Kuwait’s real estate sector is enjoying a boom. High oil prices, moderate inflation and an excess of available capital means property prices have risen rapidly over the past few years.

Projects such as the KD21bn ($58bn) City of Silk, which received approval from the municipality in November 2007, greater political stability and renewed confidence following the fall of Saddam Hussein in neighbouring Iraq in 2003 have sustained this buoyancy.

With so much liquidity being generated within the state, cash needs to be invested. How-ever, there are only two core options available: the stock exchange and real estate. Real estate is viewed as the safer option of the two, and it is this that is keeping land prices at a disproportionately high rate.

This has lead to a high proportion of individuals, not companies, owning the land. A 2007 report by the local Global Investment House states that companies own just 2 per cent of total tradeable real estate land.

Peak prices

According to Bassam Badder, general manager of projects, at the local Tamdeen Real Estate, commercial land in downtown Kuwait City is reaching a peak of $60,000 a square metre, with residential land values reaching $1m for a 500 sq m residential plot, and $1.8m for 935 sq m of land.

The market price is compounded by the state’s population dispersal. While Kuwait is a large country, only a small percentage is actually inhabited, with the majority of the population concentrated around the coast and capital. Most of the country’s remaining land is owned by Kuwait Oil Company (KOC).

This has led to the inflated land prices. “The land price here is crazy,” says Badder. “$100m will get you a decent piece of land, but it would not be enough to buy the land and build the project on it. How are you going to pay that much money and then construct on it?

“The feasibility of the whole thing doesn’t make much sense for the global market. Kuwait is an investment, but at the same time investors are going to Dubai, Oman, Qatar and Jordan. They are diversifying their investments - they are shrewd firms and don’t see proper business in Kuwait. That is why they invest outside. Prices here don’t add up - 50 per cent of the investment in Qatar is from Kuwait.”

Prominent Kuwaiti-based real estate developers such as Abyaar Real Estate Development Company and Al-Mazaya are two examples of local companies who prefer to pursue the richer investment opportunities and returns available in Dubai. “These companies are keeping an eye on Kuwait, but it is not necessary to be here right now,” says Badder.

It is not just market dynamics. According to Ruba Salej, senior researcher with local developer United Real Estate Company (Urec), what is holding back the country is a cultural prejudice against high-density housing or apartments, which would ease pressure on land.

“High density is not practical here,” says Salej. “You cannot build high-rise. Residential towers won’t be that successful.”

There is also an unwillingness for Kuwaitis to develop housing on land where no development has yet taken place. “If you look at the Kuwaiti map, you will see the concentration of residents and buildings only near the coast and limited areas,” says Salej. “There is a lot of open area not being developed because people are not willing to live there. They would like to be near the coast and capital. The built-up areas are very close together. Therefore, there is very little room to expand.”

Vacancy rates are still high, however. In the popular ex-pat area of Salmiyah, many buildings have remained empty for two years or more, as landlords refuse to drop their prices, preferring instead to leave them unoccupied.

Rising inflation

This has exacerbated the issue of supply and demand, and has fuelled further inflation. Rental prices have increased by 50 per cent over the past two to three years.

Salej questions the longevity of such a policy. While it appears healthy in the short term, the lack of foreign interest in the market means there may be a surplus of housing in the coming few years, and the market will become saturated. “You want the truth, I would say go and invest outside Kuwait,” he says. “That would be the best thing for your money. Our company is investing more outside than inside Kuwait. Most of the investment companies in Kuwait are doing this, because the risk is higher and the cost is higher.”

Land prices in Kuwait City are very high. An office tower in the popular Sharq area of Kuwait City, on Ahmed al-Jaber street, is priced at KD9,500-12,000 ($31,700-43,800) a sq m.

The real estate market in Kuwait City appears to be operating in a bubble generating its own energy. The consensus is that the market is ‘boiling’, and will remain so for some time to come. Even flooding of the residential market, which is happening at the moment, according to Badder, is having a negligible impact on prices.

“I cannot see anything changing in the next 12-18 months, because it has been going this way for the past two to three years, and I cannot see anything else on the horizon,” says Salej.

Kuwait Facts

Average land price: $45,000

Commercial yields: 9 per cent

Residential yields: na

Occupancy rate: 99 per cent