The successive rises in interest rates, which recently reached four percent, appears to have cast a shadow over the real estate market, especially in the investment and commercial sectors, as it is expected – according to some experts – that these two markets will become more stagnation.
Real estate sources told Al-Qabas daily that raising interest rates to four percent and the cost of borrowing in some banks which has reached nearly six percent will have a clear impact on many investment and commercial real estate.
The sources added that there are other basic factors that have a direct impact on the two sectors other than the high discount rate that must be taken into account, such as total income and employment rates, in addition to economic activity and the stability of the political situation in the country.
The sources indicated that investment properties, which generate returns between 6.5 percent and 7.5 percent, will be more vulnerable to the repercussions of raising interest than others, while their impact remains less severe on buildings, which have remunerative returns in excess of 9 percent, and which mostly enjoy high-end finishes and are located in distinct locations.
The sources believe that the real estate investor, who is still bound to pay more than 70 percent of the remaining installments, may not be able to abide by them, and therefore may increase the rental value of the apartments or shops he owns as a natural reaction to meet the financial costs and compensate for the increase in the cost of borrowing.
A real estate source confirmed that the general situation of investment real estate in Kuwait is still “comfortable” until this moment, especially that the sector is currently witnessing good occupancy rates ranging between 88 percent and 90 percent, supported by the stability of its rental value despite the recent campaigns by the Municipality to close the basements.
At the same time, the sources pointed out that the effect of the interest rate hike would be more harmful in the event of an increase in apartment vacancy rates, which may result from the state’s efforts to address the demographic imbalance and reduce the number of expatriates.
As for commercial real estate, the source stated that the return on the sector ranges between 5 percent and 6 percent, while the occupancy rates are around 86 percent and vary from one region to another.
The sources pointed out that the repercussions of the interest hike will be severe for individuals who depend on facilities for their investments, while its impact will remain less severe for large companies investing in commercial real estate.
Although raising bank interest rates remains an important factor in curbing inflation and influencing the movement of prices in the real estate sector, it will not achieve its objectives or what is desired in the absence of legislation related to liberating more lands equipped with infrastructure, and the participation of the private sector in solving the housing problem, in addition to approving real estate finance law.
Real estate experts fear that some investment property owners will resort to increasing rents, and charge the tenant the bill for the high interest, after the increase in the cost of real estate financing, which will cause a societal crisis, especially among expatriates — the main operator of this sector — who will send their families to their home countries, which will increase the number of vacant apartments, but at the same time the possibilities of the collapse of the real estate market remain far away even if prices fall.
In light of the current high interest rate and the possibility of increasing it several times during 2023 as expected, there is a great possibility for the money of some real estate investors to migrate towards bank deposits after their increased attractiveness as a safe haven that is more stable and less risky.
On the other hand, some fear that the investments of a number of real estate companies will move to neighboring countries, for many reasons, including cheap land prices compared to Kuwait, ease of obtaining the necessary financing, in addition to achieving more profitable returns and other encouraging factors that may have negative consequences for the local economy.
The following are the main expected effects of the continued rise in interest rates:
— Absorbing liquidity from the market and declining demand for real estate loans.
— Some real estate investors’ money is directed to bank deposits as a safer savings vessel.
— The lessee may be charged with a higher interest bill to compensate for the increased cost of borrowing.
— Reducing the plans of real estate investors, and a decline in trading activity.
— A decrease in the prices of construction materials, or at least their stability, after the decline in inflation and the reluctance of some investors to build.