KUWAIT: Demand for commercial real estate took a major hit in Kuwait during the financial crisis as corporate looked to downsize operations and cut costs. As the economy rebounds and with a number of major office developments slated to hit the market, analysts predict prices will continue to soften as supply is set to outpace demand for the coming few years. In 2009 the average transaction price for the commercial sector declined by 15.8 percent from 2008 levels, according to figures released by Global Investment House (GIH). Meanwhile, the rental rates for office space in the central business district (CBD) nearly halved, falling from a peak of KD14 ($48) per square meter to around KD7 ($24) per square meter. According to Rawaf Bourisli, the general manager of Action Real Estate, "Many offices in the CBD are at half-occupancy and rents are falling dramatically from the heavy competition to lure tenants. In a way, this is needed, as prices had to normalize from the extravagant levels they were at in the past." Indeed, while the sector has taken a major hit, one positive offshoot from the downturn is that it could lead to the rationalization of a sector that had, according to many, grown out of control during the real estate boom that preceded it. With surging property prices in the middle of the decade, many new investment firms formed looking to capitalize on the situation. In turn, Kuwait's investment sector, and accordingly the financial sector which provided funding, became overly exposed to real estate. According to Abdulaziz Al Nafisi, the investment group head at Salhia Real Estate, "We will see a market correction and the phasing out of newly formed investment companies that operated as 'single-project' real estate companies with no operational assets. These companies got funding during the boom, but will not be able to anymore as lenders are being very selective and only extending credit to seasoned developers with a track record, a diversified portfolio and market reputation." With work on a number of office tower developments resuming, it is estimated that by 2011 new commercial complexes could add an additional 500,000 square meters of capacity to the existing 1.2m square meters of floor space available in the CBD. As a result, companies currently renting spaces are anticipated to exploit the supply excess by shifting to attractive deals in the newly opened and best-designed developments, which come with sought-after facilities such as parking and extra services. As a result, older "class B" developments will increasingly face vacancies once existing tenant deals expire. According to Salhia's Al Nafasi, "New huge office complexes continue to be built and the anticipated supply of new office space in the next few years could sustain the market for a period of 40 years. Yet there is no net uptake of new companies to match this new supply." On the demand side of the equation, one source of good news for commercial developers has come in the form of the announcement of a KD30bn ($103 billion) government-spending package. While this will be allocated towards public infrastructure, the government has signaled that it will look to encourage and incorporate the private sector in the execution and delivery of these projects. This in turn could lead to a growth in corporate activity and the expansion and arrival of new companies into Kuwait. Overall, while the picture might point to a coming period of intense competition to lure and attract occupants and tenants, for the more-established Kuwaiti developers the somewhat negative domestic outlook is offset by the fact that their investment portfolio has a significant, if not a greater, exposure abroad. Many of Kuwait's leading developers have chosen to leverage their capital and invest either in neighboring Gulf Cooperation Council countries or in up market projects in emerging markets such as the Levant and North Africa . Fahad Al Ghunaim, the chairman of First Qatar, a Kuwaiti developer with large projects in Qatar and Oman, told OBG, "Kuwaiti developers, facing limited growth prospects at home, are looking to places that follow a more open market philosophy by allowing freeholds for foreign investors, attractive incentives and tax relief. They are also looking at markets that are seeking to create new demand by diversifying their economies into new growth sectors. In my belief, you need foreign investors if you truly want to create a thriving real estate sector."
