GCC investment brings benefits for Bahrain's construction sector

Business is booming for the construction industry in Bahrain, but this is no repeat of the heady days of the 2008 property bubble. The island is building for the future, using billions of dollars of Gulf Development Programme donations to remodel its airport and highway system, as well as to provide tens of thousands of affordable homes for its citizens.

The largely state-owned Aluminium Bahrain, also known as Alba, is spending $3.5bn on Line 6, which will be the biggest expansion of the aluminium industry in Bahrain for 15 years. Construction of a second causeway to Saudi Arabia is on the horizon, as is a second oil pipeline between the two countries, alongside plans for a new liquefied natural gas (LNG) terminal and an additional power station. “There was a time when the Alba contract alone would have kept the whole of Bahrain working,” David Anthony, general manager of Nass Contracting, told OBG. “I am very optimistic about the immediate future and I feel we can expect a fantastic five-year period ahead, because of the projects being funded by the Gulf Development Programme, not to mention Alba, Bahrain Petroleum Company [BAPCO], Bahrain National Gas Company and the LNG terminal. We are in a real purple patch.”

New Realism

Companies like Nass Contracting are involved with projects across the development spectrum in Bahrain, and many have formed joint ventures with firms from the GCC donor countries distributing funds for the housing and infrastructure projects. The current optimism across the sector is based on very different criteria from 2008 and draws more on realism than optimism. “During the boom years there was a bubble, but now people are more cautious,” Mohammed Abdulaziz Ali, director of sales and marketing at Manara Developments Co, told OBG. “Now your reputation is built on how many projects you have successfully completed, not on how many announcements of new projects you have made. People in the industry do their research before they embark on a project.”

Growing Sector

The impact of projects that have already started can be seen in the construction sector’s expanding contribution to Bahrain’s GDP. According to the Economic Development Board (EDB), year-on-year (y-o-y) growth in construction was 4.1% in 2012 and fell to 2.7% in 2013. In 2014, however, y-o-y growth was 7.3%, and was only outpaced by the hotel and restaurant sector and personal and social services. In the third and fourth quarters of 2014, y-o-y growth in construction was stronger than in any other sector of the economy, racing ahead at 12.3% and 12.5%, respectively. In the first quarter of 2015, growth was 7.5%, the second highest of any segment of the economy.

Central Informatics Organisation data shows the sector produced BD190.9m ($502.9m), BD194.8m ($513.2m) and BD198.4m ($522.7m) at constant prices in the third and fourth quarters of 2014 and first quarter of 2015, the highest quarterly output for construction seen since 2008. Total contribution to GDP at constant prices for 2014 was BD759.3m ($2bn). Based on those figures the construction sector constituted 6.7% of Bahrain’s GDP in 2014.

Funding

For many the uptick in Bahrain’s construction sector might appear counter-cyclical, with investment taking place against a background of falling global oil prices, fiscal pressure and government cost-cutting exercises. Much of this investment can be explained by Bahrain’s membership of the GCC. While Alba has appointed financial advisers JP Morgan, Gulf International Bank and National Bank of Bahrain to explore financing arrangements including loans, export credit agency finance and a capital markets transaction to fund its Line 6 development, most of the work currently taking place in Bahrain is being financed by its GCC neighbours via the $10bn Gulf Development Programme fund.

Some future projects in the country, such as the King Hamad Causeway to Saudi Arabia, or a new power station, are likely to be funded through tolls and long-term take-off agreements. The government has used a public-private partnership (PPP) for two social housing contracts and may well consider entering into similar agreements, perhaps with major corporations from South Korea or China, for some of its future infrastructure requirements.

Affordable Housing

The shortage of affordable housing in Bahrain, and the government’s efforts to address this issue with finance from the Gulf Development Programme, is driving most of the country’s residential development.

The EDB has reported that the government has a backlog of some 53,000 social housing applications, with an additional 4000 new applications made annually. In 2014 deputy prime minister Sheikh Khalid bin Abdullah Al Khalifa announced that $2.18bn of the funds being offered by the Kuwait Fund for Arab Development, the Saudi Development Fund and the Abu Dhabi Development Fund would be spent on building 9232 homes for Bahraini citizens, with 2548 to be built in 2015, 1443 units in 2016 and 5241 in 2017.

In 2015 Nass Contracting was in the process of building 483 villas in a Kuwait Fund-sponsored scheme in East Hidd, Al Moayyed Contracting was building 400 homes for the Ministry of Housing (MoH) at Wadi Al Sail, and Manara Developments built more than 300 affordable villas at its Wahat Al Muharraq and Jubilee Gardens developments.

The MoH signed a PPP with Naseej to build 2800 affordable and social units over five years as part of the Al Madina Al Shamaliya development, also known as North Bahrain New Town. At time of press the first 188 units had been sold. The first phase included 165 villas and 202 apartments.

In March 2015 the MoH additionally signed a second partnership agreement with private developer Diyar, through which it paid $1bn for 3100 homes being built at Diyar Al Muharraq.

Construction companies working on social housing projects have to be prepared to sacrifice margin for volume as the properties are selling for between BD97,000 ($256,000) and B120,000 ($316,000).

One mid-sized contractor in Bahrain told OBG that the typical labour cost on a villa is BD1500 ($4000), but that this may be as low as BD350 ($922) on a property for the MoH.

The MoH is working on five housing cities that are being mainly financed by the GCC fund: Sharq Al Hidd (4500 units); Northern City housing project (15,000 units); Sharq Sitra (5000 units); Eskan Al Ramli (3800 units); and Eskan Jnouby (4500 units). The goal is to complete these by 2022.

Community Facilities

While the MoH deals with the provision of homes, the Ministry of Work, Municipalities Affairs and Urban Planning (MoW) deals with the construction of roads, sanitary projects such as sewer systems and waste water treatment, and the construction of buildings such as schools and health centres. Its challenge is to ensure that the new affordable and social homes being built around the country are connected to vital services and to provide community facilities for residents. For instance, the MoW is spending BD50m ($131.7m) on a sewage treatment plant and sewer system for Al Madina Al Shamaliya.

In 2017 alone the MoW is planning to spend BD96m ($252.9m) on replacements to deep-water sewers serving communities around the country. The MoW is also handling 46 building projects that were either taking place in 2015, or at the tender, design or origination phases, with a total value in excess of BD180m ($474.2m). As part of this budget, by July 2015 GCC funds had been allocated for work on six schools costing BD30m ($79m) and two medical centre projects worth BD13.78m ($36.3m).

Highways & Bridges

The MoW is also responsible for roads, and again, contracting firms are busy on some schemes being paid for by Gulf development funds while other projects are either at the design phase or out to tender.

Bahraini construction companies bidding for any of these Gulf-funded schemes have to be prepared to work alongside companies from the donor countries. Nass Contracting, for example, has formed joint ventures with a Saudi firm, Al Yamama Company, to work on a BD7.5m ($19.8m) interchange project on Sheikh Khalifa bin Salman Highway, and with Kuwait’s KCC Engineering and Contracting on the BD46.9m ($123.6m) main works contract for the Alba-Nuwaidrat Interchange, a job that is expected to last for three years.

In August 2015 the prime minister, Sheikh Khalifa bin Salman Al Khalifa, said that two other major road-building projects would go ahead; a BD30m ($79m) scheme to remodel junctions on Al Fateh Highway from the financial district to Juffair, and a BD200m ($526.9m) northern orbital highway that will include a fourth crossing between Manama and Muharraq, and connect settlements being built in the north of the country to the main island. A project to widen Sheikh Khalifa bin Salman Highway is also on the drawing board, with two options costing either BD85m ($223.9m) or BD125m ($329.3m).

Airport Expansion

The Airport Modernisation Programme (AMP) is being financed by the Abu Dhabi Fund for Development. The initial enabling works began in the first half of 2015, with the tenders for BD300m ($790.4m) in contracts on the new terminal and facilities due to go out to bidders soon. US company Hill International is the project management consultant for the AMP, while Aé roports de Paris Ingénierie is the design and supervision consultant. Construction is due to start in 2016 and be completed by 2019.

Regional Rail Link

After witnessing steadily growing traffic for 30 years, the King Fahd Causeway, the 25-km road linking Saudi Arabia and Bahrain is prone to severe congestion.

In the first week of September 2015 alone, 429,325 vehicles travelled the causeway, and both Saudi Arabia and Bahrain have agreed that a parallel structure should be built. The new connection will be called the King Hamad Causeway, and the plan is for it to carry both road and rail traffic in order to alleviate congestion and to enable Bahrain to be connected to the GCC rail network.

The railway connecting the six Gulf countries was originally due to be finished by 2018, but this deadline now appears ambitious. However, there is optimism that the new crossing will be built and that a rail service to Bahrain will come to fruition.

“Having such a rail line across to Bahrain, and connecting the other parts of the GCC, would be great,” Robin Walton, manager of the engineering and export initiative at Arabian International Mechanical Contracting (AIMC), told OBG. “They are talking about more than 2000 km of railway line. I can see the whole network might be completed by 2030, which would fit in with Bahrain’s 2030 Vision.”

Aluminium Smelter

Although Alba was still consulting with its financial advisers on the best way to fund its $3.5bn Line 6 project in late 2015, the company wants to see it up and running by 2019. That means constructing both the new factory’s facilities as well as a fifth power station with a capacity of 1350 MW. Alba is working on final engineering designs and will select the engineering, procurement and construction (EPC) company for Line 6 and the EPC firm for power station 5 in 2016.

Power & Energy

The Ministry of Energy also has ambitious spending plans to cope with growing demand for electricity and desalinated water, as well as strategic investments designed to modernise the kingdom’s hydrocarbons sector. Shortly after taking office in December 2014, the energy minister, Abdul Hussain bin Ali Mirza, revealed that $4bn would be spent from 2015-19 on power and water projects, including $1.3bn on building Al Dur 2, an independent water and power project. The site for this scheme already exists, including the necessary water intake basin, adjacent to Al Dur 1.

With just under 4 GW of generating capacity, according to the Electricity and Water Authority (EWA), Bahrain is able to cater for existing demand, but in the summer of 2015 peak load was 3335 MW, up 5.8% on 3152 MW the year before. It typically takes four years from tender to commissioning for a project of this scale, so growing demand suggests an announcement could be imminent.

Another $1bn worth of work is taking place on the power network, with EWA spending $265m on upgrading distribution networks around the country, while the Kuwait Fund for Arab Development is paying for a $740m upgrade to the national grid from 220 KV to 400 KV and the construction of three sub-stations at Hidd, Riffa and Umm Al Hassam, a project due for completion in 2017.

Thomson Reuters’ Project Finance International has speculated that a consortium including Marubeni, Daewoo, Samsung C&T and Petrofac could be interested in bidding for the $500m contract to build a floating LNG import terminal, which is due to be completed by the second half of 2017.

BAPCO held meetings in Dubai and Bahrain in January 2015 to invite bidders for the new 115-km pipeline – 42 km of which will be under water – between Sitra and Saudi Arabia. The pipeline will have a capacity of 350,000 barrels per day (bpd) and ties in with another major construction project in the energy sector, the expansion of BAPCO’s Sitra refinery, to create a facility capable of handling 360,000 bpd, up from 267,000 bpd. Technip Italy was commissioned to produce the front-end engineering design report on the scheme in September 2014 and was due to complete its study before the end of 2015. BAPCO expects to issue EPC tenders in 2016, with a completion date of 2020.

Retail

Although much of the construction taking place or due to take place reflects the impact of the Gulf Development Programme, some developments are a response to demand created by the spending power of GCC citizens who visit in their millions.

The retail sector is among those keeping construction firms busy, thanks to GCC shoppers. The Nass Contracting Company team that finished the Dragon City Mall Chinese outlet and warehousing complex in September 2015 moved straight onto the BD35m ($92.2m) Avenues in Bahrain Bay scheme, where the company’s specialist marine engineering team had begun work in 2014. The Avenues, which is being developed by King Faisal Corniche Development Company, a consortium of Bahraini investors partnering with Kuwaiti retailers MH Alshaya and Mabanee Corporation, is a single-storey construction with basement storage for each retail unit and a gross leasable area of 38,000 sq metres. The site is set on a 1.5-km strip of the corniche and will include landscaping and leisure amenities on a total site area of 265,000 sq metres.

In September 2015 Bin Faqeeh Real Estate Investment Company announced that a retail floor would be included in its new Water Bay residential development in Bahrain Bay. The design features three 10-storey residences with 600 apartments and is due for completion in 2017, according to the EDB.

The Wadi Al Sail centre due to open in Riffa in 2016 is an example of another trend; community malls with enhanced facilities. It will have a six-screen cinema among its amenities.

Hospitality

Bahrain’s hotels and restaurant sector grew by 9.9% y-o-y in 2014 and the kingdom received more than 10m visitors during the same year, fuelling demand for new hotels with an emphasis on five-star establishments. Anthony believes the upmarket approach being taken by new hospitality developments makes sense. “With the opening of the Four Seasons, the bar has been raised, and I understand it already has a very high occupancy level,” he told OBG. “We have high-net-worth visitors from Saudi Arabia, Kuwait and Qatar who travel all over the world and are accustomed to staying in the finest hotels. So if you build one in Bahrain, that is where they will want to stay.”

The EDB reports that Emaar Hospitality Group plans to introduce two of its flagship brands to Bahrain, the Address Hotel and Resort and Vida Hotel and Resort. The EDB also notes that in addition to the One&Only Royal Mirage scheme just along from the Ritz Carlton, hotel groups Shaza and Melia Hotels International are believed to be interested in building in the kingdom.

Regional Factors

From 2014 onwards new life has been breathed into the kingdom’s construction sector, in large part thanks to the Gulf Development Programme. Pessimists in the sector may look at the falling global oil price and wonder if the budgetary restraint being practised by even the wealthiest economies in the region might result in delays or cancellations for some of the projects that are planned for the next five years.

However, a look at the broader GCC picture shows that Bahrain’s building activity is a small part of the wider regional trend. According to Alpen Capital’s “GCC Construction Report” published in June 2015, a survey of the top 100 construction projects in the region for 2014 showed that 42.9% were in the UAE, 33.3% were in Saudi Arabia, 10.1% were in Kuwait and 2% were in Bahrain. The report stated that the three countries contributing to Bahrain through Gulf development funds had committed to a combined total of $1.06trn in construction projects in 2014. Qatar is also spending $113.8bn.

Several construction companies in Bahrain are reaping the rewards of their location at the heart of this regional development drive. AIMC, which recently opened a sales office in Saudi Arabia, is currently completing the fabrication of 3000 tonnes of complex profile steel formwork or moulds destined to produce the above-ground rail line concrete support columns for the Riyadh Metro system.

“The potential for us is significant, especially when you consider that Saudi Arabia’s railway network will require around 5000 km of safety fencing at each side of the tracks, so you can appreciate the scale of the enterprise,” Walton told OBG.

Outlook

There is no doubt that construction, engineering and design consultancy businesses in Bahrain have lived through lean times in recent years. Nass Contracting, which employs 2500 people, had 7000 workers on its books during the boom years. Yet the same companies are now looking ahead to a period of opportunity and renewed confidence. The majority of the construction work taking place in the kingdom is funded by the Gulf Development Programme, which is making a positive impact on construction activity, especially in affordable housing. As the government continues its focus on infrastructure improvements, private sector opportunities are expected to emerge in sectors ranging from transport and power to retail.