Jun. 29, 2018
Kuwait is shifting to increased private participation in the real estate and construction markets in an attempt to build a more diversified economy.
The story of Kuwait's real estate and construction sectors in recent years has been one familiar to the rest of the GCC: reduced activity due to wider economic slowdown resulting from a fall in oil revenues. As oil volatility increases in recent years, the real estate market has contracted in the face of uncertainty, with the residential sector particularly vulnerable. 2016 saw sales volume fall to the lowest level in six years, but 2017 has brought new signs of stabilization. October 2017 saw real estate activity reach its highest monthly point since June 2014, with the commercial and residential sectors leading the way. This recovery has given industry participants reason for optimism for the continued health of the real estate sector. On the construction side, firms are looking to infrastructure projects for future opportunities. The government's New Kuwait blueprint calls for a sweeping set of new transport and tourism projects to help diversify the Kuwaiti economy, and this will result in a steady source of new opportunities for a construction sector that has seen flagging growth in recent years.
The limited amount of land available for development in Kuwait has led to a strict regulatory environment in which the government carefully manages land use and allocates vouchers that allow for the construction of private residential developments. Kuwait's Public Authority for Housing Welfare (PAHW) has played a major role in this allocation since it was established in 1975, taking charge of the distribution of land for public projects. As of 2009, PAHW provided state hosing units to more than 93,000 Kuwaiti families, equal to around 40% all Kuwaiti households. Growth in the private sector residential market remained strong for most of the past two decades due to consistent undersupply and a rapidly growing wealthy population fueled by oil revenues, but shifting economic fortunes revealed some flaws in the market. Investors have long been frustrated by the difficulty in accessing land for development in general and residential development in particular, noting that the structure of the markets dramatically privileges Kuwaiti citizens, who make up only 30% of the population.
The recent slowdown has particularly affected the residential sector, which has served as a good bellwether for the health of the larger real estate market. Investor uncertainty about the Kuwaiti government's fiscal position led to lower residential sales volumes in 2015 and 2016, with total sales in the market almost halved from 2014 to 2016. Reduced private willingness to spend was compounded by an increase in PAHW housing allocations; in an effort to add supply to the market, the government's housing program dramatically increased the share of state-funded housing distributed. All told, 2016 saw the National Bank of Kuwait's residential home price index fall by 12% YoY by December 2016. The one bright spot in the real estate sector was a strong performance in commercial properties, which saw sales rise to KWD575 million in 2016, a new record. This came on the strength of a series of major retail projects in Sabah Al-Ahmad Sea City and Salmiya, demonstrating that while individual confidence might be low, international firms still have some degree of faith in the strength of Kuwait's retail sector
Aware of the need for structural changes, 2017 has seen the Kuwaiti government take steps to open up the real estate sector to provide a clearer regulatory landscape and bring in new foreign investment. Part of the New Kuwait 2035 plan announced in early 2017 is an emphasis on providing quality living accommodations, and the government has been clear about its desire to bring new volume to market with the aid of private industry. The previous model, which called for the government to assume almost all the costs of housing provision, is increasingly becoming unsustainable due to the nation's worsening financial position, and partnering with experienced international firms is a way for Kuwait to increase efficiency, build new relationships with foreign developers, and take advantage of new environmental policies that can help reduce water usage, which is quickly becoming one of the country's most pressing environmental issues. New regulations passed in 2016 give PAHW the power to form public-private partnerships without having to wait for multiple levels of bureaucratic approval, and Kuwaiti officials are optimistic that more than 100,000 homes can come to market over the next five years via these new initiatives. Buoyed by this new regime, the market has seen promising stabilization thus far in 2017; residential sales were up 20% YoY in 3Q2017.
This housing push, and the wider New Kuwait 2035 plan, should be a boon to the Kuwait construction industry. The housing projects outlined in the development plan alone account for more than KWD400 million, and the government is also preparing for a wave of transport infrastructure projects designed to allow for increased business and tourism flows as part of its efforts to build a more diversified economy. Kuwait International Airport is in the midst of a USD4.3-billion expansion project that will add a terminal and expand capacity to 25 million passengers per year. Future expansions are expected to raise capacity to 50 million before the end of the project. Another landmark construction project underway is a USD7-billion metro line that will include 68 stations across 160km. First announced in 2006 but long delayed, Kuwaiti government officials are now confident enough in the nation's economic position to launch feasibility studies and tenders in September 2017. All told, the nation's five-year development plan calls for more than KWD34.15 billion on infrastructure spending, via increased usage of PPPs, a situation that has the construction sector optimistic about moving past the slowdown of the past few years.
Previous development plans have failed to meet their stated goals due to a combination of bureaucratic delays and shifting economic conditions. Kuwait recognizes that it is in a bit of a fix: it needs structural reforms to grow a more diversified economy, but the lack of oil revenues has left it unable to fund said reforms. To move past this, the country is focusing on funding construction through private financing, setting the goal of increasing the private sector's share of construction to 41% by 2020. Though the plan has received praise from the construction sector, it remains to be seen if it can overcome the immediate cuts in spending that have come about as a result of the country's worsening fiscal position. What appears clear, though, is that Kuwait is ready to take the steps needed to build a better future.