Eight months after Kuwait Investment Authority’s (KIA) $3.6 billion investment in local real estate, the decision may be proving less positive than expected for the Kuwaiti housing market.
Despite the $300 billion sovereign fund’s decision in March to launch a real estate portfolio to invest in the local commercial market, it seems many remain unconvinced that it will address systemic risks associated with weak demand from Kuwaitis.
KIA said at the time that it hoped to achieve good returns on the back of a “steep plunge” in real estate and that it had hired Kuwait Finance House, the country’s biggest Islamic lender, to manage the portfolio. The move was seen as an attempt to rescue the struggling property market, which has suffered similar structural issues to Dubai, such as massive oversupply.
Stefan Burch, a strategic consultant for the GCC at Cluttons, says: “Kuwait City has witnessed a large increase in commercial stock over the past five years which has resulted in an oversupply. As with many capital cities across the Middle East, occupier markets are currently weak as a result of the general economic downturn that hit the region in 2008.
“The major risk to the Kuwait commercial market remains a lack of occupier demand which is the main driver of value in difficult market conditions. This will not be addressed through the investment by the KIA in the commercial market,” said Burch.
He added that KIA could inadvertently push property inflation up if it is forced to pay above the odds to entice landlords to sell. Commercial owners are reluctant to sell office space when prices could appreciate in the coming months if regional unrest dies down.
Since the global financial crisis, the commercial sector, the market that KIA is targeting with its investment, has struggled to get off the ground.
In the first quarter of 2011, the number of investment real estate transactions in Kuwait rose by nearly half, but the market for commercial housing saw a large slump in activity, according to a report a report by Global Investment House (GIH).
While the total value of transactions amounted to $1.437 billion, this was down 66 per cent compared to last year, the report said.
“There is a risk that if the markets are systemically oversupplied then this [KIA’s investment] won’t make a difference. It’s just throwing good money after bad,” says Matthew Hooton, a real estate partner based in London at law firm Ashurst.
“From KIA’s perspective, the yield profiles that they can achieve will be quite attractive. Having bought them at the bottom of the market, there’s an opportunity to rent or sell as the prices rise.”
KIA announced the investment in March at the height of the political protests in the Middle East, prompting many to speculate that it was part of a wider effort to quell potential anti-government sentiment in Kuwait.
Gulf states, including Saudi Arabia, Qatar and the UAE, have unveiled huge public spending packages in recent months, including wide-ranging measures to support the national population and boost the local economy.
Earlier this year, Oman and Bahrain said they were planning massive boosts in state spending aimed at calming popular unrest. Bahrain approved a budget of $16.44 billion over the next two years, a 44 per cent rise from previous years.
Hooton added: “I would say there could also be a degree of social benefit in the investment. If KIA can sell these properties at lower prices then it’s a bit of social engineering, plus it will perhaps appease those that feel unsettled by the Arab Spring.”
Many Gulf-based sovereign funds were created with the intention of investing income from oil exports, which dominates their budgets, into a diverse range of assets that would guarantee lasting returns for post-oil generations.
The funds have increasingly turned away from foreign holdings since the recession in a bid to shore up regional markets that were battered by the downturn.
Abu Dhabi-based Mubadala has sought opportunities in its own back yard in recent times, including the launch of a joint venture company last year with Pramerica Real Estate Investors to raise capital to fund and invest in the UAE capital’s real estate projects.
In a separate joint venture launch in 2007, Mubadala struck a deal with CapitaLand to design, build and operate residential developments. The government fund has since bought up units in the project when it was unable to sell properties in the open market.
This has typically not happened though in Dubai, sector analysts say, where there hasn’t been the interest by the government to buy up stock that hasn’t been sold for fears of depressing the market further.
KIA’s decision is likely to be seen as a tipping point for the property sector in one way or another, primarily because of its sheer size and influence in the market. Many Gulf-based investors will see it as a positive endorsement of the product by a well-respected institutional authority, and perhaps that Kuwait property is at a point to start investing.
Nick Clayson, head of real estate for the Middle East at the Norton Rose Group, said a reduction in house prices is throwing up some exciting investment opportunities in general across the region.
“KIA’s move seems to be part of a shift we are seeing in the focus of a number of countries in the MENA region in relation to their policy on local real estate and infrastructure development. Many such countries are now focussing on affordable or lower cost housing which has been in short supply, which was not the focus of the recent building boom.
“The lowering of house prices across all sectors means that existing stock can become a suitable product to fill this need. Other jurisdictions without a surplus are looking at private/public partnerships and legislation to catalyse demand, however, for Kuwait, this seems like an appropriate solution,” he added.
It is hoped that investments like KIA’s will stimulate activity in the real estate sector in general, which has also struggled because of a lack of credit for potential property buyers.
Kuwait, which restricts foreign ownership of property, saw property prices slump about 30 per cent after the government also banned companies from investing in real estate to stem inflation. It has suffered from a shortage in both residential and commercial properties as delays in public investments in recent years aggravated the imbalance.
Most recently, mainstream banks in the country have lobbied for a relaxing of the mortgage laws to open up the underserved home loans market. Islamic lenders already offer home financing packages but conventional lenders are restricted from doing so.
Investor jitters over this regulatory uncertainty were compounded in the first half of this year by regional political strife, which many warn could haunt Gulf economies for some time to come.
But Hooton, from Ashurst, adds: “Now would be a better time than this time last year to start investing in the Middle East property sector. But whether or not all the pain that’s going to be felt in this market has been felt is yet to be seen.”
It seems KIA still may achieve its goals of capitalising on plunging property prices, but whether there will be a long-term uplift for real estate in Kuwait is yet to be seen.