Kuwait's booming housing market

As evidenced by the construction cranes littering the skyline, the real estate sector in Kuwait continues to boom, with the market growing by 57% in value over the first two quarters of 2007 compared to the same period of time in 2006.

According to a recent report by the National Bank of Kuwait (NBK), nearly 1,000 sales transactions were recorded last month, with an estimated value of approximately $855 million, one of the highest amounts on record. Average prices were also up by as much as 8% over the previous year for apartment and commercial units.

The property market, as a whole, has experienced unprecedented expansion as oil revenues flood into some of the 270 new towers and projects crowding Kuwait city's urban centers - mainly in Sharq, Kuwait City, Salmiya, Hawally and Fahaheel.

However, a spokesperson for Kuwaiti real estate firm Tijara Real Estate and Investment, told Oxford Business Group (OBG) it is the residential and housing market that serves as the growth engine in the country's property market, as a result of both demographics and limited supply.

Kuwait's population increase, which hovers around 4.5% annually, combined with high levels of liquidity, burgeoning regional markets and relative political stability, has created an ideal environment for property investment, attracting both locals and foreign expatriates to buying residential villas and apartments.

Figures from the NBK report show it was the increase in the value of housing sales transactions, which grew by 64% over 2006, that has sustained the ongoing boom in Kuwaiti properties. The volume of units sold also increased dramatically, expanding by 52% in the residential sector and 54% overall over the first half of 2007 compared to the same period of time in 2006.

The lack of available land has also driven up prices and value of transactions. The vast majority of the land in Kuwait is owned by the government, with estimates ranging as high as 95%. The scarcity of supply has sent costs skyrocketing. According to figures from Alargan, a Kuwait-based property developer, land accounts for over 50% of the cost of a finished project, far higher than the standard 15 to 25% range.

Despite the increased volume, residential construction has failed to keep pace with the high demand. The number of building permits issued has shown a steady rise over the past few years, growing from around 2600 in 2004 to well over 3000 in 2006. But, up until recently, only a few units were making it to the market. In the ten years prior to 2006, only 19,000 new units were released for sale.

While Kuwait's construction industry is one of the most robust in the region, with a value nearing $4 billion and planned investments of over $11 billion, it faces cumbersome bureaucratic procedures and burdensome material costs that often causes unexpected delays.

Nor will residential demand be slowing down anytime soon. Although several major projects are currently in the pipeline, with over 70,000 units due to come online over the medium-term, there is a long waiting list for housing. Under a 1993 law, the Kuwaiti government is required to provide property to Kuwaiti citizens within five years of an application for housing. Today, there are an estimated 70,000 applications currently outstanding, with an additional 7,000 applications being added each year.

The continued success of the sector has overshadowed some underlying weaknesses. Demand for low and middle-income housing has grown at a strong pace, pushed in large part by the growing number of foreign workers who comprise the majority of the country's construction workforce. However, like elsewhere in the GCC, there is a noticeably heavy emphasis on building luxury units in Kuwait, skewing the market and increasing risks of slowdown and overvaluation.
 

Jason J. Nash is Head of Research at the Oxford Business Group
(www.oxfordbusinessgroup.com)

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