In terms of construction activity, Kuwait has fallen far behind by its Gulf peers. While over the past five years there has been an unprecedented boom in real estate projects in the Gulf, which has transformed major cities such as Dubai and Abu Dhabi beyond recognition, Kuwait has effectively gone backwards.

Stifling bureaucracy and an associated inability to drive projects forward means its plans for increasing oil production and developing new cities have stagnated.

Despite several high-profile project launches, such as the Madinat al-Hareer (City of Silk), with a proposed 250-square-kilometre urban zone that will house 700,000 people, little tangible progress has been made on schemes as members of the National Assembly (parliament) argue over the awards being made to contractors and developers.

Government monopoly

The failure of the Kuwaiti authorities to steer flagship projects through the decision-making process has led to a change in the way the country is viewed by investors.

Once seen as a haven for investment, Kuwait is now considered a source of finance. “It is a difficult market,” says Kamel Lazaar, managing director of Riyadh-based corporate financial adviser Swicorp.

“It was at the forefront of the sophisticated investment a few years ago, but then it took a sideline. Now it is a source of capital.

I go to Kuwait to raise money. It is very liquid, but they do nothing with it. Kuwait is not a good model for economic development. It could do something, but it needs leadership.”

Kuwait’s real estate market encapsulates many of the problems the construction industry is facing. Land prices in the state are kept at artificially high levels, because the government’s near monopoly of available land restricts the opportunities for developers.

Little, if any, land is released each year for development, driving up land prices as the highest bid wins the rights to the few empty plots that are available.

Despite planned developments theoretically providing up to 1 million homes over the next decade and driving down both residential and commercial land prices down, the delays in launching such projects mean Kuwait will be stuck with its land shortage for the foreseeable future.

“The government owns the land and it is not giving it away to developers, even on a build-operate-transfer basis,” says one Kuwaiti developer. “Most of the land is owned by the government and it is not releasing it.”

Real estate prices have risen sharply over the past 12 months, particularly in prime residential areas such as Shuweikh and Abdullah al-Salem.

Land in Shuweikh is currently worth KD800-1,500 ($2,986-5,600) a square metre, up from KD510-1,200 a sq m for the same period in 2007, a rise of 34 per cent in a year.

Similarly, land prices in Abdullah al-Salem residential area currently range between KD753 and KD1,467 a sq m.

Commercial real estate prices have also risen sharply. Land in one of the main downtown areas in the capital, Fahd al-Salem street, is now valued at KD12,000-13,000 a sq m, up from KD9,500-11,400 a sq m for the same period in 2007, a 19 per cent increase in value.

Jamal Itani, chief executive officer (CEO) of Jordan’s Abdali Real Estate & Investment Company, says such high commercial land prices put off potential investors.

“Kuwait prices are rocketing,” he says. “You look at an office building and you pay $10,000 a sq m, whereas in Amman you pay $3,000 for the equivalent. It is not an open market and not easy to get into.”

Despite the rising price of land, the government has made no attempt to alleviate the strain on the market, creating frustration for developers and buyers alike.

“The main problem is the price of land,” says Randa Azar-Khoury, group chief economist at National Bank of Kuwait (NBK).

“If the government frees up unutilised areas of the country, the price of land will be affordable for the middle class.

“This is not the case at the moment. The government only uses 15-20 per cent of its land for housing; the rest is vacant.

“There are many areas where oil companies have concessions, but there are other areas that are free and should be sold to the public.”

However, instead of releasing more land to alleviate pressure on the housing market, in February this year the government introduced new laws putting restrictions on shareholding companies’ ability to develop real estate on private land, to prevent land price inflation caused by speculative investments.

But to date this change in the law has not achieved its aims, according to one local developer.

Adverse impact

“Nothing has changed and nothing seems to be changing in the near future,” says the developer. “They have imposed some law on residential development, but it has made it even worse. Now developers cannot develop residential units.”

According to figures issued by the Justice Ministry’s real estate registration and certifi-cation department, the total value of real estate sales in the second quarter of 2008 was KD749m, a 21 per cent fall on KD957m in sales registered in the first quarter of the year.

Emad al-Thaqeb, acting CEO and assistant general manager of Islamic bank Kuwait Finance House, says the new measures have had an adverse impact on the real estate market.

“The idea was stop the prices increases for residential real estate,” he says. “But it is not a good idea because they have stopped collateral and loans.

The problem in Kuwait with this is that for young people who wish to buy land or a house, this law stops their dreams.

Even with government grants of KD70,000 and personal savings of, say, KD30,000, if a house is KD200,000 then financing from banks will make all the difference. With this law, they cannot get the funding.”

“When the government thought to implement this law, it did not think about the small family or the young people. It just thought about reducing the cost of housing, which was increasing to crazy prices.”

The concern is that the gridlock in Kuwait’s real estate market will continue to force regional and international developers to look elsewhere.

“We are not interested in Kuwait,” says Nasri el-Helou, managing director for Saudi Arabia at Riyadh based The Land Real Estate Investment & Holding Company. “It is expensive and difficult to work in.”

The apparent failure of real estate laws demonstrates a policy gulf between Kuwait and its neighbour Saudi Arabia.

The kingdom is attempting to ratify a new mortgage law. If successful, it will not only act as a catalyst to growth in its real estate market, but also offer financing to large sections of the population who cannot, under the present laws, secure loans to purchase their own property.

With 65 per cent of the Saudi population under the age of 30, it is paramount that such financial structures are in place to provide mortgages.

In Kuwait, land price increases and the related real estate stasis have led several developers and contractors, such as the local Mushrif Trading & Contracting, to relocate to a more promising business environment such as Abu Dhabi (MEED 8:7:08).

According to Donald Featherstone, CEO of Mushrif, the UAE is one of the most attractive construction markets in the world.

More pertinently, major flagship developments earmarked for Kuwait are facing delays, which does not help it attract investment.

In September, MEED revealed that Kuwait’s most high-profile project, the $77bn City of Silk, is facing a delay of up to three years.

According to the developer, Tamdeen Real Estate Investment Company, construction is not due to start until 2011 or 2012.

Considering the project was launched in 2006, the six-year time-lag between the launch of the project and the start of construction is enough to worry developers and contractors who are considering bidding for future projects in Kuwait.