Property demand drives Kuwait real estate prices sky-high

09 November 2007

Mega-projects are being delayed by political indecision, while the sector struggles to meet local housing needs.

Real estate and construction in Kuwait conjure up tales of two sectors experiencing different fortunes. While the real estate sector struggles to keep up with demand with property sales more than doubling in value over the past 12 months, the construction sector has stalled with high-profile megaprojects facing delays because of political disagreements, bureaucracy and soaring land prices.

Residential real estate projects have caught the attention of investors recently. Changes to the regulations have altered the height restrictions of skyscrapers, leading to widespread redevelopment of the older districts as low-rise properties are replaced with high-rise blocks. But few of these new developments are affordable to the average Kuwaiti worker.

“A lot of people in Kuwait will only invest in the stock market or real estate - if the stock market is underperforming, as it did at the end of last year, they shift their money into construction,” says Ghazi Abdul Raheem, senior manager in the economic research department of the National Bank of Kuwait.

“That puts a lot of demand on land, in addition to the demand for housing close to Kuwait City. Prices have jumped 30 to 50 per cent in the last year, and real estate is overpriced, especially in the residential sector.”

Many Kuwaitis have traditionally relied on the government to provide them with housing, paying a fixed price every month over a 15 or 20-year period. Although it is now possible to supplement the government grant of KD 70,000 ($250,000) with standard bank loans, there is no formal mortgage system, and most nationals are now finding the cost of buying a house out of their reach.

“The end users are not the ones buying residential properties - the purchasers are investment funds and real estate companies,” says Fawaz al-Bader, senior manager in the real estate investment unit of Kuwait’s Global Investment House.

“Loans cannot exceed 50 per cent of a person’s salary, and the average salary is KD 1,200 ($4,300) per month - so the most they can borrow is KD 70,000, plus KD 70,000 from the government, for a total of KD 140,000 ($500,000). The lowest price you will find for a plot of land - not a house, just the land - is KD 150,000 ($538,000), so prices are out of reach for a normal person - and even if someone can afford it, it does not make financial sense.”

Higher rents

The soaring prices are driving rents higher, and are compounded by the lack of foreign ownership laws, meaning that expatriate workers who are not allowed to buy are forced into the rental market as well. “Things are out of control - speculators are entering the market in the short term, to buy land and sell it on without developing it, and there is little construction going on in terms of residential units,” says al-Bader. “Residential high-rises are not attracting investors because there is uncertainty over the tenancy laws - it is not clear whether you can take someone to court for not paying their maintenance charges, for example.”

Commercial real estate is facing the opposite problem, Al-Bader says - too many office towers are being built and threaten to outstrip the expected demand.

“None of the real estate companies constructing office towers are paying attention to supply and demand, and I have seen a lot of studies that say there will be a dip in the commercial sector,” he says. “Within one or two years, supply will far exceed demand, and commercial rent is already starting to drop. It does not make sense to build all this commercial property. I see a real estate bubble here, and in the commercial sector it is definitely going to burst, no question about it - but in the residential sector there is huge demand.”

Land can only be developed and traded in Kuwait once released by the government. So far, analysts estimate that between five and 10 per cent of the country has been made available, driving up prices for ordinary Kuwaitis, but leading to huge profits for some.

Construction in Kuwait seemed ready to boom just a few years ago, with the announcement of a clutch of Dubai-style mega-projects, most relying on build-operate-transfer (BOT) agreements to attract the private sector. Those developments include residential and tourism projects on the islands of Bubiyan and Failaka, together with a deep sea port; the 250-square-kilometre, KD 25,000 million ($86,000 million) Madinat al-Hareer (City of Silk), which included plans for a skyscraper over a kilometre tall; and several master-planned new towns designed to relieve problems of overcrowding and traffic congestion in Kuwait City.

“All of the mega-projects have stalled because of a lack of government commitment to some of them, too much bureaucracy, too many monitoring agencies such as the audit bureau, and staff fearful to make decisions because previous decision makers have found themselves in the prosecution office being accused of squandering public funds,” says Abdul Aziz Sultan, president of KEO International Consultants.

“Smaller projects are doing better, but not much better. We are not aware of any challenges for the construction and real estate sectors, other than all land is still in government hands and Kuwait Municipality take such a long time to issue building licences. These two problem areas can be overcome by the government making the land available to the private sector, and by the municipality taking a serious look at procedures to expedite the process of issuing building licences. But so far we see no evidence to suggest that steps are being taken to overcome the problems.”

Stalling development

A senior foreign consultant who has worked extensively in Kuwait blames political squabbles for many of the problems in the industry.

“There are significant blocks in parliament who are opposed to development, either because they are afraid of eroding their traditions and heritage, or because they want to preserve state assets. They see BOT agreements as giving away those assets to foreigners, and you have Islamist politicians who think that development and tourism means alcohol and prostitution, although that is never realistically going to happen,” he says.

“After [the US invasion of Iraq in] 2003, there was a lot of enthusiasm for building projects and infrastructure - there was a feeling that with the threat of Saddam Hussein gone, Kuwait could really get on with development that had more or less been on hold since [the Iraqi invasion of Kuwait in] 1991. That enthusiasm has largely faded, but I think some of the big projects could start up again.”

One reason that support for mega- projects has stalled, the consultant says, is that some members of the royal family have become prominent in Kuwaiti business, breaching a century-old agreement between the major families that the Emir’s line could rule politically unopposed, as long as his family does not get involved in commerce.

“Some politicians have used parliamentary power to attack members of the government and royal family by blocking developments, and several have been cancelled mid-stream,” says the consultant.

A senior figure in one of Kuwait’s most prominent contracting firms agrees that politics has played a part in stalling development, but says there is a clearer reason why some projects have not progressed as quickly as they should.

“The planning is not good - they announce a project and put out press releases before consulting the environment agencies and doing proper feasibility studies,” he says. “You have some government departments that will think a project is important, but they do not consult properly with other departments and there are delays and conflict later on. It creates big problems for contractors when you cannot plan ahead.”

He says that profit margins for contractors have been driven down in recent years, partly because of the regional competition for materials and trained personnel, and partly because there are not enough big projects being built.

“The number of projects is not suitable for the number of companies - there is a lot of competition for every job and we have to put in low prices all the time. There are enough projects to survive on, but some of the smaller companies find it difficult - we hope that in the next year more projects will finally get started and there will be more work.”

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