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Kuwait: Property market showing signs of recovery

Wednesday, 12 May 2010 13:52

As the domestic economy starts to rebound from the impact of the global financial crisis, Kuwait's residential property market is starting to show signs of recovery. However, despite improving sentiment and market confidence, Kuwaiti developers and analysts cite a lack of access to land as a constraint on more rapid growth.

To alleviate pressure on borrowers and encourage lending, the Central Bank of Kuwait has cut interest rates dramatically during the economic downturn (with the discount rate having been reduced six times between October 2008 and February 2010 from 5.75 basis points to 2.5 basis points). Cheaper borrowing terms for housing purchases, combined with renewed consumer optimism from an announced government economic stimulus plan, have caused residential retail sales from January until March to soar by 130% on the same period a year earlier, according to figures released by NBK.

While residential property purchases are on the rise, there still remains a significant housing shortage in the country, in particular in the area of guaranteed public housing for Kuwaiti nationals, where there is still a waiting list in excess of 90,000 units.

In February 2008, laws no. 8 and 9 were passed restricting banks and investment holding companies from owning, mortgaging and trading in residential buildings and land. At the time, the rationale behind the move was to prevent housing prices from escalating to unaffordable levels based on perceived speculative behaviour on the part of banks and investment firms. But according to most developers, the law has not served its intended purpose, mainly due to a lack of land being extended to the private developers and inflexible laws limiting their overall participation. According to industry players, the government is not able to adequately develop the nation's housing requirements alone. And in turn, by limiting the private sector's role, demand is outpacing supply and housing prices remain disproportionately high.

Khalid Faisal Al Mutawa, the chairman and managing director for Dar Al Dhabi Holding, a Kuwaiti-based developer with projects across the Gulf, told OBG, "Some 95% of the land in Kuwait is held by the government, and the result is that, with little land to develop, housing prices have reached nearly the same level as one would find in Tokyo and London."

According to many of the property players OBG spoke with, a sensible solution would be to provide land concessions to the private sector for developing housing schemes, capping the price and enforcing minimum specifications at which they can sell units to end users. It would then be up to the developers bidding on these projects to generate an internal rate of return at the capped selling prices.

Abdulaziz Al Nafisi, the investment group head for Salhia, a leading upmarket Kuwaiti developer, told OBG, "The model, as its stands today, does not work. And it is a shame for the country as we have many capable Kuwaiti developers working with governments in other countries on public housing schemes."

Rawaf Bourisli, the general manager of Action Real Estate Company, echoed this sentiment. "The terms and conditions imposed are crippling private sector participation in residential housing. Without an allowance to mortgage the land, it is not feasible to borrow the entire project amount without huge upfront collateral. We know the law is currently being reviewed, and we hope it will be changed soon," he said.

In fact, earlier this year, Islamic financial institutions became exempt from the law and are now eligible to provide financing after a successful appeal lead by the country's largest Islamic bank, Kuwait Finance House.

In addition to the prospect of laws no. 8 and 9 being removed, further help to directly ease pressure on the residential segment could come in the form of increased government expenditure on public projects. Earlier this year, the Kuwaiti government received approval from parliament for a stimulus package that will entail an estimated KD30bn ($103bn) of spending on mega-projects over the next five years. Included in the plan is a significant allocation towards the creation and development of new residential areas, with six new towns encompassing a total of 75,000 housing units being slotted.

Given Kuwait's pressing and immediate housing supply shortage, the planned new towns could prove pivotal in alleviating short-term affordability pressure by adding new supply onto the market. Longer term, however, with young demographics (37% of the population is between 15 and 29 years old) and in order to avoid a dependency on ad-hoc government projects, many believe that a mechanism must be sought to allow the private sector to become more involved in residential development.

Global Arab Network

This article is published in partnership with Oxford Business Group

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