Everyday I drive to work and pass by all these huge buildings and skyscrapers, wondering who will fill all this space?
If you think the bad days are over read this article in AlRai local paper, titled “47 New Buildings in Kuwait… Any Tenants?” (see full article)
In recent years, Kuwait City has transformed from an old traditional city filled with old markets and sheesha places to a modern skyscrapers filled downtown with a fast paced corporate life vibe. Unfortunately, most buildings began construction in the peak phase of the economic cycle and planned operation in the recession or arguably, the trough. A study done by local real estate experts states that currently there are 47 buildings under construction; 15 of which are skyscrapers. These buildings are going to add 700,000 sqm of office space and it will be a big challenge to find new tenants to fill these buildings up.
The basic economic question is whether office space demand will keep up with the growth of supply. If not, then we are heading into a giant bump.
Even before the economic crisis many local experts acknowledged that Kuwait would be oversupplied with office space by 2010. Following the economic crisis, many new projects and start-up companies (potential tenants) placed their orders on hold, canceled, and are cutting costs. Moreover, rents of soon-to-be operational buildings are plunging, thus, making feasibility studies worthless. With all that being said, we can get a clear picture of the oversupply in the real estate market. As for the demand side, the IMF expects Kuwait’s economy to grow at modest rate of 3.3%. This indicates that there won’t be enough demand to meet the supply.
As supply exceeds demand, rents dive further down. This will decrease the value of the assets; making the projects run on a loss. Since most real estate projects highly depend on debt, they will hardly generate enough cash flows to pay their interest, thus, forcing banks to take further provisions.
Chairman of Al Mubarakiya Real Estate, Abdulla Hashimi expects the price of the sqm to drop to KD 11. “Who is going to rent all that space,” he added. Also, he sees that all this extra space could be a large contributor in decreasing the prices of those assets by approximately 10%.
“Those new buildings will create another crisis as 800 new companies are needed to fill them up.” said Khalid Al Azmi, Chairman of Manazel Real Estate.
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Wow.. Lets just hope newly married couples are interested in downtown kuwait
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Keynesian Reply:
October 12th, 2009 at 5:05 pm
lol.. I guess you should send a proposal to the Ministry if Housing
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Excellent observation and question Saud !
I often ask myself the same question everytime I visit home.
What in the world the developers were thinking about? What is the key factor/s that will create the internal and external (foreign companies) to occupy these high rises?
Is it the revival of a regional economic power such as Iraq? This is a far fetched dream, forget about being a reality. Or, are we going to experience some social and economic evolution that puts us at equal level with our regional rivals (Qatar, Dubai, Abu Dhabi..)?
Or is it simply a fantasy?
Give me an answer, please!
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Saud Reply:
October 12th, 2009 at 6:54 pm
I’ll give you an answer as soon as I get one! But they should consider changing many of those office spaces to residential spaces
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Hello,,
The key player here is the banks, they were financing all these projects and knew that its not really worth that much.. but they were keeping financing them cause the guys who built them are speculators who are going to sell it to someone else when they get a good deal.
Its good idea to transfer those buildings to residential purposes, but it will add huge loss to these companies.. cause the rent for residential purposes is much less than commercial purposes.
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I don’t think that would happen… too much red tape.
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Yeah we’re one of the companies that plans on moving to a new building and we had to negotiate down the rent price.
What annoys me is that some new buildings strive so hard to find/keep companies when they should just allocate more place for parking and charge us more! Where I work now there is my building with lots of companies in it, and not one but TWO headquarter banks neighboring my building and because each building doesn’t have enough parking underneath it all three big buildings are using like two parking lots nearby. Where I’m going to move also doesn’t seem to have enough parking! Inzain you’ve seen the problems other buildings have with parking why didn’t you plan for that in advance! It’s so frustrating.
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Ra'ad Reply:
October 13th, 2009 at 3:03 pm
You nailed a major regulatory issue on the button !
Where are the regulations on building plans by the Kuwait City Hall?
No building plans + lack of law enforcement = shanty town
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Keynesian Reply:
October 13th, 2009 at 5:10 pm
True. I guess there is a law, but no one is adhering to it. Most new buildings have no parking plans! This is simply outrageous. If I was a profit-maximizing real estate guy in Kuwait, I would obviously disregard parking space laws and build my skyscraper on the whole lot. Unfortunately, that is what everyone is doing!
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Saud Reply:
October 14th, 2009 at 12:32 am
they are trying to maximize profits by trying to rent as much space as possible
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comments:
1- lets get this out of the way first: the country is, in toto, a bad joke backstopped with oil-based welfare. a well known and intractable conundrum.
2- engineers feel free to chime in but i dont think you can convert an office building into residential apartments without prohibitive costs.
3- most important point: i think people who are predicting the market will come DOWN to 11 KD such as that guy in the article are delirious and the real number will be even lower than that even for many grade-A office spaces.
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I LOVE your 1st point!
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[...] Another 30% of the loans are given to the constructions and real estate sector, a sector doesn’t look very promising right now with current conditions. The highly leveraged commercial real estate market in Kuwait grew much faster than the demand. This will affect the cash-flows expected from these projects sparking a potential default on loans outstanding. For more details on this subject read “Got-Tenants?”. [...]
Hi
Still the commercial office cost is very high in places like Ahmadi, Fahaheel etc., and even for old offices the key money people are asking is very high.
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The comments are great here, above.
Got Tenants? That’s what we ask in the UAE everyday.
The rich citizens, the property holders, will feel the pain pretty bad 2011 and 2012 because asking rents for commercial must inevitably come down as banks suffer and to begin attracting potential businesses.
Banks will have to see a further haircut in share prices (50%) before I begin picking up shares in the GCC.
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Keynesian Reply:
May 31st, 2010 at 7:46 am
I hope not many people share your pessimism! Yet, it may be warranted.
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haha..who said anything about the local region GCC markets trading on any sort of fundamentals ? Be it equity markets, real estate markets etc. what drives the markets here is liquidity.. oil prices are down and things are as gloomy as ever.. if oil jumps to $150/bbl..I don’t think there is any doubt that 50 more skyscrapers would kick-off in Kuwait.
Money managers here are dime a dozen, the vast majority of them are useless. IF you go to a money manager and ask for investment advice he will never say don’t invest in anything (if he does, he’ll have to close his shop soon due to lack of fees on AUM). So a typical money manager in GCC has to invest somewhere. Two options are – equity and real estate. So when things are gung-ho lots of liquidity flows into the sector creating asset bubbles and distorting the underlying supply/demand metrics. And that has what has happened in both these markets. Bubbles have burst and everyone is speculating where the bottom is. But since there was no real demand (only speculation) driving up the assets prices there is likely to be no demand / marginal demand when the asset prices fall until they reach the point where all the artificial demand (speculation) is wiped out.
My theory: real estate markets in the GCC have been severely distorted since early 2000 and the bottom will be the real estate prices of year 2000/01 (inflation adjusted of course) – as populations (no. of families) in most GCC(ex-saudi) has more or less stayed the same (taking into account the expats who have left). Now back to practical life, no real estate developer is going to write down the prices of his investment to the 2000 levels as that will result in huge losses; the result – a very long term correction where there is no demand until the next oil price boom; till then real estate developers will continue to sit on useless piles of concrete until then. Developers will not write down prices to the extent which will spur real demand and rents will be artificially (collusion) kept high which will further deter any real demand in the near-midterm Local banks will be stuck with restructuring/rescheduling loans but will not be calling in defaults and taking possession of the property as the usual practice in this part of the world. What a shame!! Fact: No end of misery in sight. Only savior next oil boom.
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