New supply helps buoy Bahrain's real estate market, defying regional trends

The kingdom is set to see a number of residential, retail and hospitality properties launched in 2017 as the country’s real estate sector pushes ahead with new developments. The macroeconomic issues affecting the country and its GCC neighbours, as governments in the region trim expenditure in response to the global slump in oil prices, do not appear to have dented the confidence of developers or buyers in some sectors in the Bahraini market. This comes despite a fall in the value of actual real estate transactions in the kingdom and the residual issue of stalled projects that hark back to the double-dips caused by the global financial crisis and regional unrest during the Arab Spring.

More than $1.4bn worth of affordable residential development in Bahrain is being funded by wealthier GCC neighbours from the UAE and Kuwait through the Gulf Development Fund, but private investment from those same countries, and from wealthy Bahrainis, is also being poured into ambitious schemes catering to luxury living, leisure and tourism. “Every dinar being spent by the government on housing projects encourages the private sector to spend an amount that exceeds government spending five-fold and provides the banking sector with additional funding opportunities for mortgage holders,” Ahmed Al Hammadi, general manager of construction and real estate development services firm Naseej BSC, told OBG.

ECONOMIC CONTRIBUTION: The confidence being expressed by real estate developers in late 2016 was reinforced by the number and scale of properties either under construction or coming onto the market. However, the impact of this uptick in real estate activity was more muted at the macroeconomic level. According to data from the Information and eGovernment Authority, at constant prices, the contribution to GDP by real estate in the third quarter of 2016 was BD117.26m ($311m), up 2.4% on the same period a year earlier and a 1.8% rise compared to the second quarter of 2016. The sector’s contribution picked up slightly over the course of 2016 from BD114.10m ($302.7m) in the first quarter to BD115.21 ($305.6m) in the second quarter of 2016; however, there was no evidence of a more pronounced upsurge in real estate’s impact on GDP. This follows a trend of modest performance from the sector in recent years.

According to the e-government authority, from 2011 to 2015 the real estate sector’s contribution to total GDP at constant prices fell every year from 4.23% in 2011 to nearly 4% in 2015. In 2011 the sector shrank by 6.7%, growing by 2.8%, 2.3% and 3.2% in the three successive years to 2014. In 2015 growth at constant prices was just 1.6%, and when the third quarter of 2015 is compared to the third quarter of 2016, real estate’s contribution to GDP increased by 2.4% from BD114.5m ($303.7m) to BD117.26m ($311m). In nominal terms the contribution to GDP has climbed gradually from BD417.34m ($1.1bn) in 2011 to BD460.28m ($1.2bn) in 2015.

PROPERTY TRANSACTIONS: The government department with responsibility for publishing data on property sales is the Survey and Land Registration Bureau (SLRB). In January 2017 its most recent published figures were for the first three quarters of 2015. This report showed that property transactions worth BD923.7m ($2.5m) had taken place in Bahrain by the end of September 2015. In its own report on the Bahrain real estate sector’s performance in the first quarter of 2016, international real estate services firm CBRE was able to source SLRB figures for the final quarter of 2015 and put real estate transactions at BD286.8m ($760.7m). This suggests total transactions for 2015 of BD1.21bn ($3.2bn), a 6.2% fall from BD1.29bn ($3.4bn) in 2014. However, it is worth noting that the 2014 figures represented a nearly 50% increase compared to 2013, when total property transactions amounted to BD861.96m ($2.3bn).

CBRE also reported that in the first quarter of 2016 transactions fell by 6% when compared to the final quarter of 2015 and totalled BD268.2m ($711.4m). The data for the first three quarters of 2015, comparing sales figures to the same period in 2014, showed marked declines in the value of property sold to GCC buyers, which was down 32%, and to international clients, down by 31%. Bahrainis purchased 90% of property in the kingdom in 2015, while GCC nationals and international customers accounted for 6% and 4% of sales, respectively, down from 8% and 5% of sales in the first three quarters of 2014.

LOANS TO THE SECTOR: The Central Bank of Bahrain (CBB) sees the construction and real estate sector as a particularly important barometer of the health of the wider economy. In the bank’s most recent Financial Stability Report (FSR), published in July 2016, the CBB reported that construction and real estate “is usually highly sensitive to developments in macroeconomic conditions” and explained that the central bank pays particularly close attention to the direct and indirect exposure of the country’s banks and financial institutions to the sector. The CBB report further noted that as of March 2016 the construction and real estate sector accounted for the largest proportion of business loans in the country at 30.8%, or a total of BD1.29bn ($3.4bn) for that particular month. Within that total, commercial real estate financing accounted for 17.4%, construction amounted to 5.3% and residential mortgages came to 7.3%.

The CBB data further sub-divided the loans to the sector supplied by retail and wholesale banks into conventional and Islamic categories. In the conventional bank loans segment, real estate accounted for some 35.3% of total commercial loans from retail banks and 12.6% of wholesale bank lending. For sharia-compliant lenders, meanwhile, construction, commercial real estate and mortgage loans accounted for 29.5% of all loans from retail banks and 30.7% of loans from wholesale banks, with the highest percentage of retail loans funding commercial real estate (14.9%), while wholesale bank lending was dominated by construction, which soaked up 17.3% of all loans.

The CBB report also noted that in the six-month period covered by the report from September 2015 to March 2016 “the main contributor to the increase in business loans was the loans to the construction and retail sector.” The data shows that retail banks saw the proportion of loans they supplied for commercial real estate grow from 17% to 17.4% of total commercial loans among conventional lenders and from 14.5% to 14.9% among Islamic banks between September 2015 and March 2016. Wholesale Islamic bank loans to commercial real estate remained the same at 0.9% of all commercial loans, while conventional wholesale banks reduced their exposure to commercial real estate from 2.7% of their loan portfolio to 1.9%.

INVESTMENT OPTIONS: While most banks in Bahrain have clearly continued to maintain or increase credit for the construction and real estate sector in the kingdom, many investors have also been attracted by the returns property development promises when compared to other investment options. Property has clearly outperformed equities in the GCC’s regional stock markets. In its July 2016 FSR report, the CBB pointed out that the Bahrain All Share Index decreased by 249.5 points, or 18.2%, from June 2015 to June 2016 and that its market capitalisation had decreased by 17.5% year-on-year. The CBB also predicted the index was unlikely to make “big gains over the short to medium term”. According to the central bank, none of the GCC bourses had performed well; it cited the collapse in value of a barrel of oil, which fell from $105.8 in June 2014 to $63.26 in June 2015 to $37.28 in December 2015 to $49.68 in June 2016.

These depressed prices have not fed into Bahrain’s real estate market, and developers in the kingdom believe the island’s property sector offers a safe haven in times of trouble. “We have seen falls in commodity prices, but in real estate we have seen investors pouring in additional cash, and the proof of that is in all that you can see being built in Bahrain, because property gives a better yield than the stock market,” Al Hammadi told OBG.

Another of Bahrain’s leading real estate developers echoed this sentiment. “When it comes to real estate in Bahrain, the price and the quality is the best in the region, and investment in real estate is seen as a safer bet in the long term with yields in the range of 8-10%, and a clear and well-regulated banking sector for those looking for ease of exit,” Mohammed Kooheji, COO of Kooheji Contractors, told OBG.

Buyers looking for buy-to-let opportunities can also see a good return on investments, according to James Lynn, CBRE Bahrain’s director of research and consultancy. “You can get rental yields of 7-8%, compared to 5% or less on money sitting in the bank, if you are prepared to take the risk,” Lynn told OBG.

MAN-MADE ISLANDS: Much of the focus of property development in Bahrain is taking place on man-made islands. The country originally consisted of 33 islands with the capital Manama located on Al Awal Island and the international airport on Al Muharraq Island to the north. Much of the kingdom’s industries have been built on Sitra, immediately to the east. The country’s population has grown by 543% from 213,000 in 1970 to 1.37m in 2015, according to figures from the Information and eGovernment Authority.

A study of NASA Landsat satellite imagery conducted by the American Association for the Advancement of Science (AAAS), found that 80 sq km of land was reclaimed between 1987 and 2013, representing a 12.5% increase in the total land area of the main island group. Over the same period, the AAAS found the built-up area in Bahrain had more than doubled from 76.2 sq km to 155 sq km. The study found most of the new land was created in the north, with 10 sq km reclaimed between 1987 and 1998, primarily around Al Muharraq Island. Subsequently, between 2004 and 2013 new projects saw additional reclamation around Al Muharraq and on the northern coast of Al Awal Island, while in the south at Durrat Al Bahrain a set of fish- and crescent-shaped islands appeared on later sets of satellite imagery.

AL MADINAH AL SHAMALIYA: The construction of new homes in Bahrain is being driven by the desire to meet demand for luxury waterfront holiday homes, but also by pent up demand for affordable homes for the country’s citizens. In the north-west of Bahrain, adjacent to Budaiya, a new master-planned community is being built on 13 reclaimed islands covering 750 ha and is collectively known as Al Madinah Al Shamaliya, or Northern City. The plan is to build 70,000 homes over six to seven years. Work has commenced on parts of the project, with infrastructure contracts including the construction of roads, sewage systems, and vehicular and pedestrian bridges awarded to international construction firms including SSH, Mott MacDonald and Wabag in 2016. As part of a $450m public-private partnership (PPP) with the Ministry of Housing (MoH), Naseej has developed 2817 social and affordable housing units on Island Number 13 at Al Madinah Al Shamaliya.

The first phase was handed over in July 2016, with new residents due to receive keys in the second quarter of 2017. The social housing will be handed over to the MoH for distribution, but customers choosing to purchase affordable homes with state-backed financing also have the option of Naseej’s Jumana development, which consists of 165 villas and 202 apartments. “The demand for housing is growing by 5000 people a year and supply has not been growing at that rate, and so there could be as many as 60,000 citizens looking for social or affordable housing. The public and private sectors are both working on solving this issue,” Al Hammadi told OBG.

DIYAR AL MUHARRAQ: On the north-eastern tip of Bahrain, behind the international airport, another master-planned community is being built around a cluster of seven man-made islands at Diyar Al Muharraq. When it was showcased at Dubai’s annual Cityscape Global exhibition in September 2016, the 12-sq-km development promised “lucrative opportunities for local and international investors” with third-party developer options and freehold residential plots. The master plan shows provisions for waterfront apartments and villas facing onto canals, a marina or beaches with destination malls, neighbourhood retail, commercial showrooms, private schools, mosques and resort hotels connected by roads and promenades. In June 2016 a groundbreaking ceremony was held at Diyar Al Muharraq for a social housing scheme being built as part of the wider development through a PPP agreement with the MoH. Under a BD276m ($732.1m) agreement signed in 2015, the developers will deliver 3100 social housing units to the MoH by 2018, creating a community called Deerat Aloyoun, covering 1.2m sq metres on the southern flank of Diyar Al Muharraq.

MARASSI AL BAHRAIN: Another of the communities being developed within Diyar Al Muharraq is Marassi Al Bahrain, a joint venture between Diyar Al Muharraq and Eagle Hills of Abu Dhabi. Spread over 865,000 sq metres on the eastern side of Diyar Al Muharraq, the development will feature its own mall, upmarket seafront dining and luxury hotels. One aspect of this development hints at how Bahrain is repositioning its appeal to tourists. Marassi Al Bahrain is to have its own harbour for cruise liners, which currently dock at the industrial Khalifa bin Salman Port. While cruise passengers may currently take a coach trip from the port into Manama to see the old souq, Marassi Al Bahrain will allow them to simply walk ashore and enjoy fine dining, entertainment and luxury shopping.

DILMUNIA: Another island development, just to the south of Diyar Al Muharraq is Dilmunia. The $1.6bn island, which has an area of 1.25m sq metres, was conceived as a health and wellness destination by the Ithmaar Development Company (IDC), a wholly-owned subsidiary of retail Islamic bank Ithmaar created in 2007. The IDC has sold a number of plots on Dilmunia to third party developers. The Kuwait Resort Company bought a parcel of land for BD8.84m ($23.4m) in May 2015 and will develop 300 waterfront homes.

The IDC has two schemes of its own: Temara and Seavilla. Both have been sold out. Seavilla comprises 32 homes, while Temara was planned as 37 plots with 22 sea-facing and 15 coastal homes. In November 2015 Naseej bought a 13,068-sq-metre parcel of land on Dilmunia, which will be used for its BD24m ($63.7m), mixed-used development Canal View which will see restaurants, boutiques and residential apartments built alongside the island’s waterway. In January 2016 the IDC also announced it had signed an agreement with Dar Al-Handasah Consultants (Shair and Partners) for the design of a gateway bridge to connect the rapidly developing island to the mainland.

DURRAT AL BAHRAIN: In the far south of Bahrain, new developments have been announced for the exclusive Durrat Al Bahrain residential complex. Bin Faqeeh Real Estate Investment Company’s Layan development will offer apartments and villas set around a residential waterpark, and the developer is promising a luxury yacht and car with each villa for buyers seeking “the perfect weekend retreat”. The privately-held Bahraini company behind Layan has invested $500m since its first scheme began construction in 2010, and Bin Faqeeh has announced it will launch a new luxury project every year between 2016 and 2020. CBRE noted in its report that most buyers of freehold properties at Durrat Marina to date have been either Bahraini or from the GCC, and it anticipates the new developments there will appeal to the same demographic groups.

RESIDENTIAL FAVOURITES: Among young professional expatriates looking for properties to lease, Juffair, Seef and Reef Island remain popular in Manama, as well as Amwaj Islands, which is closer to the airport, according to CBRE. Seef and Reef Island are convenient for many offices, destination malls and entertainment centres, while Juffair is close to the US Naval base and to the restaurants of Adliya. Among the companies developing multiple schemes in these residential areas is Kooheji Contractors, which markets, operates and manages its properties through its sister firm Royal Ambassador. The company is developing Ariva, a 20-storey tower with 89 apartments in Amwaj Islands, and the $75m Fontana Suites, a 27-storey building with 387 apartments due to be completed in mid-2017 in Juffair. In October 2016 it had just handed over Fontana Gardens, a luxury development consisting of more than 400 apartments in three towers. It is also planning Fontana Infinity for Juffair, which will have 814 apartments in twin 43-storey towers.

RETAIL: The completion of so many new homes in Juffair has fuelled demand for retail and food and beverage outlets. In 2016 Lulu opened a supermarket in the new Juffair Mall, which was developed by Al Rashid, a division of the Landmark Group. Less than half a mile away an Oasis Mall, also owned by the Landmark Group is under construction. CBRE estimated that the two-storey Oasis Mall will have a gross leasable area (GLA) of 56,000 sq metres and that it will open in 2018. CBRE also calculated that new malls with a combined GLA of 219,000 sq metres are due to open in Bahrain before 2019, including The Avenues in 2017, and the Villamar@The Harbour, Oasis Juffair and Al Muharraqia Souq in Diyar Muharraq in 2018, and the Manama Lagoon in 2019. These new retail developments come in addition to 604,000 sq metres of GLA in large or destination malls and 242,000 sq metres in smaller community malls. In December 2015 the Chinese-themed Dragon City Mall opened in Diyar Al Muharraq with 787 commercial units.

HOSPITALITY: Thanks in part to some of the major new mixed-use developments springing up in Bahrain, the number of new hotels in the pipeline suggests optimism in the hospitality sector. New hotels are also due to be built at Marassi Al Bahrain, including The Vida and The Address Marassi Al Bahrain. According to CBRE’s report, the Marriott Residence Inn at Water Garden City, Seef, was due to open in 2016, as was the Wyndham Grand in Bahrain Bay. However, no further news was reported as of January 2017.

OFFICE: The demand for new office space in Bahrain was described as “moderate” by CBRE in its report and “flat” by Cluttons. Both firms acknowledged that companies preparing to move are often looking for buildings that have better service and facilities or an opportunity to cut costs. Cluttons suggested smaller, fitted offices are likely to attract clients, while CBRE pointed out that proximity to malls or leisure amenities can be an important attraction for staff.

OUTLOOK: The modest demand for office space may reflect the economic difficulties being experienced by businesses in the GCC, but the optimism which remains among developers catering for leisure and tourism, shopping and entertainment suggests there is confidence that the wealthier citizens of those countries still have the money to spend and invest in Bahrain.