Kuwait: Stormy waters 

(MENAFN - Oxford Business Group) New data released by the National Bank of Kuwait (NBK) for February 2008 appear to show the real estate market entering a period of increased turbulence. The figures, which record a sharp fall compared to the market peak last July, are attributed by the bank to the possible early effects of an amendment to law number (8) 2008, forbidding commercial companies from trading in residential properties.

Despite being relatively well-insulated from the types of financial products related to the subprime crisis currently afflicting parts of Europe and the US, Kuwait has nonetheless suffered a sharp downturn in its domestic real estate market since the beginning of the year. The residential sector has seen the biggest fall, with February's average unit prices dipping below both 2007 and 2006 averages. In all, the average residential unit price dropped 47% for the month, with total real estate sales falling 20% from January figures. This marks the third consecutive month of falling sales in the Kuwait market, while average residential prices have dropped by 60% since August 2007. Both the number and value of approved loans is also shrinking, from 368 and KD8.4m respectively in January to 286 and KD6.6m in February, which may possibly be related to a decline in plots distributed by the Public Authority for Housing Care (PAHC).

Kuwait's real estate market is small, and hence prone to heavy exaggerations from minor market trends. Some observers have argued that the fall in residential property prices may merely be the result of an abnormal number of transactions involving low-valued properties for the month. Certainly, there is some consolation in the fact that the number of units sold rose 43% between January and February, not usually an indication of bearish market sentiment. Yet while the average unit price for residential properties may be arguably a blip, the longer-term figures for total market value seem to show a steady shrink, offset by a brief upturn last November.

Arguably, the figures suggest Kuwait's real estate market is entering a downward cycle. Ghazi Abdul-Rahim, senior manager of economic research at NBK, told local press he expects to see real estate prices fall between 10-20% this year, mostly as a result of the new amendment.

Falling real estate prices may not necessarily be a bad thing for Kuwait: with inflation currently running at a record 7.54%, a down-turn in the real estate market may be precisely the disinflationary influence the economy needs.

In an effort to encourage just such a phenomenon, the Central Bank of Kuwait (CBK) last month attempted to slow down consumer lending by tightening the rules on borrowing, dropping the ratio of interest repayments from a maximum of 50% of salaries down to 40%, and 30% for those with pensions. It is likely to be several more months before the result of this policy is reflected in official statistics, yet the likely upshot will be a further cooling of the real estate market.

Indeed, overall market confidence in the wider construction sector appears to remain high, with stocks in Mabanee and Injazzat Real Estate both advancing on the Kuwait Stock Exchange (KSE) last week. By comparison, shares in NBK fell 1% on April 22, perhaps an indication of traders factoring in the new government lending restrictions.

Kuwait's real estate figures demonstrate one further interesting fact. When compared to the market price of Kuwait's major export, crude oil, there is a tight correlation with the OBG real estate index until last December, followed by a rapid fall away this year. This indicates two things: first, growth in Kuwait's real estate sector has been fuelled by the recent growth in oil prices (though it should be noted that last July's peak in the housing market can not be directly attributed to the price of oil at the time). Second, that correlation appears to have been broken in recent months, suggesting Kuwait may be able to escape its current inflationary cycle.

Whether or not this second trend is maintained, or is merely a blip on the radar - an artifact generated by the small size of Kuwait's real estate market - is uncertain. Analysts will have a better picture in the months ahead, as the effects of the government's monetary policy become clearer.