Kuwait’s real estate sector vital to economic growth

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KUWAIT CITY - A Professor of Economics at Kuwait University and a researcher in urban economics and housing Dr. Dhari Al- Rasheed highlighted the importance of the real estate sector in the country. It accounts for approximately nine percent of Kuwait’s GDP.

Housing expenses consume between a third and half of the average household budget. He stressed the need to reassess various housing and real estate issues, especially with the state’s near-total control over private housing provision through the housing care program, which has limited the private sector’s involvement in real estate development.

Moreover, Dr. Al-Rasheed raised concerns about the limited housing options and the constraints imposed on supply by the laws and regulations related to building and land use, such as those that restrict area, classification, density, and ownership of subdivided units. In an exclusive interview with Al-Seyassah, Dr. Al-Rasheed emphasized that the current reality of the housing issue in Kuwait remains largely unchanged, if not worse. He highlighted many challenges facing Kuwait's real estate and housing market, indicating that most transactions are still paper-based and manual, resulting in lengthy administrative procedures.

Dr. Al-Rasheed also pointed out the prevailing chaos surrounding sales offers, which fosters a fertile environment for fictitious speculation, inflated values, and artificial manipulation of supply and demand mechanisms among others. He called for creating a central electronic real estate exchange to facilitate transactions between buyers and sellers. This platform would promote transparency in offers, prices, and agreements. Dr. Al-Rasheed also called for regulating the construction contracting sector and publishing detailed real-estate information by the Ministry of Justice with full addresses, building characteristics such as the number of floors and rooms, and available services and facilities. He said the Central Statistical Bureau should conduct regular housing surveys to assess housing conditions of families, their preferences, and challenges.

The concerned authorities should also adopt an open data philosophy and make information available to academic researchers, which will help in providing scientific evidence to guide real estate and housing policymakers. When asked about his perspective on the economic reality of the real estate and housing sectors in light of new policies, Dr. Al-Rasheed explained that the real estate sector is a major part of Kuwait’s economy. Real estate, rental, and construction activities contribute approximately nine percent to the gross domestic product of Kuwait. This figure rises when we include related sectors such as financing, insurance, storage, electricity, water, restaurants, and hotels.

Housing expenses

Housing expenses constitute a major part of household budgets, accounting for up to one-third of spending according to the latest survey of household income and expenditure in Kuwait. For many families, this figure exceeds half of their budget. Given its economic impact, it is not surprising that real estate and housing issues are central to decision-making and public discourse.

In recent years, there has been a notable shift in public policies related to the real estate and housing sectors. These policies include initiatives related to housing cities, taxes on vacant land, housing financing, and the re-pricing of state properties, as well as the regulation of various aspects of real estate transactions. While these measures are designed to address the symptoms of the underlying issues, it is too early to assess their effectiveness or evaluate their impact comprehensively. Although they aim to tackle specific problems, they do not necessarily address the root causes of these issues.

Regarding the assessment of the housing situation from a previous study conducted in 2020, and whether the situation changed in the four years that followed, Dr. Al-Rasheed said, “In the study that I conducted with other researchers, we investigated the issue of high costs for Kuwaitis to own houses. This problem arises from both high prices in the private housing market and the long waiting periods for housing care from the state, leading to rental costs and economic and social instability. Anyone who read the study, which is available on the Kuwait Foundation for the Advancement of Sciences website, will realize that the core issue lies in the prevailing model, which relies heavily on the state’s near-total control over private housing through the housing care program and the minimal involvement of the private sector in real estate development. Moreover, the limited housing options and the restrictions imposed on supply through building and land use regulations such as those restricting area, classification, density, and ownership of divided units exacerbate the problem.

Therefore, in the study, we aimed to address the issue within a broader framework, rather than the narrow confines of the prevailing model. We considered housing as part of an integrated urban, economic, and social context.” When families make housing decisions, their considerations extend beyond just cost and living space. They also take into account factors related to quality of life, such as the location, ease of access to workplaces, availability of essential services like schools and clinics, commercial and recreational facilities, as well as the efficiency of infrastructure and municipal services. Social dynamics within the neighborhood, or “the community,” also play a crucial role. For many, owning a home is not merely a property investment but a choice of lifestyle that shapes experiences, memories, and relationships that can span generations.

When reviewing the current housing situation, we observed that it remains largely unchanged – or even worsened – compared to the past. Many families still face difficulties purchasing directly from the market, and waiting periods for housing care continue to be lengthy. The laws and regulations that restrict housing supply remain in place, and alternatives are still lacking. Residential areas continue to be designed with a focus on maximizing concrete building space, rather than enhancing the quality of life for residents. Legislative and executive efforts to address the issue remain confined within the narrow framework of the existing model, which has proven inadequate for both current and future needs. The proposed solutions, including recent legislation, are still limited in scope, merely perpetuating the problem and failing to address its root causes.” Regarding the major challenges facing Kuwait’s real estate and housing market today, Dr. Al-Rasheed highlighted a fundamental economic problem in the global real estate sector, which is the imbalance of knowledge and information between sellers and buyers.

He said, “A house, for instance, is a complex asset with many factors influencing its value, including the land, the building’s features, construction quality, infrastructure, and the surrounding urban and social environment. Sellers typically have more insight into these details than buyers, which can lead to disagreements over pricing and potentially prevent the sale from going through. Also, purchasing a home often involves bank financing, but banks may not have complete information about the borrower’s financial stability.

There is also a disparity in technical knowledge between the property owner, designer, engineer, and contractor. Legislators and regulatory authorities have made efforts to bridge this knowledge gap by facilitating information flow between stakeholders and implementing regulatory controls for market activities. These issues are prevalent in Kuwait’s real estate and residential market, where most transactions are paper-based and manual, leading to lengthy administrative procedures.

The chaos surrounding sales offers creates a fertile environment for speculative practices, inflated values, and artificial manipulation of supply and demand. Furthermore, the construction contracting sector lacks proper organization, and the market lacks data necessary for fair property evaluations and scientific analysis.

To address these knowledge gaps, several actions should be undertaken:

1. Establish a Central Electronic Real Estate Exchange - Create a platform where transactions between sellers and buyers are conducted transparently, especially when it comes to offers, fees, and agreements.

2. Regulate the Construction Contracting Sector - Implement regulations to ensure proper organization and standards within the construction industry.

3. Enhance Real Estate Transaction Data - Ensure that the Ministry of Justice includes comprehensive details in real estate transaction data, such as accurate property addresses and building characteristics, including the number of floors, rooms, services, and facilities.

4. Conduct Periodic Housing Surveys - The Central Statistical Bureau should carry out regular housing surveys to assess family housing conditions, preferences, and challenges.

5. Adopt Open Data Philosophy - Relevant authorities, including the Ministries of Justice, Kuwait Municipality, Public Authority for Housing Welfare, and Central Statistical Bureau, should embrace open data policy and make information accessible to academic researchers.

This will facilitate studies and provide scientific evidence to guide real estate and housing policy decisions.” When asked whether real estate developers alone are a sufficient solution to the housing problem and what alternative solutions he might propose, Dr. Al-Rasheed acknowledged that real estate developers play a necessary role but their involvement alone is not enough to resolve the housing crisis. He explained that since the 1990s, housing legislation has permitted the Public Authority for Housing Welfare (PAHW) to collaborate with real estate developers on various projects. However, these collaborations have not produced any successful, replicable models.

This can be attributed to the limitations imposed by the prevailing housing model, which has proven inadequate. The existing framework restricts real estate developers with stringent procedures and requirements for residential projects, making them unattractive to reputable investors and developers. The motivation for real estate developers to engage in a project is primarily driven by the potential for profit, which necessitates flexibility to adapt to changes in demand and to offer housing options that cater to the diverse needs of families. Real estate development should be a market-driven solution rather than being constrained by a government housing model. The state should focus on stimulating the real estate development sector independently of the PAHW, while ensuring that housing products meet quality standards, and transactions are conducted transparently.

Regarding the attractiveness of the current real estate market for investment, particularly with discussions about reducing bank interest rates, Dr. Al-Rasheed said, “If we are referring to investment in real estate development, the market’s appeal could be enhanced by reviewing and streamlining the administrative procedures that investors go through, as well as alleviating or modernizing regulatory restrictions.

Also, restructuring the economy by diversifying beyond the oil sector would create investment opportunities across various industries, generate job opportunities for citizens, and attract tourists and investors. These factors will increase demand for real estate across all sectors. However, this must be accompanied by policies that boost supply, such as easing restrictions on land use and facilitating the development of new lands. Making land more accessible to investors and entrepreneurs at fair prices, reflective of both their nominal and economic values, would support the national economy and create job opportunities for citizens.” Regarding the storage issues highlighted by the Mangaf fire incident, Dr. Al-Rasheed outlined several key problems that need addressing.

Structural changes

He explained that, “The Mangaf fire tragedy exposed many problems. First and foremost is the inhumane living conditions of many migrant workers in Kuwait. Overcrowded housing that fails to meet quality and safety standards is a significant concern. Addressing this requires structural changes in the economy, labor market, and population structure, along with direct measures to improve building safety and quality, enhance workers’ rights to negotiate and litigate, and free them from restrictive sponsorship systems. Secondly, there is a problematic level of residential segregation between Kuwaitis and non-Kuwaitis. This segregation often leads to the neglect of infrastructure and building quality in non-Kuwaiti areas, resulting in negative social phenomena.

Unfortunately, the state’s approach to the so-called ‘workers’ cities’ might exacerbate this issue by isolating these areas further from public scrutiny and media attention. Thirdly, the storage issue revealed a poor distribution of real estate resources. Rather than merely blaming companies that have repurposed residential buildings as storage facilities, it is more productive to address the underlying problem.

This includes reviewing regulatory restrictions that have prevented real estate developers from responding to the clear and growing demand for dedicated storage facilities.” Regarding the viewpoint of some people that involving the private sector in economic and development projects is the magic wand for moving the wheel of the economy, Dr. Al- Rasheed explained that the economy is a complex system with no single solution. While the private sector cannot independently drive economic growth, it must play a leading role in addressing structural imbalances in Kuwait’s economy, including issues related to production, public finance, and the labor market.

The private sector, particularly small, medium, and emerging enterprises, should be instrumental in diversifying the production base, localizing essential goods and services, and contributing to public finance through profit taxes. It is also key to creating job opportunities for citizens, especially given the anticipated influx of half a million young Kuwaitis into the labor market over the next two decades. To support this, laws should be reviewed and updated, regulatory restrictions eased, and investment in infrastructure and service facilities should be prioritized to foster an attractive investment environment for both local and international entrepreneurs. Furthermore, it is essential to reevaluate the support system for the private sector to ensure that it aligns with the goals of economic sustainability and job creation.