KUWAIT, (Reuters) – Almost half the office space in Kuwait’s financial centre lies empty after plans to become a regional business hub rivalling Dubai were wrecked by the financial crisis and the difficulties of doing business in the Gulf state.

Kuwait’s economy has long been underpinned by its oil production but growth in other sectors has only been moderate and observers such as the International Monetary Fund have stressed the need for Kuwait to diversify its economy.

Developers went on a building spree after the overthrow of Iraq’s Saddam Hussein in 2003, believing that businesses would flock to Kuwait once the region stabilized.

But the financial crisis and an unfavourable regulatory and infrastructure environment kept many companies away, with recent political tensions putting off both local and foreign investors.

Unfinished tower blocks now dot the skyline of the capital Kuwait City, where even prime locations struggle to fetch more than half their rental value from before the crisis, real estate officials said.

Occupancy in Kuwait City is 55 percent, said Tawfiq al-Jarah, the head of the union of Kuwaiti real estate companies.

“There is a glut of supply of office space,” he said. “Occupancy is the engine and dynamo of the property market.”

“We sense that the government is taking this issue seriously this time,” Jarah said, adding that the government had indicated it would rent spaces instead of building new offices.

The average monthly rental rate is 6.9 dinars ($24.55) per square metre, compared to 13-14 dinars before the crisis, he added. In the country as a whole there are 817,000 square metres of office space and only 59 percent of that is occupied.

According to research by Kuwait Finance House, one of the Gulf’s biggest Islamic lenders, commercial property prices have also halved in since 2008.

The downturn has hit real estate companies hard, with several closing down or having their shares halted from trading on the stock exchange.

Upheaval in the major OPEC oil producer has deterred foreign investors. Kuwait consistently ranks lower than other Gulf Arab states in global business and competitiveness rankings.

Political turmoil in Kuwait, which borders fellow oil producers Saudi Arabia and Iraq and sits across the Gulf from Iran, has also held up a 30 billion dinar development plan.

Last year the Kuwait Investment Authority, the country’s sovereign wealth fund, said it was setting up a real estate portfolio with 1 billion dinars of capital to invest locally. But market observers say they have yet to feel the effect.