Record oil prices and an ambition to emulate the development plans of the region is fuelling a real estate boom, which will see the steady transformation of Kuwait’s low-rise skyline into tall high-rises, according to the Kuwait-based Global Investment House.

01 December 2007

The good times are here to stay as portended by the global oil demand forecasts and with oil prices surging higher and higher, liquidity is ensured in the Kuwait market. Besides the buoyant oil scenario, what enhances expectations for the medium term are the multiplier effects of projects, which attract huge investments.

While transport and utility-related projects are set to ensure steady investments for years to come, other construction and tourism-related projects would abet the optimum utilisation of liquidity in the shorter term.
Aside from the oil sector, Kuwait has two major markets: the stock exchange and the real estate sector which continue to hold potential, as the record levels of liquidity and the uneasy world economic recovery will keep funds flowing into sectors that are deemed by many as a safe haven.
Looking ahead, the construction industry is expected to benefit from $8 billion worth of private investment and $3 billion worth of government investment over the next five years. The combined $11 billion investments could rise to $40 billion if future build-operate-transfer (BOT) projects are taken into consideration, including the planned residential and tourist resort developments in Failaka and Bubiyan islands. This apart, much of the current investment is going into the construction of shopping malls, which include entertainment and retail facilities.
Kuwait’s GDP stood at KD29.6 billion ($107.2 billion) by the end of 2006, growing rapidly by 20.8 per cent. Oil and gas accounted for the lion’s share of last year’s GDP, contributing KD16.3 billion or 55 per cent of the total. However, although oil is still the main component of GDP, the non-oil component has continued its steady rise since 2000, growing by 19.9 per cent in 2005, and a further 14.2 per cent in 2006. Among the non-oil sectors that have shown marked improvement were financial institutions
(37 per cent), transport, storage and communication (13.6 per cent), and construction (9.7 per cent).

Public finance
The preliminary actual results of the fiscal year 2006-07 revealed totally different figures from those in the budget. As compared to a budgeted deficit of KD2.6 billion, 2006-07 saw a substantial KD7.2 billion surplus, representing 24.3 per cent of GDP and 4.8 per cent higher than the surplus for 2005-2006 surplus. This is the seventh consecutive year that the government has been able to produce a surplus resulted from actual revenues overperforming the budget by 181.5 per cent and expenditure underperforming the budget by 25.7 per cent (See Table 1).
For 2007-08, the government has budgeted an 18.4 per cent increase in total capital expenditure. Budgeted construction and land acquisition expenditures stood at a new level (KD1.8 billion), which is 304.6 per cent and 38.8 per cent above the actual and budgeted levels for the previous year. It is important to note that, the burdens of construction spending are still relayed to some extent onto the shoulders of the private sector, through the use of BOT method.
The new budget for 2007-08 seems to be a very positive and a forward-looking statement made by the government. It has tried to focus on capital expenditures and on maintaining a significant rate of investment in public spending because of the important role it plays in activating the economy. The new budget has reported marked difference in the capital expenditure for transport and equipment and projects and maintenance, both with the highest growth rates of 33.6 per cent and 38.8 per cent over the previous budget.

Real estate
The real estate and construction segments continued to expand rapidly and additional funds were pumped into these sectors which have become pivotal to the health of the local economy. In growth terms, both construction and real estate were able to improve their contribution to GDP. The construction sector’s share to the GDP grew by 9.7 per cent during 2006 while that of the real estate sector grew at 7.2 per cent.
The real estate and construction sectors have been among the forerunners of those sectors receiving credit facilities over the period 2000-06, with real estate accounting for 22.0 per cent of the total extended by banks during 2006 – the second largest after personal facilities.
Further, the sector has consistently expanded, with banks increasing facilities to the sector at a CAGR (compound annual growth rate) of 25.2 per cent over the same period. During 2006, facilities extended to real estate sector reported 29.5 per cent of annual growth, standing at KD3.3 billion. Similarly, banks increased facilities to the construction sector by 25.9 per cent on average over the period 2002-06 to breach the KD1 billion mark by the end of 2006. The new Islamic financing method Ijara or lease-to-own, has been a major success, pumping considerable funds into the real estate sector and taking a large role in driving up property prices across Kuwait.
Construction cost, meanwhile, has increased by 50 per cent because of the rise in prices of building materials. Consequently, the government was prompted to temporarily raise subsidies for building materials, especially of cement and steel during 2005 and 2006. Total government subsidies for building materials reached KD9.9 million last year, increasing by 32.6 per cent over KD7.4 million in 2005, with steel accounting for 42.6 per cent and cement subsidies being 50.8 per cent.
Real estate in Kuwait can be broadly divided into three main segments: residential, investment, and commercial properties. Although other segments such as agricultural property, industrial, warehousing and public property also exist, negligible activity within these sectors makes them less attractive and insignificant.
Housing (residential): Owing to the resolve of the Kuwaiti government to provide a house to every citizen and concrete steps towards achieving the resolution, the residential sector is the most important market segment of the real estate sector in Kuwait. Therefore, the housing segment in the country largely deals with “housing for Kuwaiti nationals”. Among the different segments of the real estate market, the residential segment is quite distinct, as it is the direct indicator of the well-being of the people. In developing nations, the segment is important in its role to provide the one basic requirement of life to the population, while in the developed countries this sector is more attractive because it serves as both a potential investment avenue and a barometer of the standard of living.
Investment: This segment represents investments in land and construction of either villas or buildings for leasing purposes, where the construction usually takes the form of high-rise apartment buildings. Although not substantially different from the residential segment, the possible difference that may be cited is the final user not being the investor and is unlikely to become the owner of the property. Importantly, this segment is active in high-demand areas as well as in areas that can be turned into high-demand residential localities, and most apartment buildings are usually occupied by expatriates.
An increase in the size of the building area by the municipality on investment plots by 250 per cent as well as the increases in heights of buildings has also been a catalyst for investors towards this sector. The changed municipality law means more apartments may be built which in turn will boost returns on the plot, making it even more attractive to investors. The investment segment has become a vibrant portion of the real estate market, with the influx of expatriates resulting in robust demand for apartment rentals, substantiating a hike in both rates and occupancy levels.
Commercial: This segment represents the construction of commercial complexes and sale or rent of spaces in commercial complexes for offices and/or shop establishments. Quite often, especially for complexes constructed in earlier years, such commercial complexes are combined with commercial car parks to capitalise on the unavailability of sufficient parking lots in prime commercial areas. It is difficult to judge the economic activity in the commercial real estate segment by simple supply-demand dynamics because of high investment owing to high cost of land and construction. The high cost of land is due to the scarcity of commercial land, and investors in the sector are limited to large corporations or high net worth individuals.
The real estate sector in urban Kuwait comprises six governorates, which are the Capital, Hawally, Ahmadi, Jahra, Farwaniya and Mubarak Al-Kabeer. Each of these governorates is made up of several areas, with some of the upcoming residential areas being Mangaf, Doha, Sulaibikhat, Jahra and Fintas. New residential areas such as South Surra and West Jleeb Al Shiyoukh continue to witness increasing activity.
The prime investment areas in urban Kuwait are Salmiya, Hawally and Jabriya. Other investment areas include Mangaf, Fintas, Fahaheel, Abu Halifa, Khaitan and Farwaniya.
The main commercial areas are Kuwait City, Sharq, Farwaniya, Hawally and parts of Salmiya. Salmiya, Hawally and Farwaniya mostly have retail commercial space.
Although the number of residential building permits declined by 10.5 per cent reaching 2,738 permits in 2006 and there is a growing interest in investment properties, residential property remains the backbone of the local property market (See Table 2).
This has resulted in the supply/demand dynamics being deeply biased towards an undersupply of residential property, which is confirmed by Public Authority for Housing Welfare (PAHW) data on the total applications and waiting list (See Table 3).
According to PAHW, the waiting rate has been increasing over the years, rising from 16.8 per cent during the late eighties, to 24.6 per cent in the nineties and reaching more than 50 per cent over the period 2004-06.
The investment properties sector continued its exceptional performance during the period 2000-2006, with the influx of expatriates and rising rents being the main reasons backing it.
After a relatively stagnant performance by the retail market until 2001, commercial real estate property in Kuwait has seen increased activity. Currently, vacancy rates are still low because of a huge demand and a scarcity of supply and thus rental prices are rising. There is also increased demand for office space, which has translated into precipitous increases in commercial land value, with prices increasing to record levels of KD7,750 per sq m by the end of 2006.
Meanwhile, the hospitality sector has emerged to the forefront with a flood of hotel guests to Kuwait, having driven up prices to record levels immediately after the fall of the Iraqi regime. The government has also shown its intent on fully supporting tourism in Kuwait, by launching a number of tourist projects that could place Kuwait on the regional tourism map, These include the Failaka Island development project that is expected to add more than 4,000 rooms and chalets to the sector in the picturesque island off the coast of Kuwait. The project will add no less than 12 hotels, a new harbour and marina for up to 300 boats.
 
Private sector
Significant growth in demand for housing, which is set to increase further, indicates the need for rapid development of infrastructure in new areas. The government has given the private sector a more dynamic role in easing the housing shortage in the country using the BOT route, which allows private sector companies to develop and invest in plots that are owned by the government for a period of 20 years or more.
Similarly, another type of BOT available but not widely used in Kuwait is called “mubadalat”, which works in the opposite way to BOT projects. Within mubadalat, the private sector offers services to the government where it develops ideas, identifies the land, designs it and presents the proposal to the government. Within the same concept is the less-known mechanism ‘build-to-suit’ type project, where the private sector firm builds and operates on its own plot of land following the specifications and regulation of the government body. An example would be the building of a school or hospital by a private sector firm for the benefit of the government.
BOT schemes, initiated in the seventies but later suspended, were revived in 1994. Since then 93 projects with a total value of KD355 million have used the system. In recent years, BOT has become a favoured method for financing infrastructure projects especially in the power, wastewater, real estate development and transport sectors. The Sharq development on the waterfront of Kuwait City was the first BOT project in Kuwait while other major projects such as Failaka and Bubiyan islands, Arefijan and Kheiran residential projects are already in the pipeline.
Among other developments, the Ministry of Public Works has received tenders from nine local companies for the execution of development projects of Failaka Island while the ministry’s Mega Projects Authority will float another BOT investment project in Failaka for constructing a huge water desalination station and a 165 MW electricity plant. Other projects include designing and building further scheme in the areas of Murgab, North Amghara, Amghara D, Sharq, Sulaibikhat and Fahad Al-Ahmad.

Government regulations
Although the real estate market is not organised or regulated by a government authority, the Kuwaiti government still holds a key position in stimulating growth in the sector as decisions taken by related government ministries or authorities – especially the municipality – often prompts increased activity in certain areas or induces a sell-off in others. Such decisions may vary to include among other things approving: building permits, higher buildings, transforming permits from one segment to another, granting land or allowing foreign ownership.
Many times the government can take initiatives to drive the real estate market forward. Such decisions include the cabinet’s approval for the municipality decision to transform the rest of Salem Al Mubarak Street from investment to commercial and the transformation of the eastern portion of the area behind Al Hamra complex from residential to investment property, due to its lack of appeal for villas – which instigated increased activity and rising prices in the area, also spilling over into neighbouring areas.
Changes in government laws also affect real estate market, for example, the new municipal law No 5/2005, allows the Municipal Council to monitor laws and regulations on projects and their locations and gives it the authority to approve or reject any project established on state-owned property according to the BOT system. Hence, some projects may experience delays awaiting approval of the Municipal council.
Regarding built-up area and number of floors, Kuwait was classified with a 20-storey maximum height up to the mid of 1990s. Over the past three years, the rules governing skyscrapers have been increasingly relaxed with 2006 witnessing the vision of City of Silk project, which involves the construction of the world’s tallest tower with a height of 1,100 m named Kuwait Tower with 250 floors. This new trend will attract further developers as the additions of floors would mean more income on the same plot of land. Currently, there are close to 10 towers under construction in Kuwait City, with another 20 or 30 licensed and industry sources are estimating to see a few 80-storey buildings in the near future. Other projects in the offing include three 70-storey tower, six buildings which will have between five and 60 storeys and at least 10 others with 40 levels.
Looking ahead, lots of industry players are calling for passing a law to allow expatriates to own real estates to increase the flow of investments in the market. A year ago, the government indicated that foreign ownership regulations would be redrawn allowing limited foreign ownership in designated areas. Discussions have centered on a proposal restricting the amount of property available for sale to expatriates to 1,000 sq m, with no right to resale and a requirement that the Prime Ministry approve the deal- and even then, a Kuwaiti national would still need to hold a stake.
Commercial properties will continue its boom because of the scarcity in supply as well the high yields and profitability in that segment. The sector is not expected to face a decline until 2008-09 when the new supply is delivered to the market.

Major projects
A number of new projects are currently in the pipeline, which includes Failaka Island, Kuwait University, the First Ring Road, the Bubiyan Island and Project Kuwait. Mega Projects Agency (MPA), a division of the Ministry of Public Works, is charged with overseeing the development of the state’s two most important infrastructure projects, Failaka and Bubiyan. Such projects are bound to affect the real estate market in Kuwait. Moreover, it is stated that the Public Authority for Housing Welfare is executing 27 housing projects at a value of KD153 million.
Silk City – To be located in the Subiya peninsula and considered as one of the largest additions to real estate development in Kuwait, it will comprise residential and commercial areas, schools, and hospitals. The city will be built on 250 sq km, and is expected to house 500,000 residents. The project will be built on a BOT model, by Tamdeen Real Estate and Ajiyal Real Estate companies. The completion date of the first phase will be within a period of seven years. It involves the construction of what is expected to be the tallest skyscraper in the world, Kuwait Tower, with a height of 1.1 km.
Jabr Al-Ahmad Township – The project, already under construction and due for completion in two years, will have 1,220 housing units to accommodate 78,000 residents.
Subiya City – The project located at the north of Kuwait City involves the construction of 50,000 residential units in the area. It will also require developing a new 75 km motorway and 36 km causeway from Kuwait City.
Arefijan and the Khairan projects – These two major residential projects are also being offered to the private sector on a BOT basis over a 20-year period. The Arefijan project costing $1.87 billion is to be a comprehensive residential area with associated facilities to house more than 100,000 people covering an estimated area of 40 sq km and comprising more than 11,000 residential units. The Khairan Residential Project is a massive 40 sq km project, which would add 26,000 residential units, at a cost of more than $20 billion.
Failaka Island – The estimated $5 billion project is to be developed on a 20 to 50 year BOT basis and calls for the construction of tourism infrastructure on the 43-sq-km island, including hotels, chalets, leisure and entertainment facilities. The Ministry of Public Works has received tenders from nine local companies for executing the project. In addition, the Mega Projects Authority is said to have floated a BOT investment project for the construction of a water station and a 165-MW electricity plant in addition to a water distillation station at an estimated cost of $25 million.
Bubiyan Island – The estimated $6 billion development of Bubiyan involves the construction of a new port, container terminal and residential and commercial infrastructure on the island. Nineteen companies were prequalified for the first phase tender covering the construction of road and bridge access to island, plus railway option at a cost of $200 to 300 million. The second stage will cover the dredging of 40-km-long, 260-m wide, 14-m-deep approach channel at a cost of $500 million.
Kuwait University – The KD1.0 billion project aims to bring all the current university faculties, currently spread across the capital, under one roof. The new educational facility will be co-educational and accommodate up to 40,000 students. Local consultants are undertaking the designs for the dormitories, sports facilities and auditoriums as well as all the individual faculties.
The International Hospital and South Surra Hospital – the KD8 million International Hospital is a 52-bed facility with a built-up area of 6,000 sq m to be built in Salmiya. The South Surra Hospital is a 1,050-bed facility with estimated investment of KD50-60 million, which is expected to be the largest general-purpose hospital in Kuwait.
The First Ring Road – The $100 million First Ring Road project involves the upgrade of a 2.5 km of carriage way, 10 bridges and a division of existing underground utilities. The project also entails the construction of an 800-m-long stretch of single-lane overpass and a 1.5-km section below ground.
Project Kuwait and fourth refinery project – The $8.5 billion project entails the development of the strategically vital Northern Oilfields, to achieve production levels of 5 million barrels per day (bpd) by 2020 from about 2.8 million bpd today. The fourth refinery project is expected to be the world’s largest greenfield refinery project. It would raise the country’s refining capacity to 1.5 million bpd and involve an estimated overall investment of $14 billion.

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