Mega-projects drive construction growth in Bahrain

As a significant contributor to growth, Bahrain’s construction sector stood as the fastest-growing non-oil sector in 2018. Its expansion was supported by a surge in investment into infrastructure for energy, manufacturing and real estate. Rates of growth and lending have risen steadily in recent years on the back of a major oil and gas modernisation programme and a number of big-ticket projects. These include an upgrade of the Sitra refinery; a new aluminium smelter line for Aluminium Bahrain (Alba), which is majority owned by the country’s sovereign wealth fund; an airport re-haul; and a dual rail and another causeway that will link Bahrain to Saudi Arabia. As Bahrain is a net importer of cement, the recent removal of tariffs on the material exported from Saudi Arabia should help mitigate building cost inflation and help the sector maintain its position as a key driver of economic expansion.

Structure & Oversight

Much of the infrastructure development agenda is planned and implemented by the Ministry of Works, Municipalities Affairs and Urban Planning (MoW). The ministry oversees the Urban Planning and Development Authority, the General Directorate of Urban Planning and the Undersecretary of Municipalities Affairs. As the government’s construction arm, the MoW is responsible for infrastructure development and strategic planning; the design, construction and maintenance of Bahrain’s public road and drainage systems; and the design, construction, project management and maintenance of public buildings.

The ministry also coordinates with domestic and international stakeholders. In August 2019, for example, the MoW reported that it completed construction work on the $28.7m Sheikha Moza bint Hamad Al Khalifa Primary and Secondary Girls’ School. The project was built by a joint venture between Bahrain’s Al Moayed and Saudi Arabia’s Nesma Contracting with support from the Saudi Fund for Development.

Other important offices include the Ministry of Housing, which is currently working to deliver 40,000 new affordable homes, and the Ministry of Transportation and Telecommunications, which plays a key role in planning and implementing projects such as the upgrade of Bahrain International Airport (BIA).

Although the public sector has been a major driver of new projects in recent years, private sector-supported real estate projects have also become increasingly prevalent. Reflective of the increasing space for private investment, the kingdom is home to several major contractors including Cebarco Bahrain, SAS Contracting Bahrain, and Al Bustan Civil and MEP Contractors.

Ease of Business

Bahrain ranked 17th out of 190 countries in terms of dealing with construction permits in the World Bank’s “Doing Business 2020” report, with a total score of 83.1 out of 100, up from 73.4 the year before. By comparison, Qatar ranked 13th in this category with score of 84.2, while Oman ranked 47th with a score of 75.2. According to the World Bank report, the average value of a warehouse construction project stood at BD427,201 ($1.1m). The number of procedures needed to get a construction permit was nine, lower than the regional MENA average of 15.7. Additionally, it took significantly less time to get a permit, at 71 days compared to the regional average of 123.6. Costs were lower as well, with Bahrain at 3.7% of warehouse value compared to 4.4% in the region. Building quality control – at 12 on a scale of zero to 15 – was relatively on par with the MENA’s 12.5.

Size & Performance

Construction’s total market value rose to $8.4bn in 2018, from $7.9bn in 2017. The rate of growth averaged 5.1% a year between 2014 and 2018, and was supported by private and public investment in infrastructure and residential projects.

Energy and utilities accounted for 36.7% of the industry’s total value in 2018, followed by residential, at 22.8%; commercial, at 17.6%; infrastructure, at 16.6%, institutional, at 3.8%, and industrial, at 2.5%. Energy and utilities are expected to remain in the top spot, accounting for 35.9% of total construction through 2023.

Construction is a top employer of expatriates and hiring has risen even as broader labour indicators deteriorated. According to the Labour Market Regulatory Authority construction accounted for the highest number of work permits – 13,073 or 33% of the total – issued in the second quarter of 2018, the most recent statistics available. While Bahrain does not publish data on overall employment by sector, in November 2016 the US Department of State reported that 78% of the workforce was expatriate and that the majority of foreigners employed were unskilled construction workers.

Although slowing macroeconomic growth across the region has negatively impacted building activity, it remains an engine for expansion and progress, with the Economic Development Board reporting that the sector’s contribution to GDP rose from 7% in 2017 to 7.3% in 2018. Construction was the fastest-growing sector of the economy in 2018, expanding by 5.6% compared to 1.7% in 2017. Meanwhile, petroleum and natural gas – the largest contributor to GDP – fell by 1.3% in 2018, while financial services – the largest non-oil contributor – grew by 0.9%. Construction’s growth easily outpaced overall GDP, which expanded by 1.8%. Over the course of the year 119 tenders valued at BD278m ($737.4m) were awarded for roads, sewage systems and buildings, while total spending on projects in this category reached BD48bn ($127.3bn) for 304 projects.

Building Materials

Imports from Saudi Arabia meet most of Bahrain’s demand for cement. In April 2017 Bahrain stopped imports from its larger neighbour after the Saudis implemented cement tariffs the month before. As such, during 2017 the UAE was Bahrain’s largest supplier, but in February 2018 the Saudi government lifted the tariffs. Almost immediately after the barrier was removed, Saudi exported almost 60,000 tonnes to Bahrain’s United Cement Company (UCC) between mid-March and mid-April 2018. UCC supplies 70% of the construction sector’s demand for cement, company CEO Faisal Shehab told local media in May 2018.

Permits

The issue of permits, which includes those for renovations, reclamations, new building, demolitions and additions, has moderated in recent years. The total number of such permits issued fell from 7267 in 2016 to 5955 in 2017 and to 5810 in 2018, according to data provided by the Central Bank of Bahrain (CBB). A total of 5810 permits were issued in 2018, with 1471 issued in the first quarter; 1533 in the second; 1275 in the third; and 1531 in the fourth. In the first quarter of 2019, the number of new permits ticked downwards to 1092. Following this trend, permits for new building dropped, falling from 3420 in 2016 to 2656 in 2017 and 2614 in 2018. In the fourth quarter of 2018 Bahrain issued 675 of these permits and by the end of the first quarter of 2019 that figure reached only 371.

From the Bank

Lending to construction has risen steadily in recent years even as construction permit issuance dropped off. According to the CBB, total outstanding loans to construction and real estate rose from BD1.66bn ($4.40bn) in 2009 to a peak of BD1.74bn ($4.62bn) in 2010, before dropping to BD1.68bn ($4.46bn) in 2011, BD1.64bn ($4.35bn) in 2012, BD1.57bn ($4.16bn) in 2013 and BD1.36bn ($3.61bn) in 2014. Construction and real estate lending bottomed out at BD1.34bn ($3.55bn) in 2015, but has since been rising, reaching BD1.37bn ($3.63bn) in 2016, BD1.7bn ($4.51bn) in 2017, and BD1.87bn ($4.96bn) in 2018. Total outstanding loans to the sector fell to BD1.83bn ($4.85bn) in the first quarter of 2019, but rose to reach BD1.87bn ($4.96bn) in during the second quarter, according to CBB statistics.

Construction and real estate loans were the main factor behind the increase in business loans during the second half of 2018, according to the CBB. Indeed, firms in these sectors accounted for BD1.9bn ($5bn) of a total of BD5.1bn ($13.5bn) as of December 2018, accounting for 36.6% of business lending. This figure was up from BD1.8bn ($4.8bn) of out of a total of BD4.9bn ($13bn) – or 36.1% of all lending – in June. The value of business loans to the sectors rose 5.1% over the period.

Financing for construction and real estate accounted for 30.7% of conventional retail bank activity in December 2018, down slightly from 30.8% the previous year. As a percentage of total facilities, exposure to real estate and construction for the Islamic wholesale segment was 19.8% and 28% for Islamic retail banks in December 2018. Across the entire banking sector, real estate and construction comprised 24% of total loans in December 2017 and rose to 25.8% at the close of 2018.

Growth Projections

Construction’s near-term growth prospects are nonetheless strong, supported, among other things, by a $10bn financing package put together by other members of the GCC in late 2018 (see Economy chapter). As with a previous $7.5bn financing infusion that was delivered in 2011, much of the funds will be channelled into infrastructure.

Looking to the future, the sector’s output value in real terms is expected to have a 5.6% compound annual growth rate between 2019 and 2023, at which point it will reach $11bn. The total estimated project pipeline as of March 2019 was valued at BD32.8bn ($87bn). This includes projects in the pre-planning stages to those under execution, with 75.2% of the pipeline considered late-stage projects. The Ministry of Finance and National Economy said at the close of the first quarter of 2019 that it expects “substantial” infrastructure investment to drive growth throughout the year. This is especially the case for energy, with the $4.2bn expansion of the Bahrain Petroleum Company (Bapco) Sitra refinery, the largest infrastructure project in Bahrain’s history, in the works (see Energy chapter).

Line 6

The ongoing Alba Line 6 expansion project is another mega-project that will make the local company the world’s largest aluminium smelter with a new hot metal potline. One of the most significant brownfield developments in the Middle East, Line 6 entailed $3bn in capital to construct a sixth potline at Alba’s Manama facilities, as well as a 1792-MW power station. The first hot metal from the new potline was delivered in December 2018. Alba’s annual smelter capacity is expected to reach 540,000 tonnes upon completion in 2019, bringing total annual production capacity to 1.5m tonnes (see Industry chapter).

Real Estate

Housing has notable potential, with around 60,000 Bahrainis on the government’s waiting list for subsidised homes as of February 2019. To address this issue, King Hamad bin Isa Al Khalifa issued a directive in 2014 to build 40,000 residential units by 2024. Developing more housing has been a long-term goal, with Bassim bin Yaqoub Al Hamer, the minister of housing, telling the UN-Habitat Assembly in May 2019 that between the 1960s and 1990s, the government built 129,000 units, benefitting 65% of the population.

The bid to increase the supply of affordable homes is supported by the private sector, which has committed to build 25,000 homes between 2019 and 2022. Major private real estate projects under development include the Dilmunia and Durrat Al Bahrain project in Diyar Al Muharraq, which is also home to the 3000-unit Deerat Al Oyoun. The $650m Villamar Towers, originally launched in 2007 but delayed because of the global financial crisis, is again under way at the Bahrain Financial Harbour development in central Manama, after years of delays (see Real Estate chapter).

Transport

New transportation projects will be another major growth driver in the coming years, and BIA’s $1.1bn modernisation programme is the largest such project in the pipeline. The 220,000-sq-metre development will replace the existing facility and is expected to increase the airport’s passenger handling capacity from 9m to 14m annually when it is completed in 2020. It will include a 4600-sq-metre departure hall, 104 check-in counters, 36 passport control booths and 24 security-screening points.

The airport upgrade is supported by a rehaul of surrounding roads. The BD2.4bn ($6.4bn) first phase of the road project – which turned the route running parallel to the airport into a one-way artery from the airport’s roundabout to Arad Highway – was 96% complete as of July 2019. The second phase, valued at BD3.1bn ($8.2bn), was reported to be 71% complete at the time. All four phases are scheduled to be completed in 2020.

Another key project is the planned 25-km rail and road connection between Bahrain and Saudi Arabia. The $4m King Hamad Causeway will be built through a public-private partnership (PPP). Construction is set to kick-off in 2021 and will take three years to complete. Bahrain’s first metro is also expected to be tendered as a PPP. The $2bn project will lay 109 km of track running across Manama, with all construction expected to be completed in 2025 (see Transport chapter).

Outlook

Although Bahrain’s construction industry has faced the same challenges as elsewhere in the GCC – including a subdued regional growth and oil price volatility affecting investor confidence and capital expenditure – the sector has continued to thrive and looks set to remain a leading non-oil growth driver in 2019. Ongoing work for Alba and Bapco will dovetail new transportation mega-projects under development, while real estate, including the construction of thousands of new affordable houses, are expected to keep the sector on track for another strong showing in 2020.