Projects drive post-pandemic construction growth in Bahrain

The construction and real estate sectors are important contributors to Bahrain’s GDP, yet in the years preceding the pandemic both sectors displayed erratic growth due partly to oil price instability and the government’s fiscal consolidation programme. However, recent legislative amendments and strategic announcements are expected to reinvigorate the closely linked sectors and support the central goals of Bahrain Economic Vision 2030, the overarching policy framework guiding the country’s development through to the end of the decade.

A major infrastructure development drive, which includes a plan to expand Bahrain’s land mass significantly, alongside ongoing and recently announced upgrades to the country’s industrial base, should drive construction and real estate growth. Enhanced private sector support for the provision of affordable housing is being promoted through a number of initiatives, while new areas of the country are being opened for freehold luxury property development. Tourism, transport and education infrastructure developments are also open to private investment, and Bahrain’s favourable regulatory environment could prove crucial in attracting the finance required to achieve the government’s goals.

Structure & Oversight

The Ministry of Works, Municipalities Affairs and Urban Planning has historically been responsible for overseeing the construction sector. In June 2022 it was divided into the Ministry of Works, with a remit to develop infrastructure and act as the construction arm of the government; the Ministry of Housing and Urban Planning (MHUP); and the Ministry of Municipalities Affairs and Agriculture. With ministerial direction, the Urban Planning and Development Authority, the General Directorate of Urban Planning and the undersecretary of municipalities affairs operate on upkeep and development of general infrastructure, public buildings, and road and drainage networks. The ministries also coordinate with public bodies such as the Ministry of Transport and Telecommunications and individual municipalities on matters related to their specific areas of jurisdiction.

The ministries and other sector stakeholders play an important role in ensuring the kingdom adheres to the UN Sustainable Development Goals, which are built into Bahrain Economic Vision 2030’s core principles of sustainability, fairness and competition. The new Economic Recovery Plan, which was released in October 2021 following collaboration with public and private stakeholders and academic bodies, offers a detailed roadmap of how these goals can be achieved in a post-pandemic reality.

The real estate sector is overseen by the Real Estate Regulatory Authority (RERA), which was established as part of a series of regulatory changes brought about by the Real Estate Law No. 2 of 2017. The RERA’s chief mandate is to provide Bahrainis with a well-regulated, internationally competitive real estate market that facilitates economic growth, attracts investment and protects citizens’ rights.

Performance & Size

After experiencing a contraction in 2019 and 2020, an upturn in demand in the real estate market and increased activity in the construction industry helped the sectors recover in the second half of 2021. According to the most recent quarterly economic report released by the Ministry of Finance and National Economy, the real estate and business activities sector grew by 4.8% year-on-year (y-o-y) over the final three months of 2021, while the construction sector was up 3.1% over the same period. In comparison, the two sectors rose by 4.7% and 0.7%, respectively, in the previous quarter. As of the end of 2021 construction activities contributed 7.5% of real GDP, while real estate and business activities accounted for 5.4%.

The Survey and Land Registration Bureau (SLRB) reported that real estate transactions reached a value of $2.8bn in 2021, a 46% increase from $1.9bn in 2020. That total comprised 26,136 separate transactions, up 35% on the previous year. Meanwhile, the number of building permits issued rose by 21.4% from its 2020 level, and the area of land those permits accounted for was 55.8% higher.

Budget & Active Projects

The public expenditure budget for the period January 1, 2021 to December 31, 2022 includes a provision of BD600m ($1.6bn) for construction projects, with infrastructure, housing, health, education, sport, culture and utilities among the segments set to receive public investment. In addition, in the first quarter of 2021 the government awarded around BD602m ($1.6bn) worth of contracts, which included significant projects in the oil, aviation and engineering sectors.

As of mid-2021 the kingdom’s construction pipeline was the 10th-most valuable in MENA, with combined BD24.5bn ($65bn) worth of projects at varying stages of implementation. Among the most notable are the BD11.2bn ($29.7bn) Bahrain Petroleum Company (Bapco) Modernisation Programme, the BD752m ($2bn) Marassi Al Bahrain multipurpose beachfront development and the BD487m ($1.3bn) Al Dur 2 independent water and power plant.

Strategy & Regulation

Within the real estate sector, a series of regulatory changes have been enacted with the aim of improving consumer protection, streamlining processes, and accelerating the shift away from speculation and market bubbles and towards a more stable, sustainable growth model.

The RERA’s National Real Estate Plan 2021-24, launched in March 2021, was created to align the sector with international best practices and facilitate the implementation of the new regulations. The strategy is built around the values of sustainability, innovation, transparency and cohesion.

Protracted administrative and bureaucratic procedures have historically proven a barrier to investment in the sector. The authority is taking a multi-pronged approach to tackling this issue, which will include creating a centralised authority to streamline communication between real estate investors and the government.

Furthermore, the RERA aims to offer more support to tenants and landlords by ensuring they receive a comprehensive breakdown of their rights and obligations before property transactions are finalised. This aspect of the plan aims to promote safety and fairness across the property market.

The National Real Estate Databank was launched in June 2021 as a collaboration between the RERA and the Information and eGovernment Authority (iGA). The databank aims to provide all stakeholders with access to timely and accurate information to enable informed decisions. The country’s mature financial technology (fintech) sector and rising interest in entrepreneurship offer significant opportunities for the further development of technological real estate solutions. Initiatives to attract both private finance and international talent to the country’s property sector will also be implemented, while there are plans to integrate real estate education into secondary and tertiary education curricula.

Increasingly, investment opportunities must have solid environmental, social and governance (ESG) fundamentals. In light of this, the RERA is incentivising sustainable property developments. Mixeduse developments, including the transit-oriented developments that have proven successful across other emerging economies, could potentially ease ongoing challenges like excessive private vehicle use, traffic congestion, carbon emissions and a lack of affordable housing stock.

Private Investment

Bahrain hopes to attract increased private sector involvement in order to achieve its economic expansion plans. The government is therefore taking steps to provide a more accommodative regulatory and investment framework to persuade multinational companies to invest in the kingdom. At least 51% Bahraini ownership is required for businesses in a minority of industries, but most sectors are open to 100% foreign ownership, including real estate. Indeed, international media reported in mid-2021 that property sales in Bahrain rose by 51% y-o-y in the first quarter of the year as investors sought to take advantage of this opening. The value of real estate transactions by expatriates and other GCC nationals also increased by 21% over the same period. There are, however, restrictions on foreign ownership in the construction industry, though the kingdom is still keen to attract private sector investment in the sector, with neighbouring GCC countries particularly active in financing infrastructure projects.

For example, Ascon Control, part of the Saudi-owned Amad Group, inaugurated its new 7150-sq-metre switchgear factory in Mazra Industrial Zone in Askar in January 2022. The BD1.8m ($4.8m) project marks a key milestone as it is the first switchgear factory in Bahrain to be built by an expatriate firm. The government hopes to attract more manufacturers in its bid to support the expansion of strategically important construction, real estate and industrial activities.

The government has traditionally financed infrastructure development in the kingdom through public funds, but this dynamic is no longer sustainable. Bahrain does not have a dedicated public-private partnership (PPPs) law, but PPP frameworks have been successfully used on numerous occasions for the construction of water, wastewater and power facilities, and affordable housing projects.

The section of the Economic Recovery Plan that directly relates to real estate details the Sharaka programme, through which private investors are invited to bid for government land, reflecting the government’s desire to cultivate stronger public-private cohesion and encourage private sector involvement in the expansion of affordable housing.

Strategic Development

The Strategic Projects Plan (SPP), which was announced in 2021, builds on the infrastructure development plans announced by the government in 2018 and is designed to drive broad-based economic expansion. PPPs are to be implemented across the SPP’s 22 big-ticket construction projects, which include the King Hamad Causeway – a $3.5bn road and railway bridge connecting Bahrain and Saudi Arabia – and a 109-km metro project, which will traverse and connect Bahrain’s main islands and enhance connectivity between primary transport hubs, residential districts, schools, and commercial and industrial zones.

In March 2022 the government announced that 11 companies had pre-qualified to bid for the first phase of the fully electric, emissions-free metro. The project is being offered as an integrated design, build, operate, maintain and transfer PPP on a 35-year contract. The first phase will consist of around 26 km of track, 20 stations and two interchanges, and is expected to carry up to 200,000 passengers per day in its early years of operation. This will significantly boost the country’s sustainability ambitions by helping to reduce carbon emissions, traffic congestion and reliance on private vehicles.

New Cities

The SPP’s potential to stimulate longterm growth is best illustrated by the announcement that five new cities – Fasht Al Jarim, Hawar Islands, Fasht Al Adhm, the Gulf of Bahrain and Suhaila Island – will be constructed on reclaimed land, increasing Bahrain’s land mass by as much as 60%.

Fasht Al Jarim will be built around the concept of sustainable living and will promote the construction of multi-use developments and transit-oriented developments. Its primary island will house a new airport and will be surrounded by multiple islets, connected by a lattice of bridges and canals.

The Hawar Islands project is to be split into four zones that will contain nature reserves and open spaces, urban centres and waterfront property developments. The project is led by the Bahrain Real Estate Investment Company (Edamah), the real estate arm of the sovereign wealth fund.

The Fasht Al Adhm group of islands will comprise over 100 sq km and contain industrial and logistics areas, including a dedicated investment zone with a focus on renewable energies and innovative technologies, as well as residential and urban areas.

The Gulf of Bahrain development appears set to be relatively sparsely populated, and will promote the cultivation of mangroves, boosting biodiversity and protecting the country’s coastline. Details are currently limited for the Suhaila Island project, but its urbanised, residential islands will be designed and landscaped to harness the natural elements, optimising renewable energy cultivation.

Tourism Zones

Two dedicated tourist areas will also be constructed under the SPP. The 1.3m-sq-metre Bilaj Al Zayer tourist city involves the development of an expanse of prime real estate along the south-west coast of Bahrain Island, five kilometres south of Bahrain International Circuit, the kingdom’s primary tourist attraction. The project is being overseen by Edamah and is estimated to require investment of $330m and offer returns of 10%.

The first of its five phases comprises the construction of two luxury hotels, which are due to begin in the second quarter of 2022 and are slated for completion in 2024. The South City project, meanwhile, is to be developed on Bahrain Island’s south-east coast, with Edamah overseeing the project in collaboration with prominent Islamic financial institution Kuwait Finance House. The city will house a fivestar, all-inclusive resort, theme park and shopping mall. While the new cities are designed to stimulate growth across a range of sectors, other SPP projects will promote expansion across strategically identified areas of Bahrain’s economy.

Golden Visa

In February 2022 Bahrain launched a new 10-year Golden Residency Visa, which should benefit the construction and real estate sectors (see analysis). Highly skilled professionals, owners of Bahraini homes with a minimum value of BD200,000 ($530,500), persons receiving a pension worth BD4000 ($10,600) and foreign nationals already living in Bahrain earning a minimum of BD2000 ($5300) per month are eligible to apply.

Bahrain’s real estate sector is open to 100% foreign business ownership, making the visa attractive for foreigners looking to invest in property. The government is seeking to capitalise on this by increasing the amount of land available for freehold development by up to 60%, with outright foreign ownership of properties and plots of land possible in specific regions of the country.

These developments are expected to increase real estate transactions by at least 25% and property purchases resulting from the new visa provision are forecast to reach $1bn in the first year, driven by increased demand for high-end residential properties. Transport and logistics costs for businesses in Bahrain are estimated by the government to be 30% and 50% lower than the regional average, respectively, with other business overhead costs also averaging below the GCC mean – factors that could benefit Bahrain in what is likely to be a competitive regional market. The UAE also relaxed foreign residency regulations in 2021 and offers a similarly liberal investment environment.

Energy

The Bapco Modernisation Programme is one of the largest projects ever undertaken in the kingdom. It comprises five greenfield construction zones, as well as multiple brownfield developments to expand Bapco’s existing facilities. Once completed, the project will raise the capacity of Bapco’s refinery by 42% from 267,000 barrels per day to 380,000. The plant’s energy efficiency index will also be increased by 28%. Bapco is the project owner, while Australian consultancy Worely is the project management consultant. TTSJV WLL, a joint venture between US-French firm TechnipFMC, Spanish contractor Técnicas Reunidas and South Korea’s Samsung Engineering, has been contracted for engineering, procurement and construction activities.

Trade & Industry

A memorandum of understanding between Bahrain and the US was signed in 2021 for the construction of the new $75m, 1.1m-sq-metre US Trade Zone, located in Salman Industrial City, one of Bahrain’s key industrial centres. Construction on the zone’s logistics, distribution and manufacturing facilities began in early 2022. The zone is expected to open in 2025, and will boost trade between the two nations, which in 2019 amounted to around $1.8bn (see Industry chapter).

A new 472-sq-metre aluminium downstream zone is also planned to be built close to Aluminium Bahrain’s (Alba) primary factory, which is home to the largest single-site aluminium smelter outside of China. Occupants of the zone will benefit from convenient access to liquid aluminium, boosting the dynamism of Bahrain’s already well-developed downstream aluminium industry. The Ministry of Industry and Commerce (MoIC) is charged with overseeing both of the aforementioned projects.

Cement

Cement production rose from 1.4m tonnes in 2017 to 1.5m tonnes in 2018, according to the latest data from Statista. However, the country still relies heavily on imports. Bahrain imported $68.2m worth of cement in 2019, with this figure falling to $52.5m in 2020 as construction projects were forced to halt due to the pandemic.

As a result of a decline in construction activity, demand for cement has decreased. In 2017 Bahrain’s cement consumption totalled 2.1m tonnes, but by 2021 it had fallen to 1.2m tonnes. Cement prices have risen by between 8% and 10% since the start of the pandemic. As of January 2022 the cost of a single bag ranged from BD1.35 ($3.60) to BD1.60 ($4.20), depending on strength and volume.

Saudi Arabia is a key player in Bahrain’s cement industry: it was Bahrain’s second-largest import market in 2019 after the UAE, and United Cement Company (UCC), Bahrain’s largest cement importer and distributor, is a subsidiary of Saudi Cement, which in 2021 increased its stake in UCC from 37% to 100%. Early in 2022 the MoIC pledged additional support to the country’s cement producers, while Alba’s now-operational spent pot lining processing plant enables it to convert waste from aluminium production for use in cement production.

Residential Real Estate

The downward pressure exerted on rental prices by the pandemic has seen transactions increase in the residential segment. Furthermore, a $12bn pipeline of mixed-use developments are set to enter the market in the coming years, further altering the demand profile and increasing competition, so any price increases are likely to be gradual. Prices in Al Hidd and Riffa dropped from BD350 ($928) per month to BD300 ($796) per month between January 2020 and June 2021. In Juffair, Amwaj Islands and Tubli, demand remained high and prices were unchanged at BD450 ($1190), BD500 ($1330) and BD300 ($796), respectively, across a range of property types.

Villa rentals remain in high demand, with the healthy supply in Jannusan seeing prices drop from BD1000 ($2650) to BD850 ($2260) between January 2020 and June 2021. Prices were unchanged in Adliya and Barbar, at BD950 ($2520) and BD800 ($2120) per month, respectively, while in Amwaj Islands, Riffa and Um Al Hassam, monthly rates rose from BD1250 ($3320), BD800 ($2120) and BD1000 ($2650) to BD1350 ($3850), BD850 ($2260) and BD1100 ($2920), respectively.

Demand and supply also remain high for property purchases, and the new permanent residency visa is likely to continue that trend. Apartments are particularly popular among investors and first-time homeowners. As of the first half of 2021 Bahrain Bay had the highest apartment prices, at BD1319 ($3500) per sq metre, down 3.9% y-o-y. The lowest-priced apartments were available in Riffa, at BD415 ($1100) per sq metre, down 5.9% y-o-y.

One issue facing policymakers and real estate developers is the large number of expatriate workers that left the kingdom during the pandemic, which created gaps in demand. While the introduction of the Golden Visa will likely attract foreign workers, local developers are still concerned about how this change will impact the sector. “As many people left Bahrain during the pandemic, the challenge will be to attract them to come back. As a result, many property owners are switching their preferences to smaller units with lower prices. The mentality has changed, and cost has become a much bigger factor,” Faisal Faqeeh, chairman of Bin Faqeeh Real Estate Investment Company, told OBG.

Affordable Housing

Given its importance to the economy, the government’s affordable housing drive has been incorporated into the SPP. In order to satisfy the current requirement of 40,000 units, construction will be dispersed throughout the country: 1200 units in Madinat Salman, 5000 in East Hidd, 3500 in East Sitra, 4500 in Madinat Khalifa and 4000 in the Al Ramli District. Meanwhile, the rollout of the Sharaka programme is expected to attract private investment for around 16,000 of these developments in the near term.

In 2021 Naseej, a local integrated real estate and infrastructure construction company, partnered with financial services organisation Ithmaar Holding on a BD40m ($106m), 150,000-sq-metre affordable housing development in the Northern Governorate area of Barbar. It will comprise a total of 400 residential plots to be offered to applicants to the Mazaya mortgage financing initiative operated by the MHUP and the National Bank of Bahrain.

More than 65% of Bahraini citizens have benefitted from the MHUP’s various housing schemes to date, which include purchase and construction loans, the provision of housing units and rental subsidies. These schemes have helped to drive job creation in a range of sectors, including construction, real estate, financial services and manufacturing. According to the UN, each BD1.00 ($2.60) that is invested in social housing schemes in the kingdom stimulates roughly BD1.72 ($4.60) in economic multiplier effects, making them a quantifiable vehicle for national development and prosperity, as well as a viable proposition for private investors.

Mortgages

The Mazaya programme saw 3271 Bahraini residents purchase apartments or traditional housing units in 2021, up 93% from 1691 in 2020. The scheme, which is integral to the government’s affordable housing expansion drive, allows eligible applicants to borrow 100% of the finance required, with a maximum value of BD120,000 ($318,300) and flexible repayment periods of up to 25 years. An important aspect of Mazaya’s popularity is the fact that homebuyers pay a maximum of 25% of their basic salary towards the fixed repayments, and the government covers the remainder. Data from the Central Bank of Bahrain shows that between 2012 and 2021 mortgage lending rose from around BD713m ($1.9bn) to nearly BD2.3bn ($6.1bn).

Commercial Real Estate

In spite of improving macroeconomic conditions, post-pandemic financial prudence is likely to lead to a reduction in private spending and consumption. In turn, businesses are expected to shelve near-term investment and relocation plans and continue to revise their commercial and office space requirements, particularly as many employees have shown they can remain productive while working remotely throughout the pandemic.

With many companies and teams planning to continue to work remotely or in a hybrid model for the foreseeable future, a number of firms could feel more confident in reducing the footprint of their offices. Indeed, Fitch Solutions projects lower office rents in 2022 as Bahrain’s economy recalibrates.

Adding to challenges for landlords is a current supply-demand imbalance, with substantial volumes of new office space coming on-line in recent years. The market, therefore, still favours tenants. However, an anticipated rebound in the tertiary sector should rekindle demand, buoyed by the continued growth in financial services and financial technology (fintech), lower-than-average business costs relative to the region and a favourable regulatory environment expected to drive that trend, particularly in Manama – the preferred Bahraini base for blue-chip companies. Fitch Solutions forecasts that rents in the capital will range from $7.30 to $18.60 per sq metre in 2022, averaging $13.10 per sq metre and representing a 1% decrease on the previous year.

Demand in secondary cities is likely to be stimulated by the country’s continued focus on small and medium-sized enterprise growth. This has been supported by various business funding, incubation and acceleration initiatives being undertaken by the Bahrain Economic Development Board, Export Bahrain and Tamkeen, the semi-autonomous government labour fund, among other organisations.

Hospitality

According to commercial real estate firm CBRE, international arrivals to Bahrain rose by 1011% in 2021, following the curtailment of global tourism in 2020. During 2020-21 hotels in Bahrain experienced an average occupancy rate change of 14.3 percentage points, whereas in Manama it was 14.9 points. Average daily rates across the country rose by 0.7 points y-o-y in 2021, while in Manama they increased by 0.9. However, those figures are, still considerably below pre-pandemic levels. The occupancy percentage-point change between 2019 and 2021 shows a regression of 12.4 for the whole country and 12.5 for the capital. Likewise, average daily rates during the same period shrank by 10.2% and 11.8% for Bahrain and Manama, respectively, while revenue per available room contracted by 30.3% for all of Bahrain and 31.7% in Manama.

The pandemic has been particularly difficult for hotels, but the gradual lifting of restrictions has had a positive effect on occupancy rates. With major upgrades to tourism infrastructure in the pipeline, many hotels in the kingdom should see steady increases across key performance indicators in the coming years, albeit with additional competition. For example, Dubai-based Emaar Hospitality opened its 157-room Vida Beach Resort Marassi Al Bahrain in late 2021, and multiple other mid- to high-end developments are expected following the announcement of the new tourism zones.

Sustainability Challenges

ESG considerations and standards are increasingly being woven into policy formulation and strategic development at the local, regional and international level. This is of particular significance to real estate developers, given that buildings account for a significant portion of global carbon emissions. Bahrain has a total of 29 LEED-registered buildings across the country, with five of the seven that achieved silver, gold or platinum certification reaching completion in 2021. LEED is the world’s most widely recognised green building certification standard.

Many of the kingdom’s existing buildings have integrated green energy technology. For example, the Bahrain World Trade Centre in Manama, built in 2008, was the first building in the world to include wind turbines in its design. The level of construction activity scheduled in the coming years presents an opportunity to integrate further innovative green building specifications into a large proportion of the country’s structures from the bottom up.

“The idea of ESG is increasingly relevant. In Bahrain, we now have a green building code, and there’s a growing appreciation of how sustainability measures can preserve a structure’s value,” Jarmo Kotilaine, chief strategy and data analytics officer at Tamkeen, told OBG. “Due to fiscal consolidation, energy bills are rising, offering a clearer perspective on the value of waste, so we are at an inflection point in this respect,” he added.

Outlook

As infrastructure projects are rolled out under the SPP, environmental sustainability is likely to feature more prominently in Bahrain’s development agenda, offering long-term savings to citizens and public and private entities, while driving Bahrain’s bid for net-zero carbon emissions by 2060.

Meanwhile, government data has shown that the construction and real estate sectors are responding positively to the easing of pandemic-induced stresses and to various initiatives designed to stimulate growth, which should give investors more confidence moving forwards. The rising cost of primary building materials is a concern, but the expansion of downstream aluminium production capacity and an increased focus on cement production should help to boost the value Bahrain can extract from the SPP. At the same time, the expected influx of tourists and foreign residents should eventually allow for a price shift in the market that favours landlords, investors and hoteliers, driving sector revenue and contributing to healthy and sustainable growth.