Capital Expenditures to Revive Real Estate in Kuwait
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Kuwait, along with all of its GCC partners, has suffered badly from the global financial crisis. All types of businesses in the country have been affected by the collapse of the region’s stock markets and diversified investment portfolios, especially those based in the real estate sector.
Nevertheless, Kuwait has already overcome the negative implications of the global financial crisis, a sentiment recently confirmed by the Kuwaiti Minister of Finance Mustafa Al-Shimali. Yet, the Kuwaiti government is well aware of the country’s economic challenges so it is undertaking intensive efforts to create the congenial and stable political atmosphere for meeting such challenges. The Kuwaiti government and the national assembly recently approved a development plan which entails spending approximately $103 billion (KD30 billion) between 2010 and 2014.
The plan includes lots of mega projects that will have its impact on the real estate sector as well as the whole economy. The announced mega projects include a new business hub, dubbed Silk City, with an estimated cost of $77 billion. Other projects include a railway and metro system and additional spending on new cities, infrastructure and services. The health, education, and oil sectors will also see additional investment. The real estate sector in general, and the residential segment in particular, is expected to benefit the most. That’s because housing problems are set to be solved with the establishment of new cities and because real estate is the second largest industry in Kuwait.
Expansionary fiscal policy main driver of growth
According to the Emirates Industrial Bank (EIB), the six GCC nations, which pump more than 15% of the world’s crude oil supply, assumed a modest deficit in their 2010 budgets. Those deficits could turn into massive surpluses by the end of the year as crude prices are projected to average far higher than the budgeted level. A recent study predicted an improvement in oil prices from an average of $60 barrel 2009 to $70 this year. That would widen the GCC’s fiscal surplus to nearly $50 billion in 2010 after it plunged last year to one of its lowest levels in a decade.
According to EIB, the GCC’s consolidated fiscal surplus dipped to only $19.6 billion in 2009 from a record $189 billion in 2008, but the balance is expected to rebound sharply this year. “Although the six-member countries forecast a deficit of $2.9 billion in their budgets for this year, the actual balance is expected to turn into a surplus of nearly $50 billion. This is because most of the budgets were based on an oil price of $50 a barrel while prices are expected to average $70,” EIB said.
Accordingly, the 2010 budgets were the highest in the GCC, as they were nearly 3.5% to 20% higher than the previous year’s budgets. Naturally, this record expenditure is expected to stimulate the economies of member countries and the surplus will be achieved despite an expected rise in actual spending.
Kuwait is expected to record the largest fiscal surplus in 2010 as it had in 2009, mainly because the country normally assumes the GCC’s most conservative oil price of below $40.
Semi-official data shows that Kuwait budgeted revenue for fiscal 2010-2011 at around $33 billion and spending at $55 billion, leaving a deficit of nearly $22 billion. But analysts believe the actual balance will turn into a large surplus as oil prices have been assumed at nearly half their current level and the country has shown a great degree of spending restraint.
After a shock, real estate and construction in Kuwait move forward
According to a report published by KAMCO, an investment company based in Kuwait, the Real Estate and Construction sectors in Kuwait had a buoyant market fuelled by the rising oil prices up to the end of 2007. Improved surpluses in public finances along with abundant liquidity among local banks helped to pour vast sums of money into new projects, specifically retail, office and residential projects. In terms of contribution to GDP, total real estate and construction activities grew from $2.9 billion during 1998 to almost $4.5 billon during 2003 and $6 billion during 2008 representing an average contribution of 7.3% over the period 1998-2008.
Since the start of the economic crisis in 2008, as KAMCO indicates, activities of both sectors have been on a downward trend with a large number of major projects either delayed or cancelled. The Commercial Bank of Kuwait (CBK) recorded a decline of 4.5% percent in 2008. According to information published by the Ministry of Justice, the average monthly value of registered real estate transactions in 2009 decreased by around 7% since 2008 from $1.05 billion to $976 million.
By end of 2009, as oil prices stabilized at a higher bracket, Kuwait recorded a budget surplus. In fact, over the past five years, Kuwait posted over $250 billion in oil revenues, its budget surplus amounted to over $92 billion over the same period.
According to the Kuwaiti Minister of Finance, “Kuwait is considering more ambitious spending in 2010-2011 fiscal year with spending expected to range between $41 billion to $51.5 billion. The global economic downturn slashed Gulf States’ revenues but a recovery in oil prices could help the world’s largest oil exporting region to sustain large fiscal stimulus packages this year without slipping into deficit. The new budget includes spending on projects in the government’s development plan which runs until 2014 and aims at decreasing the country’s dependence on oil but also includes investment on raising oil and natural gas production.”
The $103 billion development plan
The approved plan focuses on both oil and non-oil economic sectors. The plan aims to turn Kuwait into a regional trade and financial hub through sustaining economic development, economic diversification and GDP growth.
The plan includes the following mega projects:
The new business hub (Silk City) with estimated cost $77 billion
A major container harbor and a 25km causeway
Railway and metro system
Additional spending on new cities, infrastructure and services, particularly health and education
Around $86 billion of oil sector investments to raise production capacity and modernize current facilities.
The development plan is seen as the stimulus for the economy and it is expected that government-backed mega projects will revive the overall economic sentiment.
Projects worth $62 billion earmarked for 2010
Kuwait’s State Minister for Housing Affairs Sheikh Ahmad Al-Fahad Al-Sabah has announced that $62 billion worth of development projects will be launched in 2010. Sheikh Ahmad, who is also Deputy Prime Minister for Economic Affairs and Minister of State for Development Affairs, has said, “2010 will be the year of projects by means of signing housing projects in the new Sabah Al-Ahmad, Jaber Al-Ahmad and Saad Al-Abdullah cities, together with other housing areas.” The government is eager to allow the private sector to get involved in the new housing projects in the country, the minister has pointed out.
Currently, the government is keen to give more importance for BOT projects to cooperate with private sector in this field. For example, the Ministry of Finance is giving more support for the usage of BOT projects as that helps to relieve the pressure on the state’s budget. Moreover, the government intends to apply the Public Private Partnership principle (PPP) to overcome the main obstacle facing BOT projects within public authorities, namely bureaucracy.
Kuwait to open property sector to GCC investors
As part of efforts to open up the real estate sector, the Kuwaiti government recently announced that it wants to allow citizens from other Gulf Arab states to own property and land. The cabinet said in a statement that citizens of Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain would be treated like Kuwaitis in “ownership of land and property,” which until present is closed to foreign ownership. The bill requires approval by parliament and the Emir.
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| Read full story in REAL's September issue |
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