Build up: The recovery of the economy is mobilising the sector

Following the boom years of 2003-08 and the subsequent downturn in the midst of the global financial crisis, the Bahraini construction sector is once again beginning to show signs of growth. The sector was first hit by the 2008 financial crisis, which was compounded later by social unrest in Bahrain. Similar to the experience of nearly every other country in the GCC region, with the exception of Kuwait, the total value of new construction projects awarded in Bahrain dropped markedly in 2012, reaching a nadir of less than BD1bn ($2.36bn).

SOCIAL SPENDING: However, dormant projects have begun moving again and the construction sector as a whole looks set to benefit from the $10bn extended to Bahrain as part of a $20bn fund set up by GCC members to support housing and infrastructure development in Bahrain and Oman. This increased infrastructure spending in Bahrain will likely be a boon to the construction sector and facilitate the implementation of several new road and bridge projects, as well as public utilities, infrastructure and educational facilities. Many believe that the completion of these infrastructure projects will eventually benefit the wider economy as a whole. “Just as the recent completions of the Sitra Causeway, Umm Al Hassam Interchange, Khalifa bin Salman Port and the Industrial Area have fuelled much of the construction growth over the last three years, further infrastructure growth will also pay a dividend,” Amin Arayed, CEO of First Bahrain, told OBG.

Roads and bridges are slated to receive the largest share of investment in the infrastructure market, with some 16% of the value of all projects under consideration to be spent in these areas, according to a report on construction in the GCC by international professional services firm Deloitte. The report also maintains that the value of the market remains relatively balanced between public works projects (45% of the market) and general construction (55% of the market). According to the Ministry of Municipalities Affairs and Urban Planning the number of construction permits being awarded in the kingdom is once again rising.

The Gulf Daily News reported in May 2013 that the government has signed an agreement with the UK’s Prince Charles Foundation for the construction of 4000 social housing units, with the first homes expected to be built in the Jaw and Askar areas. The foundation will provide a team of technical and engineering experts who will work with 12 Bahraini nationals on the project, as well as facilitate skills transfer in human resources. Bassem Al Hamer, the minister of housing, said the new towns would include handicraft centres run by the Ministry of Culture in partnership with Tamkeen, a government fund that aims to develop the local workforce, to encourage small businesses, create jobs and protect traditional culture.

REORGANISATION: Construction is likely to account for 3-4% of nominal GDP in 2013, according to projections from Business Monitor International (BMI), although high oil prices and hydrocarbons receipts are likely to understate the importance of the sector. The likely value of the construction sector as a whole could reach as high as $1.4bn in 2013, according to BMI. Adjusted for inflation, this figure would be higher than the total value of ongoing projects in the construction sector during 2003-08.

Restructuring the market therefore means growth will be more sustainable in the future. “The construction market continues to witness reorganisation. While Bahrain continues to rely substantially on imported materials, going forward the challenge will be to control potential increases in construction cost due to significant demand for materials from neighbouring GCC countries,” R Lakshmanan, CEO of Sakana Housing Solutions, told OBG. Margins will remain tight, but with the number of real estate transactions increasing and GCC members helping fund social housing expansion, balanced growth is slowly returning.

According to data from the Central Bank of Bahrain, interest rates on construction and real estate projects rebounded from a low of 4.99% at the start of 2012 to 5.24% by the end of the year. The highest rates on offer were 7.5%, above even the 7% average of 2009. This suggests that interest in Bahrain’s banking sector for new projects is increasing. The kingdom’s banks and lending institutions are again showing interest in investing in real estate and development projects. UH Neelakanta, CEO of the Delta Construction Company, told OBG, “Although the banks are wary of real estate in the current climate, if the proper feasibility studies are in place, the banks are indeed willing to finance certain projects.”

As the market changes, new projects can be launched quickly. The regulatory structures in the kingdom remain competitive. According to the International Finance Corporation (IFC), the private sector arm of the World Bank, Bahrain ranked 7th out of 185 economies measured in terms of the ease of acquiring construction permits. On average, rankings suggested that approval for the construction of a warehouse would take 43 days and require just 12 bureaucratic steps.

HOTEL BOOM: One sign of strengthening confidence in the market is that a host of international hotels are set to open in Bahrain in the coming years. The new Ramee Grand Hotel and Spa, being developed by Millennium East Properties, is set to open in the Seef district in 2013 and will be the country’s tallest hotel once completed. Seef could see similar skyscraper projects in the future, as the Manama Municipal Council announced in September 2012 that it is considering allowing 50-storey skyscrapers in the Seef area for both residential and commercial projects.

Elsewhere, a host of international hotel projects are already under way. In particular, the $2.5bn Bahrain Bay development will become home to a number of luxury hotels in the coming years. A Four Seasons, JW Marriott Manama and the Wyndham Grand Manama are either planned or under construction at the site. The Wyndham Grand Manama is to be housed in the iconic twisting CIH Tower. With Ahmed Al Qaed Construction as the main contractor, the project is set to be completed by the first quarter of 2014.

These hotel projects are adding hundreds of jobs to the construction sector. The construction of a new branch of the Four Seasons on a manmade island in Bahrain Bay has already added 700 construction jobs and is scheduled for completion in spring 2014. Additionally, a JW Marriott Hotel will open in Bahrain Bay in 2016 as a joint venture between Khaleej Capital and Marriott International. “The interest of investors in hotel and tourism-related projects remains well founded due to the fact that tourists to the kingdom, particularly from Saudi Arabia, have returned to previous levels,” Robert Lee, CEO of Bahrain Bay, told OBG. According to projections from the Bahrain Economic Development Board published in the Bahrain Economic Quarterly for the second quarter of 2012, the number of tourists visiting Bahrain is increasing.

MEDICAL TOURISM: Over the long run, Bahrain hopes to develop itself into a medical tourism destination. Central to this plan is the $1.6bn development of Dilmunia Health Island. The 125-ha artificial island will be the first ever built as a medical tourist destination. In March 2013 Ithmaar Development Company (IDC), which is overseeing the Dilmunia Island project, signed a $22.5m agreement with Cebarco Bahrain to develop the island’s infrastructure. DG Jones & Partners is the overall cost consultant for Dilmunia, and engineering consultancy Mott MacDonald is responsible for infrastructure design.

MOVING AGAIN: For projects that are still on hold, the government is considering investing via the real estate arm of Bahrain’s sovereign wealth fund, Edamah, to bring jolt the developments back on-line. The Gulf Holding Company announced in September 2012 that it had signed a deal with MACE, a British construction consultancy, to resume work on the $650m waterfront Villamar development, located at a prominent site in Bahrain Financial Harbour. However, no further progress has been announced as of yet.

Another project that continues to move forward is Diyar Al Muharraq, which is set to become Bahrain’s largest private master-planned community, spanning over 12 sq km and housing 100,000 people. The development, which was launched in 2008, is expected to take another 10 years to complete and will entail a number of successive phases. When completed, Diyar Al Muharraq will include schools, mosques and commercial facilities. Some of its retail outlets and restaurants will be spread along 40 km of public beaches. The development is expected to eventually have the largest stretch of public beaches within Bahrain.

One of the key phases being developed in 2013 is Dragon City, a wholesale and retail trade facility offering a wide range of Chinese products and materials. Following the completion of Dragon City and the Muharraq Mall, there is likely to be a shift from large-scale retail projects, meant as weekend shopping destinations, to smaller retail centres focused on meeting the needs of individual local communities.

REGULATIONS: New regulations in line with the proliferation of high-profile development projects have recently come under consideration. The Marina West Owners Association, which represents roughly 300 investors in the Marina West project, announced plans in February 2013 to sue Marina West over the completion of the project, according to Construction Week, a trade publication. Still not finished, the Marina West project was scheduled to include 10 residential towers and a five-star hotel. At the core of the dispute is Bahrain’s property law, which is unclear on the relationship between the developer and the sub-developer’s contractor and sub-contractor. This is a legal issue Bahrain’s lawmakers are expected to address in the future, and decisions on this made elsewhere in the Gulf may set the tone in Bahrain.

WATERFRONT DEVELOPMENTS: Over the past decade, a number of high-profile waterfront residential properties were launched, and the trend in Manama appears to be waterfront projects that incorporate elements of cultural significance. The first of several new waterfront building projects was completed in November 2012, with the Bahrain National Theatre, opening to coincide with two important occasions – the King’s birthday and the start of Manama’s year-long run as the Arab Capital of Culture 2013. The theatre’s 1001 seats make it the third-largest modern amphitheatre in the Arab world after the Cairo Opera House and Oman’s Al Sultania Opera House. Another iconic structure, the new $100m National Assembly government building, will be surrounded by water on three sides. Prime Minister Prince Khalifa bin Salman Al Khalifa has ordered the completion of the building by July 2013. Other waterfront developments include the $14.2m King Faisal Corniche, which was delayed by two years while nearby road works were completed. On Muharraq Island, a $66.3m project will include a hotel, public beach and retail outlets all facing Manama across the water.

PUBLIC WORKS: In addition to the development of the National Theatre, which was overseen by the Special Projects Office of the Ministry of Works (MoW), the MoW is involved in a number of other important infrastructure projects, with road works being the priority. A MoW report notes that “the ultimate midterm goal of MoW is to develop an urban ring road around Manama and motorways from the King Fahd Causeway entry point to the Khalifa bin Salman Port in Hidd, as well as a roadway to the future Bahrain-Qatar Causeway entry point at Ras Abu Jarjur, which will run to the King Fahd Causeway and into Saudi Arabia.”

Infrastructure upgrades like this will be key as the kingdom’s transport network is now reaching saturation and demand is exceeding capacity in its present state. Funding from the MoW and other public bodies will be necessary to finance these improvements. There is likely to be a strong return on investment, however, as better infrastructure helps to bring in more residents, businesses and tourists, in turn generating indirect revenues for the state.

According to a 2012 report by global accounting and consulting firm Deloitte, over $4.7bn has been tapped to build or upgrade 100 km of road and bridge projects. Bahrain already has a higher road per square km average than its neighbours in the GCC, including Qatar and the UAE. July 2012 saw the opening of an expansion to the King Faisal Highway.

The expansion of the King Fahd Causeway is perhaps Bahrain’s showcase road development, linking the island nation to Saudi Arabia and carrying 50,000 commuters daily, according to online Middle East construction portal, Construction Week. Two road projects to be completed in 2013 include the BD24.21m ($63.7m) Mina Salman Interchange and the BD98m ($257.9m) North Manama Causeway. In terms of cost, the North Manama Causeway is currently the biggest single infrastructure project in the kingdom. Main contractors in the project included Bahrain’s Haji Hassan Group and Belgium’s Six Construct.

Smaller projects are designed to provide new traffic links to villages and rural areas as well. Under the MoW’s Opening of Roads (OOR) programme, the government recently completed nearly 50 km of village road projects, servicing the villages of Buquwah, Sehla, Galali, Karbabad and Salmabad with six developments as of January 2013. Other important road projects happening around the kingdom include the upgrading of the Al Fateh Highway to an urban ring-road motorway designed to allow commuters to bypass the congestion in the heart of the capital.

INTERNATIONAL CONNECTIONS: According to a 2012 Deloitte study, the volume of maritime cargo in the kingdom has been growing by 5% per year. With rising demand, the MoW has prioritised the second phase development of the Bahrain Approach Channel, which will include extensive dredging to deepen the main approach channel for the Khalifa bin Salman Port from 12.5 to 15 metres. Upon completion, even the largest container vessels will be able to enter the Khalifa bin Salman Port at low tide. The project, valued at BD22m ($57.9m), is to be completed in February 2016. The Bahrain International Airport (BIA) will also be expanded, with a tender for the project to be awarded by late 2013. The BIA currently handles some 9m passengers per year and is a hub for national carrier Gulf Air. The planned BD4.6bn ($12.1bn) contract to upgrade BIA will expand its capacity to 13.5m passengers per year. Bahrain also has plans for two highways stretching from the King Fahd Causeway east, one into the Al Hidd Industrial area and the other linking the bridge with the proposed landing site of a 41-km planned causeway connecting Bahrain and neighbouring Qatar.

While transportation on the King Fahd Causeway can take days, efforts are currently under way to help address this problem. S Mohammed Al Wedaie, the acting general manger of Bahrain Pipes, told OBG, “There has been progress in recent weeks, with both Bahraini and Saudi Arabia Customs authorities agreeing in principle to expedite the movement of trucks travelling across the causeway.” Al Wedaie added, “Progress will be vital to the growing export industries in Bahrain.”

Plans for the $3bn Bahrain-Qatar Causeway are currently being developed, and the project will require a series of artificial islands and support pylons built on a reef between the two countries. KBR will be the main contractor for the project, which was first announced in 2008. The initiative has not yet broken ground, but the Qatari leadership maintains that the development is being included in the works scheduled ahead of Qatar hosting the football World Cup in 2022. Some 40% of the project is supposed to be completed by 2016. The project would be a huge help for the Bahraini real estate and construction sectors, as it would allow expatriate workers to live in Manama and commute to work in Doha. The bridge is expected to handle 10,000-20,000 automobiles a day, according to MENA Infrastructure magazine.

UTILITIES UPGRADES: The MoW is also keen to begin a round of upgrades to sewerage and water treatment infrastructure. Bahrain was an early adopter of central sanitation facilities, and at present 95% of the population is connected to the central network. Much of Bahrain’s sewerage infrastructure dates back to the 1970s, however, and the MoW is now keen to update this infrastructure as the population of the kingdom is expected to continue to grow.

The MoW is working on a public-private partnership (PPP) agreement for a 15-metre-deep gravity trunk sewer around Muharraq Sewage Treatment Plant (STP), a first for the GCC. The project is slated for completion in October 2013. In the Tubli STP, some 15,000 metres of pipelines are being upgraded or expanded. Tubli was designed to have a capacity of 200,000 cu metres but in actuality handles about 300,000 cu metres daily. The upgrade will expand the STP’s capacity to about 400,000 cu metres by December 2016. The contract for the project will be tendered in late 2013 and is expected to be valued at BD100m ($263.14m). Construction Week has reported that part of the funding for the Tubli STP expansion will come from the Saudi Fund for Development. The MoW is also working on projects related to the water grid in Arad, Hidd and Gudaibiya, which are all expected to be completed in 2015.

During the construction surge of the past decade, emphasis was on building waterfront and luxury housing and today there is a dearth of affordable accommodation in Bahrain. As such, the government has announced plans to build new social housing projects in East Hidd, East Sitra and Northern Town, which will provide 23,000 units by the end of 2016. As of March 2013, there were some 54,000 people on the waiting list to receive a subsidised home from the government.

While foreign contractors often submit bids for larger projects in Bahrain, most contractors for the MoW are drawn from a pre-existing list of qualified bidders. According to the ministry, it is currently incorporating a host of new best practices and a new project management system. The MoW’s project budget for 2012 was BD207m ($544.7m). Additionally, the ministry managed projects for clients in the amount of BD128.4m ($337.87m). In 2012 it awarded 96 tenders (project and term contracts) worth BD62.05m ($163.3m). This is up from 2011 when it awarded 81 tenders valued at BD112.3m ($295.5m). The minister of works, Essam Khalaf, has pledged to spend around $2.5bn on infrastructure over the next 10 years.

MATERIALS: Bahrain’s construction material costs have long been among the highest in the GCC. Bahrain relies on the neighbouring UAE and Saudi Arabia for the import of industrial sand, most of which is mined from the seabed, as well as for much of its cement. The Material Directorate of the MoW is the primary government body responsible for monitoring sand, iron, steel and cement usage in the kingdom. The directorate conducts quality control testing both at the point of entry and the construction site. Given price fluctuations in the market, the MoW is keen to develop the Bahrain National Centre for Construction Materials Research in 2013. This centre will aim to bring more stability to the prices of construction materials and consider new ways to produce such materials within Bahrain.

However, a host of new initiatives, some private and some public, may help reduce material costs for steel beams and cement in the near future. Bahrain’s new United Steel Company, in which Saudi Sulb is an investor, is working to expand steel production at the Hidd Industrial Area. The first phase of the company’s expansion plan became operational in 2012. A second phase expansion will add a rebar mill with an annual capacity of 600,000 tonnes. When both phases are complete by 2015, the facility will have a production capacity of 1.2m tonnes per year of steel beams.

TACKLING COSTS: These projects aimed at reducing materials costs in Bahrain are welcome news for the local construction sector. Yet it is the price of cement, not steel, that has strained developers the longest. Bahrain’s cement market is closely tied to that of Saudi Arabia. In 2011 Bahrain imported some 75% of its cement from Saudi suppliers, according to Construction Week. That year a steep price hike on Saudi cement imports caused Bahrain to respond by temporarily banning all cement imports from the country. When trade resumed, prices continue to creep upward as a Saudi building surge had sparked an increase in demand. In 2012 the government responded by attempting to set prices. According to Cement Group, the price of cement was fixed at a price of $82.27 per tonne for Ordinary Portland Cement (OPC), while unofficial prices for 50-kg bags were over $4. Stockpiling construction materials during a building boom has long been a serious issue for GCC markets. Bahrain’s move precipitated a ban on cement exports from Saudi Arabia in the summer of 2012, although Bahrain, the destination of 35.8% of Saudi cement exports, was excluded from this.

INCREASING INDEPENDENCE: With the bulk of Bahrain’s cement needs being met by Saudi Arabia and the UAE, Bahrain’s dependency on these two countries for cement imports is a concern. Supplier diversity for construction materials is an issue now being addressed at a governmental level. In February 2013 a delegation from the Ministry of Industry and Commerce visited Thailand to discuss increasing in cement imports, according to the Bahrain News Agency. Trade journal World Cement reports that the government of Bahrain plans to redevelop the Mina Salma terminal specifically to meet the country’s construction needs by developing it into an import-export facility. “Development of the port facilities in Bahrain, and in particular a purpose-built facility for the importation of basic construction materials like cement, will be of great benefit to the local construction sector. It will speed up the time necessary to complete projects,” Robert Lee, CEO of Bahrain Bay, told OBG.

LABOUR COSTS: Labour costs within Bahrain are expected to climb in the near future. Many of the economies in the Gulf are growing rapidly, drawing labour away from Bahrain. Secondly, as South Asian economies recover, many workers are choosing to not seek work abroad. While this may cause disruption within the construction market, it also is an opportunity to encourage Bahrainis to work in the construction sector, where there is a need for talented engineers and other skilled labour. The president of Bahrain’s Society of Engineers, Abdul Majeed Al Gassab, has publically called for training nationals to meet the country’s engineering and management needs in the future.

GOING GREEN: A 2012 research paper the Bahrain Ministry of Municipalities Affairs and Urban Planning indicated that 50% of the world’s usage of non-renewable energy goes into the construction sector. As such, one of the major initiatives for Bahrain is a push toward more environmentally friendly building regulations. In 2012 it proposed adopting international environmental standards, including a requirement that 50% of all development plots must be reserved for green space, and that rooftop green zones must also be created and make use of at least 50% of available space.

Bahrain already has a number of regulations meant to make better use of natural light, efficient lighting fixtures, central cooling and green building materials. In the past, developers themselves have worked to develop high-profile and environmentally sensitive projects. For example, the World Bahrain Trade Centre building is home to the world’s first large-scale building-integrated wind turbine. While, the current emphasis is on affordable housing, this could open up new opportunities for cost-saving green initiatives. Opportunities for more environmentally friendly construction are becoming evident. “If more polyforms and other prefabricated techniques were used in construction projects in Bahrain, this would reduce construction and maintenance costs, as well as mitigate the environmental impact. This would create a win-win situation,” Mike Williams, senior director of research and consultancy at CBRE Middle East, told OBG.

For projects choosing to be certified as environmentally friendly, LEED certification is the market leader. Global sustainability assessment firm BREEAM Gulf operated in Bahrain from 2009-11, though it has subsequently withdrawn, according to trade publication Architects Journal. This has left LEED certification as the most common certification for green buildings in the kingdom. However, the Pearl System, developed by UAE’s Estidama and with a higher emphasis on water usage, is seen as better suited to the needs of the Gulf and may become the regional standard. Interest in LEED certification continues to grow in Bahrain and new LEED-certified structures are on schedule to be built.

OUTLOOK: Driven by an increase in spending by the MoW, the construction sector in Bahrain will likely see a return to sustainable growth in the medium term. The government’s current emphasis on infrastructure will likely pay two dividends. First, it will help the hotel sector by increasing accessibility for visitors to the kingdom. Secondly, the emphasis on infrastructure will also benefit Bahrain’s industrial activities. Despite the economic turbulence of the past few years, the government’s ability to adapt to a counter-cyclical policy of investment in infrastructure will be a key driver of the non-hydrocarbons economy over the next decade.