Kuwait: On Hold

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Despite strong economic fundamentals, Kuwait's real estate sector is experiencing an unaccustomed lean spell, with a decline in sales in most segments and developers reconsidering new projects as the international financial crisis takes hold.

A report issued by the Real Estate Registration and Certification Department of the Ministry of Justice at the end of November showed total real estate sales fell to their lowest level in two years in the third quarter of the year.

Overall, the value of sales was $1.9bn, down 27.1% in the three months ending September 30 compared to the previous quarter, and 54.7% lower than the third quarter in 2007.

There was a 6.6% decline in the number of sales recorded in the residential segment in the third quarter of 2008 compared to the second, while apartment sales slid by 10.1%, the report said.

One segment that bucked the trend according to the report was commercial properties, which recorded a 9.3% increase over the second quarter in the value of transactions, driven mainly by stronger activity in September, which saw 25 sales, just under half of the 56 transactions for the quarter.

While the international credit crisis has affected real estate sales, there is another factor at play, at least in the residential property segment of the market. In early 2008, legislation came into force preventing investment companies from trading in residential properties. This - combined with tighter loan requirements set by the Central Bank of KuwaitCentral Bank of Kuwait that limit the levels of funds banks can loan out for real estate transactions as a proportion of their overall portfolios - has taken some of the heat out of the residential market.

Additionally, in March the central bank implemented new regulations that limited monthly interest and repayment installments for private borrowers seeking a new loan to the equivalent of 40% or less of their salaries, compared to the previous ceiling of 50%.

The global economic downturn and the subsequent slowing of the property market is having its affect on developers as well. At the end of November, Kuwait-based real estate developer Al Mazaya HoldingAl Mazaya Holding announced it was delaying plans to expand its operations and would be focusing on completing projects currently under construction.

In a statement issued on November 30, the company said it was adopting new strategies concerning its expansion plans in the Gulf and in other Arab countries, after considering the current situation of various economic sectors.

In August, Al MazayaAl Mazaya made public plans to conduct a $137m initial public offering on the Qatari stock exchange and launch $9.5bn worth of projects in Dubai. In September, it established a Saudi affiliate, while earlier this year the company had also announced plans to set up companies in both Bahrain and in Ajman in the United Arab Emirates in order to expand its operational base. It is unclear from the company's statement if these new expansion plans will be put on hold as Al MazayaAl Mazaya focuses on existing projects and consolidates its revenue base.

Another leading Kuwaiti developer, Abyaar Real EstateAbyaar Real Estate, recently announced it was deferring plans to list on the Dubai Financial Market (DFM)Dubai Financial Market (DFM) as a result of the global economic downturn.

"We initially had planned an August listing on the DFMDFM, which was subsequently postponed to October," Marzooq Rashed Al Rashdan, AbyaarAbyaar's vice chairman and managing director, told the local press on November 9. "We are not sure of when we will go ahead with the listing but we will think about it when market conditions improve."

The company has also put on hold a plan to raise $200m through a sukuk offering, though Al Rashdan said AbyaarAbyaar would enter the market "when conditions are conducive".

Though Kuwait's real estate sector has slowed, and some of the country's major property developers are showing a degree of caution, the sector as a whole remains in relatively good health. Sales may be down and developers may be consolidating their positions, but recent moves by the Central BankCentral Bank - including cutting interest rates for loans to banks and increasing liquidity in the market - should encourage lenders to grant more loans, which in turn could boost property sales and help to make the downturn more short-lived than elsewhere.

© Oxford Business Group 2008