published four-year action included arrangements to distribute 15,094 lots in Qairawan and Saad Al-Abdullah, as well as 42,932 building permits in South Sabah al-Ahmad- South Saad Al-Abdullah, South Qairawan in the next four years. The plan also outlines steps to resolve the housing crisis through several mandates including the passing of the real estate financing and residential cities laws and their by-laws. Additionally, the National Assembly passed and referred to the administration a law to establish real estate firms for large-scale residential developments and other key economic projects. With a more than 90,000-applicationbacklog for government housing initiatives, the measure aims to increase home supply.

Private sector enterprises and citizens (via IPOs) will be important stakeholders and partners in the companies, reducing the financial load on the government. Residential market outlook The outlook for residential activity remains soft for the rest of 2023, with high valuations and the higher interest rate climate representing headwinds to demand. On a brighter note, the government’s reform proposals and focus on addressing the housing shortage offer the prospect of a supply boost in the future which would help reduce the large backlog of applications for government housing and absorb new applications. In the investment and commercial property segments, we expect that moderate growth in the non-oil economy, the pick-up in rents and the recovery in expatriate demand to provide some offset to downward pressures from the higher interest rate environment, although given global trends the latter may be at or close to their peak.