Differentiation Factors between Industrial and Non-Industrial Real-Estate: Kuwait - Case Study Example

Differentiation Factors Between Industrial and Non-Industrial Real-E Thorough Focus on the Case of Kuwait Table of Contents I. Introduction 3 II. Industrial vs. Non-Industrial Real Estate, Focus on Kuwait 5 III. Conclusion: Industrial versus Non-Industrial Land Use, Prospects in Kuwait 10 Works Cited 12 I. Introduction This paper presents a discussion on the differentiation factors between industrial real estate on the one hand and non-industrial real estate on the other, with an intense and thorough look at the case of the Kuwaiti real estate sector. The Kuwaiti real estate sector is seen as exhibiting a trend towards sustained growth from the low that it experienced together with other countries in the Gulf Cooperation Council or GCC in 2008, at the height of the global financial crisis that reached the GCC during that time. In tandem with some good prospects for other GCC states, such as Qatar which is expected to benefit from the real estate boom fueled by its hosting of the World Cup in 2022, Kuwait is seen as enjoying a boost to its real estate sector in general moving forward, with positive signs in 2012. Of the three segments, residential, investment and commercial segments in Kuwait, it is the residential sector that has seen much growth in 2012, followed by the investment segment, and with the commercial segment trailing and exhibiting problems and poorer prospects overall relative to the residential and investment segments of the Kuwaiti real estate sector (Ejaz). Taking a step back, prior to the financial crisis of 2007-2008, it is worth noting that prospects for the Kuwaiti real estate sector were seen as very good by the mainstream investing public, with the real estate sector seen as being one of the key pillars of the Kuwaiti economy, together with oil and the Kuwaiti stock exchange. As it is at present, in 2007 the residential segment of the sector was seen as leading the charge of growth, with the investment segment behind it, and the commercial segment seen as doing relatively well too, during that time, with growth at an compounded annual growth rate of 18.8 percent for the period from 2000 all the way to 2006. We can see, moreover, that from the way the literature has segmented the Kuwaiti real estate sector, that industrial real estate translates to commercial real estate roughly, as this is the segment of the sector that is allotted to businesses. The investment segment, on the other hand, pertain to those properties that are allocated to being rented out to foreigners and other entities within the Kuwait society (Global Investment House KSCC). Moreover, taking the entire discussion in the context of the situation of the real estate availability in Kuwait, one sees that because of the government mandate to provide property/housing for all citizens of Kuwait, and owing to the fact that just a tenth of the total land in the country is available for real estate activities, that two things are evident. One is that residential or non-industrial real estate dominates activities in Kuwait. Two is that there is less emphasis conversely on the industrial real estate sector in Kuwait, with Kuwaiti real estate firms focused instead on venturing into nearby regions for industrial real estate development due to the lack of land for such purposes in Kuwait. On the other hand, government is in charge of most of the industrial real estate development in the country, it seems, from the way the government has been spearheading the very large industrial projects in Silk City and in the islands of Failaka and Bubiyan, with the goal of uplifting the state of industrial development in Kuwait to make it on even terms with the level of business real estate development in the other GCC countries (Zawya). There are prospects for industrial real estate activities within the free trade zone known as the Kuwait Free Trade Zone or KFTZ, which had been in operation since 1999, and have about 90 percent occupancy rates for companies who have on paper come to enjoy some of the benefits that do not accrue to businesses situated outside of the KFTZ, including lower income taxes and relatively fewer regulations. The KFTZ can be considered as industrial real estate, designated specifically for that purpose by the government. On the other hand, in practice, restrictions and regulations are said to pepper foreign firms who locate in the KFTZ, and in general the real estate is so regulated together with oil that foreigners are effectively limited in their options for industrial real estate prospecting and development within Kuwait (US Department of State). II. Industrial vs. Non-Industrial Real Estate, Focus on Kuwait Kuwait, as discussed above, is coming off several years of recovery from the lows in the real estate sector that was brought about by the global economic crisis that hit in 2007 and 2008. This is taken together with the generally large contribution of the real estate sector to the Kuwaiti economy translates to the large impact of any sustained recovery and growth in the real estate sector on the overall Kuwaiti economy, with implications on the prospects and the importance of upcoming projects in the field. One notes too that the literature cites residential or non-industrial real estate as being the primary driver of transactions and growth in the real estate industry, with the government in charge of providing housing to all Kuwaiti citizens by law. On the other hand, prospects for what can be considered as industrial real estate development in Kuwait are constrained and generally limited to the KFTZ as discussed above, and even in that relatively free area industrial activities are somewhat curtailed by the imposition of many regulations and restrictions on the national and the local government levels. Outside of the KFTZ, industrial and non-industrial real estate development are generally off limits to outsiders, as a nationalized industry or sector on the same level of nationalization as oil. This is coupled by the generally limited availability of land in Kuwait for such real estate activities, with all but ten percent being generally off limits to real estate sector plays. All these point to non-industrial real estate, and in particular residential real estate, as dominating industrial real estate development in terms of transactions and overall level of activity in Kuwait (Zawya; Ejaz; Global Investment House KSCC; US Department of State). From the literature it is clear that where industrial real estate classification is concerned, versus residential and commercial real estate, industrial real estate is real estate designated for specific economic activities that have to do with manufacturing and processing of various materials or goods, and they are generally land that are considered as industrial whether or not there are buildings that are built on them. Technically speaking, all of the land that Kuwait has allocated for oil production is considered as industrial real estate, judging by the classification. On the other hand, while this is so, it is clear too that such industrial real estate is classified as off-limits to everyone but the government. Whether the activity is classified by the type of activity, in this case industrial, or that the activity involves oil production, which is closed off to everyone else and is a government monopoly in effect, the classification of real estate allocated for oil as being industrial does not change the way the Kuwaiti government treats the real estate sector as effectively that part of the total land area of Kuwait, 10 percent, that is allocated for residential and commercial real estate development, as well as industrial real estate allocated for mainly non-oil industries., and industrial real estate activities that have been designated as being open for foreigners to get into, such as IT and related businesses and industries (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue) The preceding discussion therefore takes the caveat that the real estate sector so far discussed excludes all of the industrial land that has been designated as being allocated for oil production and related industrial activities in the country, as well as those lands that are government owned that are allocated for other vital industrial activities, such as power generation for the country’s needs. When one considers that residential real estate segment, which has the largest share among the three allowed real estate activities in Kuwait, is likewise controlled by government, one sees that both the very large properly industrial real estate sector in Kuwait, and the large non-industrial share taken up by residential land for Kuwaiti citizens, are effectively under the control of the government. This leaves very little by way of prospects and opportunities for growth for outsiders and even for locals wanting to compete with each other for the small and highly regulated real estate within the KFTZ for the precious little industrial activities in the country outside of the government monopolies and mandated by law (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue). Examining the available literature on the prospects and state of the Kuwaiti real estate sector in the context of the differentiation between industrial and non-industrial real estate above, therefore, one sees that when the literature differentiates real estate into residential, investment and commercial real estate, one does not consider industrial real estate at all, because all three classifications lie outside of the ambit of what can be considered as industrial real estate. That latter classification can be applied to some of the land at the KFTZ allocated for manufacturing and related processing of goods activities, but as has been discussed above, those are not substantial in Kuwait in terms of allocated land. Moreover, as a whole, one sees that what the literature refers to as the real estate sector in Kuwait is really nothing more than the 10 percent of land that has been allowed for use outside of the government monopoly uses for oil and for other vital services such as power generation. That ten percent, moreover, includes the very large share of residential housing development for Kuwaiti citizens, which is also a government monopoly. With this in mind, we see that the non-industrial segment is characterized by some growth in the monetary value of all such land transactions, as reflected in the plot below (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue): Graph Source: Ejaz 4 When one looks at the plot therefore, and considers the differentiation between industrial and non-industrial real estate discussed in the literature, one sees that the entire plot can be construed as making up the non-industrial real estate sector in Kuwait over the past few years, while having nothing to say about the state and the prospects for the industrial real estate segment of the Kuwaiti real estate sector. For that we look elsewhere for figures and developments in the segment of industrial real estate, with some being culled from proxy figures relating to the state of oil production and the prospects for oil production in Kuwait. The thinking is that growth in activities relating to oil translates to growth in the activities tied to the industrial real estate used to produce and process oil. Also the paper looks at more recent developments on items that have substantial industrial real estate components, such as the developments in the building of Silk City (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue; Goldschein; Faris). First looking at the Free Trade Zone and assuming that all land there is used up by industrial activities from foreign firms, then the table below summarizes the total land area allocated to the free trade zone, a miniscule amount of land compared to the government monopoly land control over all of the industrial land allocated to oil, and over the large tracts of land allocated for residential purposes (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue; Goldschein; Faris; Kuwait Embassy in Australia): Table Source: Kuwait Embassy in Australia Moreover, we are able to get a picture of the level of activities in the Free Trade Zone, and consequently on a portion of the level of industrial real estate transactions and activities in Kuwait represented by the Free Trade Zone, from proxy data about the level of foreign investment into Kuwait. That foreign investment level is below US 100 million dollars in 2010, which is nothing in comparison to the revenues that it generates from oil, which make up about half of the country’s total GDP. The point here is that the small land allocation for the Free Trade Zone, the strict regulations within and the low level of foreign investment into Kuwait tells us that industrial land use in the Free Trade Zone is small and unimportant to the whole economy, in comparison to industrial land allocated for oil production, processing and related activities (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue; Goldschein; Faris; Kuwait Embassy in Australia). Meanwhile, using oil revenue data as proxy data for determining activities in the real industrial real estate sector in Kuwait, that sector monopolized by government and devoted to oil production, we get a truer picture of the state and prospects for industrial land use in Kuwait. Moving forward, the prognosis is that activity here will remain intense and large, and will continue to dominate Kuwait’s economy (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue; Goldschein; Faris; Kuwait Embassy in Australia). III. Conclusion: Industrial versus Non-Industrial Land Use, Prospects in Kuwait One can see that even with new projects such as the new Silk City, that the emphasis of the Kuwaiti government with regard to land development is to devote new real estate development to building more commercial, residential and investment real estate, and its implied strategy or emphasis for industrial real estate is to focus on extracting oil and expanding revenues in that sector. These are the two drivers of real estate development in Kuwait, one non-industrial and limited in the availability of the land for such purposes, and the other industrial and dominated by real estate use by the government for its very vital oil industry. In terms of growing the non-industrial real estate sector, it is clear from its plans to develop Silk City that the strategy is to increase the value of its non-industrial real estate through added-value development of the new city in the case of Silk City. For non-industrial real estate, the Free Trade Zone seems destined to remain an afterthought in comparison to the long-term plans to continue to develop industrial lands for oil production (Zawya; Ejaz; Global Investment House KSCC; US Department of State; Michigan State Tax Commission; Massachusetts Department of Revenue; Goldschein; Faris; Kuwait Embassy in Australia). Works Cited Ejaz, Sarah. “Kuwait Real Estate Sector”. Capital Standards. December 2012. Web. 5 May 2013. Faris, Nada. “Rebuilding the Kuwaiti Dream One Mess at a Time: Subbiya’s “Silk City”. En.v. 16 August 2012. Web. 5 May 2013. Global Investment House KSCC. “Kuwait Real Estate Sector”. Global Research Real Estate. August 2007. Web. 5 May 2013. Goldschein, Eric. “Kuwait is Building a $132 Billion City Around A Skyscraper With An ‘Arabian Nights’ Theme”. Business Insider. 7 December 2011. Web. 5 May 2013. < http://www.businessinsider.com/kuwait-madinat-al-hareer-skyscraper-2011-12?op=1> Kuwait Embassy in Australia. “Free Trade Zone- Kuwait”. Kuwait Embassy. n.d. Web. 5 May 2013. Massachusetts Department of Revenue. “Property Classification Codes”. Government of the State of Massachusetts. 2012. Web. 5 May 2013. Michigan State Tax Commission. “Property Classification”. State of Michigan. April 2013. Web. 5 May 2013. US Department of State. “2012 Investment Climate Statement- Kuwait”. US Department of State- Diplomacy in Action. June 2012. Web. 5 May 2013. < http://www.state.gov/e/eb/rls/othr/ics/2012/191178.htm> Zawya. “Real Estate- Kuwait”. Zawya/Thomson Reuters. November 2008. Web. 5 May 2013. < http://www.zawya.com/industryinsight/> Read More