Kuwait Real Estate News
Debts may hit Kuwait realty sector
The debt in Kuwaiti real estate sector is likely to leave its impact on short to medium-term outlook of the sector, as companies seek to re-balance their capital structure, reveals a recent report.
The report on Kuwait property sector by Kipco Asset Management Company, a Kuwait-based asset management and financial services company, said that the debt troubles in the sector will hinder the sector’s ability to recover in a timely manner during the short to medium term, coupled with the lack of demand in commercial and investment sectors.
Moreover, efforts by property and investment firms to offload property investments will also put a downward pressure on asset prices. All through 2010 and 2011, the debt re-structuring efforts will continue from heavily indebted companies to deleverage their assets and keep a renewed focus on their core real estate operations, the report said.
As the sector has tied down 60 percent of its assets to its core operations in September 2009, which amounts to KD3.45bn, its leverage stands at 0.68x, which serves as a buffer for majority of property companies in their expected short-term debt re-scheduling efforts with lenders.
The Kuwait real estate sector has an accumulated debt of KD1.05bn in short-term, which needs to be repaid within a 12-month period, and given that, the sector has only KD218mn in cash on hand, it will have to depend on its asset base to serve as collateral in its negotiations with creditors for loans rollover or replacing short-term with longer term obligations.
These assets will be used for improving the capital structure of the sector, and therefore it could result in slower growth in asset base during 2010 and 2011, with projects in progress taking the brunt in the process, the Kipco report said.
To reschedule their debt, companies may have to dispose part of their equity and real estate portfolios to pay back short-term obligations, consequently exerting pressure on property prices.
This will lead to further slowdown in the growth in the asset base of the sector. The local banking sector found itself over exposed to real estate and construction sector with local credit extended to the sector, amounting to KD8.3bn as of January 2010, which represents 33percent of total credit facilities amounting to KD25.1bn.
Kuwait’s real estate sector grew by end of 2007, enabling the sector to play a major role in the non-oil sectors of the economy. But, with large amount of accumulated debt, and limited bank lending, there was a plunge in asset prices, the real estate sector was severely hit during the financial crisis. The Government investment in real estate and construction has been below the required levels in order to stimulate demand among real estate markets and re-stabilize prices.
Kipco however expects recovery in residential real estate to supersede other segments, despite new restrictions on residential real estate trading and more stringent flow of credit for residential segment.
Absence of flexible foreign ownership laws in Kuwait is also a limitation to potential of residential real estate segment. With expatriates constituting 68 percent of the population, and absence of more flexible laws for foreign ownership, the potential of residential real estate segment is limited.
But, as this issue has been advised in parliament, hope still remains. Currently GCC nationals are allowed to own residential property. But the law prohibits foreign ownership of real estate property in Kuwait, with few exceptions. These exceptions include owning of real estate properties for diplomatic missions and ownership of properties for GCC nationals only, for use of land as a residence.
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