The Rush For Real Estate
About two weeks ago, a friend of mine asked me to write about the real estate crisis in Kuwait after he saw my tweet about the difference in prices per square meter in downtown Kuwait City vs. NYC – the financial hub of the world. Surprisingly, the financial hub of the world was cheaper than Kuwait!
Let me begin by saying real estate is not my favorite asset class, but the urge of virtually every Middle Eastern person to acquire some sort of property makes me immensely interested in knowing the details of this sector.
Let’s dig a little deeper in what constitutes the problem in real estate in Kuwait:
Most of us heard about ‘freeing government lands’ in the news by politicians and some economists. But what does that mean?
Simply put, KOC (the gigantic oil company) owns almost all the unused land in Kuwait, for the very reason that there is ‘potential’ oil underneath these lands, and therefore people shouldn’t live here. But wouldn’t that be absurd since KOC has shut down so many of its fields on lands because the oil ran out in that particular field. You can ask oil officials about that and let me know the answer if you could get one!
The other meaning of freeing lands is the list of less than 5 people who own vast lands in residential and commercial places and are not willing to develop, nor sell these lands. From one perspective people would hate that very list of 5, but I would say from a capitalistic point of view, why would he/she sell or develop the land if no law requires restricts him? Now you’d think yes, the government should be proactive in setting laws to prevent such things. Again, if you could find any answer from the government, let me know and I’ll buy you a Kitco chips.
Economic feasibility in a time of crisis
The other reason we have a real estate problem in Kuwait is because there is virtually no way for people to invest their money. And here I mean the general public of people, and not a list of 5 or 20 or 100. It’s me and you, when you get a raise, when you get a bonus, when you sell something and buy a cheaper alternative and you have some excess cash, and so on… In most cases, an average person likes to invest his money somewhere to ensure a brighter future for himself, and his family. The way you do this in western countries is by investing your money in retirement plans that include stocks, bonds, government treasuries, and other financial products. We do have a stock market, right? Yes, it’s that dark brown building on Boodai Square in Downtown. But how has the stock market performed from the day it operated? First, the Souk Al-Manakh crisis, then the 2008 Credit Crisis. For sure there were crises in other parts of the world, but the problem here is that the public sector did not deal intelligently with the aftermath of crises. That is why you see people still owing money from Al-Manakh crisis, or people selling their Aston Martins and riding a used Nissan Maxima after 2008. And it’s the reason you see bread bakers riot and shut down their shops, or parking lots increase their charge from 100 fils to 150 or 200 and literally the dramatic increase in consumer goods prices, hence Inflation!
Back to investments, so stocks are out, bonds? We do not have a bond market in Kuwait. Government treasuries? There is no vehicle that allows individuals to directly purchase government treasuries, it’s rather reserved for financial institutions that are run by the very elite part of the society.
Basically, the average citizen is left with only real estate to invest in. Of course, the older segment invested before 2000’s so they benefited from the low prices, and now the current generation is left with skyrocket prices because of what we discussed before, and the pure supply and demand economic issue.
The mentality of living inside Al-Soor, and being near to Diwaniya, or Avenues, or my friend’s uncle’s house should be changed to embracing the very fact that Kuwait is a big country with over 3.5 million population and it’s not realistic to assume everybody is literally a block away from their parents or families’ residences.
Also, the fact that every newly wed with two kids requires an entire 500 sq. m block of land to build 3 stories, and a garage, and 4 ballrooms. We are way past this stage and we should embrace the reality that if we keep building 500m houses for every family, we’ll need 10 more planet earths to accommodate Kuwaiti families in year 2250 (Yes, I have made some estimations and that’s what Excel came up with!).
Ways to recover?
Long term: Create more economic opportunities for people to invest in, and reduce the pressure on real estate as an asset class.
Long term: Introduce new laws imposing taxes on multiple land owners to put pressure on land behemoths and strict the use of the taxation money to only government institutions dealing with providing housing to citizens.
Long term: Kuwaiti families embrace living in apartment buildings and try to shrink family sizes by not having too much kids.
Long term: Government sets infrastructure rules for building high rises in residential places and accommodating needs (parking, grocery stores, health, etc…)
Short term: Have fun and eat a snickers bar. If you can afford, have a Diet Coke as well.