Bahrain's retail and housing segments grow as the real estate sector begins to bounce back

Although recovery has been slower in Bahrain compared to some of its GCC neighbours, the kingdom’s real estate sector has made steady progress since 2013, with gains in the residential and retail markets demonstrating a gradual return of investor and developer confidence. While the office market remains oversaturated, with flat growth reported in 2013, new industrial developments complementing large-scale infrastructure projects have offered developers a diverse mix of opportunities.

The provision of affordable housing remains a top priority, as evidenced by the government’s multimillion-dollar social housing agenda, which saw the kingdom’s first-ever real estate public-private partnership (PPP) signed in 2012, and a new housing finance system was introduced in 2013. This new programme offers a number of incentives. UH Neelakanta, CEO of Delta Construction Company, told OBG, “The government reimburses private companies for training Bahraini employees, which provides a win-win scenario for both sides.”

Policy

Public sector regulators include the Survey and Land Registration Bureau (SLRB), which is mandated to oversee property ownership. The Ministry of Housing is tasked with providing affordable and social housing for Bahraini nationals, with the state-owned Eskan Bank acting as the ministry’s financial facilitator for affordable housing. The government’s sovereign wealth fund, Mumtalakat, has moved to finance housing projects in recent years, while the Ministry of Works, Municipalities and Urban Planning is charged with managing building permits and maintaining the land registry.

Foreigners are permitted to own property within designated zones, while regulatory reforms have improved the operating environment for buyers and investors. In June 2013 the SLRB ratified Legislative Decree No. 13, which established a new Land Registration Law, replacing Legislative Decree No. 15 of 1979. The new law sets a flat 2% fee on all property sales regardless of purchase price, a reduction from the previous 3% charge. The new law additionally aims to promote early transaction registrations by offering a 15% discount on registration fees submitted within two months from the date of the prescribed forms of transfer.

Key Contributor

Real estate and construction have become important segments of the non-oil economy, although their contribution to total GDP declined from 13.7% in 2008 to 11% in 2012, according to the World Trade Organisation, while the Central Informatics Organisation (CIO) reported that real estate contributed 4% of GDP in 2012. Following the 2008-09 crisis and the political unrest of 2011, commercial activity declined, while a speculation-driven real estate bubble burst, seriously affecting investment across the commercial and residential segments. The SLRB reported that real estate transactions were valued at nearly $4bn in 2008; in 2012 total transactions were less than $2bn. “The main theme running through the last five years has been lack of confidence from banks, institutional investors and individuals,” Tony Connor, managing director of property developer Pentacon Management, told OBG.

In January 2013 property management and research firm CBRE Bahrain reported that Bahrain’s real estate sector had bottomed out, with land prices dropping by up to 60% in affected areas. However, this decline presents significant opportunities to investors and businesses. “The declines we have seen make Bahrain very attractive for companies who want a foothold in the Middle East,” Harry Goodson-Wickes, head of Bahrain for estate agency Cluttons, told OBG. He added, “Any property-related business is going to be cheaper; you can set up an office and find staff villas for less, which is really positive for new business. People still rate Bahrain at the top of the scale in terms of quality of life for families and expatriates.”

Indeed, “Bahrain's land prices have bottomed out, and building materials are comparatively inexpensive, so we are seeing high interest from buyers in Kuwait, Qatar and Saudi Arabia because they can get a better value for their money here,” Faisal Abdulwalid Faqeeh, chairman of Bin Faqeeh Real Estate Investment, told OBG.

On The Up

Bahrain’s real estate market has shown considerable recovery since early 2013. The SLRB reported the volume of real estate trading expanded by 30% in 2013, while the value of transactions in the first half of 2013 was just over BD500m ($1.33bn), according to CBRE. The total value of real estate transactions stood at BD861.96m ($2.28bn) in 2013, compared to BD664m ($1.76bn) in 2012, although still below the BD1.44bn ($3.82bn) recorded in 2008.

Recent announcements indicate the sector could be on track to return to pre-2009 growth levels. In June 2014, for example, the SLRB reported that real estate transactions in the first quarter were up 80% year-on-year (y-o-y), driven by rising investor confidence, with transactions among local investors up 274% and those among foreign investor up 173%. Transactions in 2014 totalled BD1.29bn ($3.42bn), up some 50% year-on-year.

Bin Faqeeh has recently delivered several sold out residential developments and is handing over a high-end office space at Business Bay. The company has projects in the pipeline due for delivery in the coming years, including The Breaker tower, which at 165 metres will be the tallest pre-cast tower in the Middle East and the second-tallest globally. Meanwhile, Eskan Bank, the kingdom’s largest mortgage provider, reported it had disbursed BD400m ($1.06bn) in home loans in 2013, a 12.5% increase over 2012, of which a record BD54.7m ($144.96m) was distributed to 4115 families under the government’s Social Housing Finance Fund.

Investor Confidence

Five years after the financial crisis, several high-profile projects remain suspended, including the Marina West, Villamar and Amwaj Gateway developments. Amwaj Gateway, for example, is the largest project under development on Amwaj Island, on the northern tip of Bahrain. Launched by Bahrain-based RealCapita and Yara Investments, Amwaj Gateway covers 33,500 sq metres, and is planned to include six 20-storey towers with a total of 550 units. The $185m project was launched in 2006 and expected to wrap up in 2009, but has yet to be completed.

The government passed a law in 2014 to protect property investors from stalling projects. While developers will be allowed to promote private developments, the law stipulates that 20% of project funding, including bank loans, be deposited into escrow accounts upfront, rather than being used to launch additional projects or phases. Any developers caught selling properties off-plan without government permission could be jailed for up to a year and fined BD10,000 ($26,500). The law also stipulates that existing stalled projects will be obliged to comply with the new regulations within six months of enactment. This could see considerable forward motion on the kingdom’s largest stalled projects, with existing stakeholders to be compensated from the fund should the project fail to be completed. The law is expected to be ratified in 2015.

Projects Resume

These measures should bolster investor and buyer confidence, which improved over the course of 2014 as several large-scale projects got back on track. Bahrain Bay, for example, received a shot in the arm in March 2014 when Indian real estate firm Ajmera Mayfair Realty announced plans to increase its current investment in the project from $30m to $300m. The $2.5bn mixed-use development anchored by three major developments – Arcapita Bank’s global headquarters, Raffles City and the Four Seasons Hotel – was initially scheduled for completion in 2012.

Diyar Al Muharraq, meanwhile, will be the largest mixed-used urban development ever undertaken by Bahrain’s private sector. Launched in 2008, the $3.2bn project will include residential and commercial properties with the potential for 30,000 dwellings housing over 120,000 people. A significant portion of Diyar Al Muharraq’s residential units will be affordable units. Third-party developer Diyar Homes reported that the first phase of its affordable villa project saw all 340 villas pre-sold within two weeks of launch, with 92% of phase two, comprising 180 affordable villas and launched in December 2013, pre-sold as of June 2014.

Affordable Housing

Government-funded housing is expected to continue driving growth in the residential sector, and the 2013/14 state budget draft incorporates BD580m ($1.54bn) to build 16,000 houses. Government-assisted housing is breaks down into two categories: affordable and social. Affordable housing units are sold on the open market by private developers to middle- and low-income families, generally carry a price tag of no more than BD110,000 ($291,500), and are financed by low-interest, long-term mortgages offered through the newly established Social Housing Finance Fund. The BD750m ($1.99bn) fund was launched in 2013 through a joint venture between the Ministry of Housing and a consortium of private banks, including Eskan Bank, Ahli United Bank, Bahrain Islamic Bank, Kuwait Finance House and Al Salam Bank.

The scheme entails provision of up to BD90,000 ($238,500) in financing for eligible citizens, with the maximum home price under the scheme set at BD120,000 ($318,000). The buyer pays a BD9000 ($23,850) deposit and finances the remaining BD81,000 ($214,650) through participating financial institutions. Monthly payments are capped at 25% of the buyer’s total monthly income, with the remainder of the balance provided by the government. “Debt coverage service ratios are different in this region,” Mark Haikal, head of business development and property services of development company Naseej, told OBG. “Individual using conventional loans may leverage up to 60% of their monthly income on their mortgage,” he added.

Social Housing

Social housing is distributed to eligible Bahraini citizens on the Ministry of Housing’s wait list. The government has signed social housing contracts with firms including Nass Contracting, Atkins Group and Al Hedaya. In 2012 the government signed its first housing PPP with Naseej Properties. The BD208m ($551.2m) deal will see 2800 affordable and social housing units built on the Al Madina Al Shamaliya islands and Al Luwzi by 2017 (see Construction analysis).

Retail

Retail, hospitality and industrial real estate also hold high growth potential. “When Bahrain City Centre Mall opened, it added 35% more retail space to the market. To accommodate more shopping malls either the population has to increase or people’s incomes need to grow. Certainly over the last few years, neither is rising,” Michael Simmelink, manager at the Bahrain Mall, told OBG. Despite the argument that the kingdom is gradually becoming “over-malled,” retail space remains in high demand. “Post-2009 there was a lot of empty retail space in the sector,” explained Robert Addison, general manager at Seef Properties. “Today the conditions are promising and improving. In terms of rent, we feel there is further room to grow, but retailers need to be comfortable enough with their profit margins to be able to reinvest and expand to new locations.” Developers have been quick to capitalise on sustained demand for retail schemes, most recently with the May 2014 launch of the 54,000-sq-metre Dragon City retail project in Diyar Al Muharraq, to be constructed by Nass Contracting. The $3.2bn mall targets Chinese retailers, while Bahraini retailers and products will also have a strong presence. The project is expected to begin leasing shortly, with rents of around BD20-25 ($53-66.25) per sq metre. An even more ambitious retail project with 200,000 sq metres of retail and recreational space is in the pipeline at Diyar Al Muharraq.

Hospitality

Hotel occupancy has been gradually rising since 2011, with Hotelier Middle East reporting it rose 43% at end-2013. Activity is expected to expand in 2014, with 11 hotel projects in the two-year pipeline, bolstered by Saudi Arabia’s move to shift its workweek to Sunday-Thursday and investor desire to transform non-performing towers into cash-generating assets.

In July 2013 Kuwait Finance House announced it would finance completion of the stalled Banader Rotana Hotel, a five-star, 251-room hotel, while the 273-room Four Seasons Hotel will open in Bahrain Bay before 2015, and Swiss-Belhotel International is working on a four-star project with 149 rooms. In June 2014, Wyndham Hotel Group announced plans to build a 140-bed Ramada Hotel, while Hilton Worldwide will open a 350-room, five-star Double Tree Suites in Juffair in late 2015.

“You can struggle to count luxury properties here on five fingers, so there is definitely an opening for that type of product,” Connor of Pentacon Management said. “However, the government has actively encouraged owners to upgrade and refurbish, and a lot of low-end hotels have dropped out of the marketplace. That space in available room stock has been filled with high-end products, so the cycle is revolving in such a way that the quality has really been lifted.”

Industrial

Industrial has proven the most resilient segment within the sector, with developments such as the Majaal industrial logistics facility, which offers 37,000 sq metres of leasable industrial facilities aimed at supporting small and medium-sized enterprises (SMEs), with unit sizes ranging from 250 to 9300 sq metres. Located at the Bahrain Investment Wharf (BIW), a $1.6bn, 170-ha mixed-use development in Salman Industrial City, Majaal was inaugurated in 2009 under developer First Bahrain. It currently hosts 28 tenants and since 2010 has stood at 100% occupancy. Indeed, the project has proven so popular that First Bahrain is now working as a consultant and franchiser for developers including Kuwait’s Al Mazaya, which is in the process of establishing its own logistics facilities at BIW. “Industrials have taken off primarily because of distribution; in the logistics and supply chain area there seems to be a shift for strong distribution as a replacement for retail,” Amin Al Arrayed, general manager of First Bahrain, told OBG. “It’s a sector of growth globally, and that is reflected here. A number of our tenants are here because they distribute in Saudi Arabia, and they need a hub here.”

Developers have been quick to capitalise on the trend, and projects such as Investment Gateway Bahrain (IGB) have witnessed strong success in recent years. IGB is the Muharraq governorate’s first project dedicated solely to light industrial and commercial activities. It covers 600,000 sq metres and offers capacity for showrooms, storage and handling facilities, and offices. Foreign investors are able to purchase land, with developer Manara Developments announcing in April 2014 that the firm is preparing to launch the second phase of the project, after 90% of plots in the first phase were sold within six months of launch. “Recent events in Bahrain have made certain companies reconsider operational and service requirements. Some light industrial and logistics facilities have shifted from Sitra, for example, to locations that are not directly affected by these events, where they are able to provide uninterrupted services to their customers,” said Haikal.

Commercial

The commercial office segment remains flat, with some firms still hesitant to enter or return to the market. The subsequent erosion of occupier confidence has had a negative impact on activity. Cluttons reports that over 90% of occupier activity is being driven by those relocating within Bahrain. “The office market has not completely recovered. Rents are still flat, and most tenants are able to renegotiate much better terms at the end of their leases,” said Haikal. Nonetheless, the government’s move to inject millions in new infrastructure projects could see an uptick in commercial property activity. Ajmera Mayfair Realty’s investment in its new Bahrain Bay office complex serves as an example of a gradual return of investor confidence.

Outlook

Bahrain’s real estate sector has been slower to recover than some of its GCC neighbours. But recent developments indicate the sector is picking up speed, driven by state spending on social and affordable housing and new infrastructure. These changes will bolster overall activity, as well as support demand in the retail, hospitality and industrial segments. Although the commercial market remains constrained by persistent oversupply, landmark legislation and a gradual return of investor confidence could help to mitigate these challenges over the medium term.