KUWAIT, 7 June 2004 — Kuwaiti investors’ interest in the local property market has been on the rise recently, with 2003 seeing the highest levels of market activity in the last 25 years. The fundamental factors underlying this remain, leading to expectations that activity and prices are set to continue upward in the current year, according to the Kuwait-based Global Investment House.

The lack of lucrative investment channels and a shaky start for the stock market in 2004 makes real estate a major investment channel. Low interest rates on bank deposits push investors to seek higher returns elsewhere, coupled with the repatriation of funds back to Kuwait after both Sept. 11 and the fall of the Iraqi regime. These external factors will steer increased activity, but there are also factors within the real estate sector itself that have supported growth in activity. The new financing medium of Islamic Ijara (leasing) has swept the market and brought into play a new class of investors. As demand has increased, the supply of plots and buildings has remained almost unchanged due to Kuwait’s small size, forcing prices higher.

Residential Segment

Although the residential sector is the backbone of the Kuwaiti real estate market as a percentage of total sales, it was affected by the decision to stop construction in areas where services and infrastructure had not been completed. Investors have backed away from purchasing properties in those areas, which led to a steep decline in prices.

Investment Segment

The investment sector also saw vigorous trading. Last year’s decision to increase the built up area as well as the influx of expatriates to Kuwait has boosted investor interest. In turn, rents have increased with demand, resulting in a yield of 8-9 percent, outperforming bank deposits. This has boosted trade on investment plots. Activity in this segment will continue to increase in the coming year, albeit at a slower pace due to already steep prices.

Commercial Segment

In the eyes of many real estate analysts there is a shortage of high quality office space. This is due in part to international firms setting up shop in Kuwait to launch business in Iraq and also the current climate in the local economy. Figures point to the ongoing construction of nearly 24 high-rise towers in downtown Kuwait City to cater to this demand.

Spiraling Price of Building Materials

The rising prices of building materials has negatively impacted the market. The increase in prices of building materials is estimated to have resulted in a 50 percent rise in construction costs. This is seen as a global problem resulting from an increase in the price of scrap metal, as well China’s huge consumption of steel to build sites for the 2008 Olympics. Previously, Kuwait obtained clinker from neighboring producers, but with the construction boom in the region, it has been forced to import it from Asian countries, adding shipping and insurance costs. To counter this, the government was prompted to temporarily raise subsidies for building materials, especially cement and steel, from 30 percent to 60 percent, pumping nearly 32 million Kuwaiti dinars into the market to control prices. The minister of commerce and industry has also banned the export of building materials, cement and steel, even to Iraq.

Real Estate Clearing Company

Although the real estate sector is an active portion of Kuwait’s GDP, it remains the only sector unregulated by government. Activity in the market is described by traders, analysts and officials as chaotic, disorganized and unregulated. After years of negotiation, it seems that the Real Estate Clearing Company may finally see the light of day. The decision by the minister of commerce and industry to establish the company is a positive sign for the market. However, the Union of Real Estate Brokers showed strong reservations to the establishment of the company. Brokers feel that as active members in the market, their stake should not fall below 50 percent. A number of brokers within the union even filed a judicial complaint, asking for the Ministry of Commerce and Industry to be prevented from establishing the company without their approval.

Up and Coming Hospitality Sector

With new geo-political conditions since the fall of the former Iraqi regime, the hospitality sector has seen rapid expansion. After the ousting of Saddam, there was a flood of hotel guests to Kuwait, driving up prices to record levels. In fact, statistics show that during 2003, occupancy in Kuwait shot to number one in the world, with 85 percent occupancy. They also charged the second highest rate in the world per room, at $172 a night, second only to Venice. As the situation in Iraq returns to normal and attacks against coalition forces and businessmen are curbed, even more visitors are expected. The legislation which scrapped visa requirements for 34 nationalities is expected to fuel business trips bound for Iraq as well as tourism. Along with the establishment of the country’s first private commercial airline. The government has also shown its desire to place Kuwait on the regional tourism radar, revealing a plan to develop tourism which includes 20 new hotels to meet growing demand.

Real Estate Companies at the KSE

There are currently 15 Kuwaiti real estate companies listed on the Kuwait Stock Exchange, accounting for around 8 percent of the total market capitalization. Corporate profits have soared and all the companies within the sector reported profit increases for the year.