Kuwait: Building back up

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According to several recently published reports, the outlook for Kuwait's real estate sector is looking up. After hitting a low in 2009, the real estate market has begun to show signs of recovery and following robust expansion in 2010, the sector appears poised to see further growth this year.

On April 22, Kuwait Finance House (KFH), the country’s largest sharia-compliant financial institution, issued a report detailing the first-quarter performance of the domestic real estate sector. The KFH report estimated that the total value of real estate transactions – including the residential, investment and commercial segments – grew by 5.3% over the previous quarter.

This continues a trend that was set in 2010. According to an April 2011 report, published by National Bank of Kuwait (NBK), real estate sales “have been trending higher since the middle of 2009 when the Kuwait and the world economies started recovering from the financial crisis”. Indeed, NBK found that average monthly real estate sales grew from KD108.7m ($381.65m) in 2009 to KD166.1m ($583.2m) in 2010, an increase of nearly 53%. In annual terms, this amounted to a total market of nearly KD2bn ($7bn) in 2010.

The residential segment, which accounted for about 55% of this total, exhibited the greatest growth, with sales expanding by 65% between 2009 and 2010. The government’s distribution of plots and units during the middle of 2010 may have been one of the factors that contributed to this rise. By comparison, the commercial segment increased by only 23% between the two years, reaching KD240m ($842.6m) in 2010.

Recent reports project an upward trend for the remainder of 2011. According to KFH, liquidity in the real estate market has increased in recent months, in part thanks to a February 2011 grant of KD1000 ($3500) to every Kuwaiti citizen and a decline in the number of investment opportunities in other Arab countries.

In addition, a recent legal decision that will allow Islamic banks to finance the purchase of private residences by individuals may provide another boost to the sector. Indeed, in an April 17 statement to the local press, Abdulla Al Shemmari, the CEO of Arkan Al Kuwait Real Estate Company, highlighted the potential positive impact of this legal development, noting that since the ruling corporate figures have indicated growing demand for residential properties.

Other factors may play a role too. Earlier in April, a report issued by Emaar Al Ahlia Real Estate Company emphasised the importance of the decision by the Kuwait Investment Authority (KIA), the country’s sovereign wealth fund, to invest in the local real estate sector. In March the KIA announced that it would launch a five-year, KD1bn ($3.51bn) commercial real estate portfolio, to be managed by KFH.

In a statement to the state news agency, KIA said that it expected “good returns” in the medium and long term, pointing out the potential to benefit from the “steep plunge” in the prices of commercial real estate. Subsequently, on April 16 a KIA official noted that the fund expects a minimum return of 6% on its investment.

Positive response to the sovereign fund’s move came from the chairman of the Kuwait Real Estate Union, Tawfiq Al Jarrah, who said, “Such huge liquidity in the real estate market will reflect positively on local investment and real estate firms, and the country’s bourse as well.” However, there have been dissenting views. Maytham Al Shakhs, a portfolio manager at Global Investment House, told the press that the KIA’s investment is “a big mistake... because it will cause a huge increase in prices. It would have been better to support other sectors like the investment and services sectors.”

A large injection of liquidity into the real estate market could indeed make profitable investments more scarce, but new residential and commercial developments are still coming to market. Investors had a chance to review domestic and international projects at the Real Estate and Investment Exhibition, held at the Kuwait International Fairground in Mishref from April 11 to 16. According to Abdulaziz Al Khalid, the undersecretary of the Ministry of Commerce and Industry, about 30 local and Gulf region companies were set to display a variety of real estate and investment projects at the fair.

While real estate prices may remain relatively low for now – at least in comparison to their historical highs – the rising demand from both individual homebuyers and institutional investors suggests that this may not be the case for long.

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