If you’re a real estate investor in Kuwait in 2020, you will certainly have asked yourself about the future of the sector and the country in these trying times. In this article, Mohammed Alhussaini (co-founder Banani App – real estate) shares his insights on what the COVID-19 crisis means for real estate investors in Kuwait.

For the past few months, the world has been fighting to control the spread of the COVID-19 virus, and mitigate its impact on our populations and economies. Countries around the world are grappling with the same impossible question: how do you balance the value of human lives against economic costs like debt, unemployment and hits to key industries? The health and economic crises the world is facing right now are inextricable from one another, and will have knock-on effects for everyone, not least real estate investors.

Here’s an example:

Imagine it is February 2020, and you are the proud owner of a brand new, high tech gym. You have taken on debt and invested startup capital into your new business. In doing so, you’ve committed to compensating your employees, as well as paying off your debt to the bank that loaned you the cash for your equipment and property improvements. Many small businesses start this way.

As the owner of the gym, your main costs are divided into two categories:
1. operating expenses (salaries, electricity, disposables)
2. financing expenses (repayment of the loan you took to pay for equipment and remodelling).

How is Kuwait’s government supporting businesses?

To prevent this from happening, governments step in to ease the burdens of business owners during this time. In Kuwait, the government stepped up to the plate, introducing a loan holiday that enabled most loan-holders to pay off their debts with a six-month delay.

Introducing a loan holiday was crucial to retail and hospitality businesses, whose cash flow is completely dependent on consumers visiting stores and making purchases – something that was not possible during full lockdown in Kuwait. It is something that also remains to be affected with the restrictions put in place by public health authorities (understandably so). Kuwait’s loan holiday is likely to save a huge number of businesses across several sectors, real estate included.

How is Kuwait’s government supporting real estate investors?

As real estate investors, we typically operate on thin margins, use creative loan-structuring and see large benefits from even 0.25% reductions in loan interest rates. In Kuwait, many consider the real estate market to be overvalued, exhibiting bubble-like characteristics in areas like Shuwaikh. Furthermore, the market is oversupplied, and investors face tough competition to attract tenants to their properties.

With the coronavirus crisis threatening the livelihoods of rent-paying tenants, the potential problems are cataclysmic. Should enough tenants become unable to pay rent, landlords will, in turn, be unable to pay their mortgages as well. This, in turn, creates a cycle in which banks begin to foreclose on properties and record losses for each one.

To mitigate this, the Kuwaiti government and banking association has announced a deferral on mortgage repayments and interest, in addition to lowering interest rates. This is a strategic move that will be crucial in enabling real estate investors to weather the storm.

What’s next?

Of course, mortgage and business loan holidays can only buy time, not solve the problem permanently. COVID-19 is still in full force in Kuwait and the rest of the world and is likely to be with us for many months to come. As long as brick and mortar businesses are unable to operate at their normal capacity, more and more tenants will be unable to make their rent payments.

Now, the government has to find a way to mitigate further damage. One probable solution is a devaluation of the Kuwaiti Dinar.

Doing this would slightly increase the cost of living in Kuwait but would be helpful for property owners with debt. Due to the recession caused by COVID-19, property prices are likely to decrease over the next few months. The debt taken on by investors will remain the same, meaning that the debt load will be greater than the actual value of the property, and investors will struggle to pay their loans off, with some defaulting.

If, on the other hand, the Dinar is devalued, neither the on-paper value of both properties or the debt load associated with them would change: therefore, the value of the investment would be preserved.

Needless to say, this solution is not perfect: devaluation of currency has many knock-on effects in all areas of the economy, especially international trade. However, if the crisis continues to drag on, it will likely become necessary to mitigate economic collapse. The high stakes race for a coronavirus vaccine and the responses of governments to the human and economic effects of the crisis will define the next decade not only in Kuwait but around the world.

For more information regarding the app, or investment advice head to bananiapp.com or follow them on Instagram @bananiapp for more information. Photos courtesy of Masrur Rahman on Unsplash.