Several major land reclamation projects expand Bahrain's real estate sector

Strong real estate growth continues in Bahrain, with a number of residential, commercial and hospitality developments coming on-line in 2017 and 2018. However, rental prices have not been immune to the ongoing regional challenges, notably lower oil prices, with rents dropping in 2017 for residential real estate, and remaining subdued for the office sector. Despite this, the overall volume of real estate transactions has grown, with strong demand from locals and residents from countries in the region.

EXPANDING POPULATION: Bahrain’s population has grown from roughly 213,000 in 1970 to 1.5m in September 2017. This has been a boon for real estate, pushing the need for more properties and the expansion of available land. While the country originally consisted of 33 islands, with the capital, Manama, located on Al Awal Island, much of the focus of property developers is on man-made islands. Between 1987 and 2013, 80 sq km of land was reclaimed from the sea, adding 12.5% to the landmass of Bahrain’s main island group, according to a study by the American Association for the Advancement of Science (AAAS), utilising NASA’s Landsat satellite imagery. Over this period, the kingdom’s built-up area more than doubled from 76.2 sq km to 155 sq km.

Among the current projects involving reclaimed land is Al Madina Al Shamaliya, a master-planned community being built on a dozen islands to the north of Bahrain. Al Madina Al Shamaliya, or North City, will house up to 90,000 people, and is being built in phases, with work having already begun on roads, sewage systems and bridges.

In 2016 it was announced that Kuwait-based consultant SSH had been appointed as contract manager and site supervision consultant by the Ministry of Housing (MoH) for around 2000 housing units on Al Madina Al Shamaliya Island 13 and 14 (East).

Other projects being built on reclaimed land include Diyar Al Muharraq, a master-planned community near Bahrain International Airport (BIA) on seven man-made islands, sprawling across 10 sq km of land, and Durrat Al Bahrain, a development spanning 15 artificial islands in the south.

GROWING MARKET: With the easing of residence and ownership restrictions over the last two decades, as well as regional opportunities, Bahrain has become an attractive property market for those looking for a second home or a buy-to-let property.

Major developments continue to take place. The authorities are currently working to provide an additional 40,000 housing units, with the government set to build 70% of these units and the private sector responsible for the remaining 30%. According to local press, the kingdom has more than 17 ongoing housing projects as of mid-2017. A significant amount of funding for these projects is coming from its neighbours: more than $1.4bn worth of affordable residential developments are being funded by GCC members, primarily Saudi Arabia, the UAE and Kuwait, through the Gulf Development Fund.

According to the Bahrain Economic Development Board (EDB), the real estate sector was up 4.6% through September 2017. This was supported by economic and legislative reforms, as well as the increasing use of public-private partnerships (PPPs) by the MoH to boost social housing availability. Real estate transactions grew by 15.2% quarter-on-quarter in the first three months of 2017, to reach $770m, according to the EDB, while in 2016 real estate and business activities contributed 3.9% of real GDP. “Recent figures demonstrate the resilience of Bahrain’s real estate sector and highlight the increasing demand for housing not only in the kingdom, but across the wider region,” Khalid Al Rumaihi, CEO of the EDB, said at the Cityscape Global property event in Dubai in September 2017. “Strong growth in this sector has been supported by the implementation of economic and legislative reform and forward-thinking policies such as the PPP model by the MoH and the recently issued real estate law,” he added.

The aggregate value of real estate deals in the first seven months of 2017 was BD613.6m ($1.6bn), according to Bahrain’s Survey and Land Registration Bureau, the governmental body in charge of land, aerial and hydrographic survey services as well as the registration of real estate properties, up 8.1% year-on-year and 15.2% quarter-on-quarter, with roughly 85% of buyers Bahraini and a further 10% coming from elsewhere in the GCC, notably from Kuwait and Saudi Arabia. “Bahrain’s residential market has always been attractive for GCC investors,” Mohamed Abdulelah Al Kooheji, CEO of Amlak, the real estate investment arm of Bahrain’s Social Insurance Organisation, told OBG. “Prices are reasonable, and returns are attractive. Demand is there, but supply is also coming at the same time,” he said, adding that global and mainly regional investors are showing interest in the market, while sovereign wealth funds are interested in the potential of PPPs.

RESIDENTIAL NEED: Demand for residential units is growing at roughly 5000 units a year, according to MoH statistics, with the number of residential applications pending allocation standing at 55,000 as of September 2017. Bahrain’s stock of housing has long underserved the market, with an estimated shortage of 75,000 units as of 2017, according to international real estate services firm CBRE’s report on Bahrain’s commercial and residential market for the first half of 2017. This is based on a calculated need of 290,000 units, with 216,000 units completed.

Most of this demand is in the low to middle end of the market, with the government pushing to develop various projects in this segment. By 2020, 40,000 new units are scheduled to be completed. Meanwhile, large-scale residential properties finished in 2017 and targeted at the higher end of the market include The Tweet, The Grand and The Nest, all developed by Manama-based Bin Faqeeh Developers, as well as Fontana Gardens by Royal Ambassador.

While social housing is in strong demand, industry insiders point to challenges for investors looking to capitalise on this segment of the industry. “If you look at all segments what is truly missing today is affordable housing,” Mark Haikal, head of investment at real estate and infrastructure development company Naseej, told OBG. “It has the largest segment of unfulfilled demand. But is it an opportunity for developers? The reason why it hasn’t been fulfilled is because the ratio of land prices to delivery of affordable housing still doesn’t work. Now that the market is slowing down a bit there may be pockets of opportunities where someone can invest, but there are not that many. Land prices are too high.”

In cooperation with the private sector, the MoH has created a social housing programme known as Mazaya that aims to open additional housing stock to lower-income buyers by providing top-up financing for mortgages with participating banks to purchase a home on the open market, thus moving eligible citizens off the waiting list for public units. Expatriates living and working in Bahrain continue to be drawn to the areas around Juffair, Amwaj, Seef and Reef Island. As such, in Juffair alone the available supply of freehold properties is expected to grow almost 80% between 2016 and 2018, from 2800 units in 2016 to over 5000 by 2018.

REGULATIONS: Within the recent Real Estate Law No. 2 of 2017, which was published in the Official Gazette in August 2017, replacing the existing two-year-old regulations, are a number of provisions aimed at furthering the stability of the real estate sector and also increasing overall trust between investors, buyers and developers. One key change in the 100 pages of regulations is to limit the off-plan sale of residential developments by requiring funds to be held separately in escrow. The aim is to ensure that developers have the funds available to complete their projects, but at the same time allow the quick return of invested capital should the property fail to be completed. “This is a welcome addition to the sector and an important step towards restoring trust in the market,” Mohammed Khalil Alsayed, CEO of Ithmaar Development Company, told OBG. “It will contribute to healthier competition in the sector as high-quality developers benefit from increased investor trust. We want to be sure, however, that implementation is balanced to avoid excessive financial pressures on developers,” he said, adding that one of the main challenges related to implementation will be establishing a capable body with sufficient knowledge and experience.

LONG-TERM BENEFITS: Such regulatory changes may create challenges at first, but will likely prove beneficial in the longer term. “New regulations on developers selling off-plan and the infrastructure tax can put additional pressure on the market during a time when it is experiencing slower growth in some segments,” Mohamed Al Sayed, managing director of Metropolitan Holding Company, told OBG. “However, these changes are an important part of building market trust that will encourage long-term growth.”

In late October 2017 King Hamad bin Isa Al Khalifa issued a decree creating the Real Estate Regulatory Authority, appointing Sheikh Mohammed bin Khalifa bin Abdulla Al Khalifa as its CEO. The board, which will include the minister of works, municipalities affairs and urban planning; the minister of industry, commerce and tourism; representatives from the Survey and Land Registration Bureau, Economic Development Board and central bank; as well as the Bahrain Property Development Association, the Bahrain Real Estate Association and stakeholders from the private sector, will be tasked with, among other things, resolving disputes, monitoring deals and overseeing the progress of projects.

All new projects in the country will also now have to pay an additional BD12 ($32) per sq metre towards infrastructure development, with the levies charged on the rentable or sellable area. This is aimed at ensuring that infrastructure keeps up with building construction. Developers found guilty of irregular property deals can also face prison sentences of up to two years and fines of BD50,000 ($133,000).

Speaking at the opening of the Gulf Construction Expo, the Gulf Property Show and the Gulf Interiors Exhibition in April 2017, Sheikh Khalid bin Abdulla Al Khalifa, the deputy prime minister, said that the new regulations were part of the government’s efforts to develop provisions and articles to cope with the rapid developments and the investment boom witnessed by the real estate sector. At the same time he expressed hope that the new legislation would strengthen the stability of the sector.

LOANS TO THE SECTOR: Credit to the construction and real estate industry is seen as a bellwether of wider economic performance. Given the importance construction and real estate play on economic developments, the Central Bank of Bahrain (CBB) views lending to the sector as a strong indicator of the macroeconomic conditions of the country.

In the most recent Financial Stability Report (FSR), published in August 2017 the central bank reported that as of May 2017 construction and real estate accounted for the largest proportion of all business loans, at 32.5% of the total, followed by trade with 25.1%. Business loans to the real estate and construction sector were worth BD1.4bn ($3.7bn) in May 2017, up from BD1.3bn ($3.4bn) in May 2016, when the sector accounted for 32.3% of all business loans. As a whole, Bahrain’s banking system had a total loan portfolio exposure to the real estate and construction sector of 23% in March 2017, up from 21.6% in March of 2016, according to the FSR.

The central bank also broke down lending by segments of the banking system: conventional, wholesale and sharia-compliant lenders. When it comes to conventional retail banks, commercial real estate financing accounted for 18.8% of loans in March 2017, compared with 17.9% in September 2016, with exposure to commercial real estate, construction and mortgage loans combined comprising 30.7% of total lending, up from 29.8% in September 2016.

In the conventional wholesale bank segment, construction, commercial real estate financing and residential mortgages accounted for 16.5% of total commercial loans in March 2017, up 3.8% from September of the previous year.

When it comes to sharia-compliant lenders, construction, commercial real estate and mortgage loans decreased from 29.4% of all sector loans to 25.6% for retail banks between September 2016 and March 2017, and from 27.4% to 19.9% for wholesale banks. Islamic retail banks saw commercial real estate financing fall from 15.3% of all loans in September 2016 to 12.9% in March 2017. Construction loans dropped from 3.9% to 3.7% of the total over the same six-month period. Islamic wholesale banks, meanwhile, saw overall construction financing declined from 16% of total loans to 14.6%, though this was still surpassed only by lending to manufacturing.

REIT OF WAY: Real estate investment trusts (REITs) are becoming an increasingly popular avenue for developers looking for project funding across the region, with Bahrain also getting involved in the sector. Long available in more developed real estate markets, such as the US and Europe, REITs have emerged in the GCC in the last few years as regulatory bodies have revised their rules and regulations. These investment trusts have also arrived at a time when direct property ownership is no longer a guarantee of strong rates of return and as investors look for tradeable assets instead of tying their capital up in wholly owned physical assets.

REITs offer stable and regular returns, and can be easily sold on if and when necessary, while offering investors exposure to large, income-generating assets that would have previously been out of their reach. In addition, they have the added benefit of being sharia-compliant investment trusts.

The UAE introduced regulations related to REITs in 2006, and launched its first REIT in 2010. In 2016 Saudi Arabia opened the Saudi Stock Exchange to REIT listings, with early entries to the market including Taleem REIT, AlJazira Mawten REIT, Riyad REIT and Jadwa REIT Al Haramain. Meanwhile, in November 2016 Bahrain enacted new trust laws facilitating the establishment of REITs in the kingdom. The first REIT arrived in the form of the Eskan Bank Realty Income Trust, launched by Eskan Bank, which listed on the Bahrain Bourse in January 2017, with more REITs likely to come in the near future.

“We are pleased with the performance of REITs, and we were able to pay the unit holders the promised yield in the mid-year dividend distribution,” Ahmed Tayara, chief business officer and deputy general manager at Eskan Bank, told OBG. However, he emphasised the importance of adding more assets to the portfolios. “We are seeking to secure new assets that yield 7% net, at least, to maintain investor interest. Such action will diversify the risk profile of REITs and make them more attractive. We’re hoping to see such assets in 2018 and 2019.”

RESIDENTIAL RENTAL: According to international property agency Cluttons, 2017 saw a marked change in residential rental prices, dropping across the board in the first quarter of the year, though it stabilised by the third quarter. In the third quarter of 2017 residential rates had fallen by 16.2% year-on-year, and by 8% since the start of 2017, according to Cluttons’ “Property Market Outlook for Winter 2017/18”. Villas were down 11% compared to the third quarter of 2016, though they outperformed the apartment market. Monthly rents in Juffair and on Reef Island dropped BD100 ($265) in the first quarter of 2017, after staying unchanged for the previous two years, while in Amwaj Islands, one of the most-popular residential markets, monthly rents fell BD50 ($133) for apartments and BD100 ($265) for villas between the third quarter of 2016 and the same period of 2017.

This is seen by many as a potential opportunity for investors. “The overall mood of the industry is cautious optimism,” Haikal told OBG. “There is a slowdown in the market that we have noticed in rents and values. However, for investors, when the market is down it is an opportunity to acquire. This slowdown may be an opportunity for many to invest. We believe it is a buyer’s market today.”

While suggesting that weaker economic conditions were partly to blame for the decreases in rental prices, Cluttons also attributed the fall to the rise in the number of new residential developments. New units are increasingly being bought by Bahraini and other GCC investors to be rented out, creating more supply than demand. The company’s spring 2017 report suggested that this elevated level of supply will last in the near future, with 4100 new units set to be completed within two years, and over 7100 units added to the residential market by 2020.

Bahrain Property World reported that at the end of 2016 the monthly upper-limit budgets in property searches decreased from BD830 ($2200) to BD809 ($2145) year-on-year, while lower-limit budgets fell from BD692 ($1835) to BD565 ($1500). High-end Amwaj Islands made up 9.1% of all property searches, down from 13.3% at end-2015. Meanwhile, according to CBRE’s Bahrain “MarketView” for the first half of 2017 residential rents remained among the highest in Seef District, which includes Reef Island, with the commercial property and real estate services adviser noting that this is unsurprising given the site’s proximity to shopping malls, offices, and other services and entertainment. “The rising cost of power and water utilities for expatriates has started to impact on key rental decisions. Consideration of home sizes, room layouts and general energy efficiencies within properties are now key factors in the home selection process, more than ever before,” James Lynn, director of CBRE Bahrain, told local press.

OFFICE SPACE: The office market in Bahrain has had a challenging few years. The total stock of grade-A and grade-B properties is around 1.2m sq metres, with CBRE estimating that the vacancy rate as of mid-2017 was 33%. In 2017, 38% of grade-A and grade-B office stock was located in Seef District and Sanabis, according to CBRE, with 22% in the Diplomatic Area, 19% in Bahrain Bay and Bahrain Financial Harbour, 18% in Central Manama and 3% located elsewhere. Modern towers are increasingly drawing clients, at the expense of older properties. Meanwhile, prime average monthly rates are as low as BD7 ($19) per sq metre, according to CBRE.

According to Cluttons “Property Market Outlook for Winter 2017/18”, Bahrain’s office rental market has largely remained stable, with no movement in headline rents, though this is at least in part due to office rents hovering near record lows for the previous two years. Since 2010 rents for shell and core space have dropped by between 40% and 70%, according to Cluttons, while rents for fitted spaces have gone down 33% to 50%.

The company notes that while overall demand is weak, start-up businesses are active in the market. However, their budgets are often in the range of BD4-6 ($11-16) a sq metre, with requirements tending to be in the 100-sq-metre range.

In its spring 2017 report Cluttons noted that some landlords have begun to break rank and reduce their asking prices; with some landlords in the Diplomatic Area dropping rents in the first quarter of 2017 to BD2 ($5.30) per sq metre for fitted office space.

The report noted that it expects landlords in other areas of Bahrain to follow the lead of those in the Diplomatic Area, dropping their rents by BD1-2 ($ 3-5) per sq metre. Landlords are also offering added incentives like free parking spaces. All of this has left those looking to rent office space, or renew their contracts, in a strong bargaining position.

It is too early to know what the impact related to the upcoming 5% value-added tax rate will be, since it is unclear if it will be imposed on the commercial office market as is the case elsewhere in the GCC. According to Cluttons, if it is indeed applied to commercial offices it could have a serious impact on international occupiers, and push back any rise in rental prices by several quarters.

COMMERCIAL: The retail sector in Bahrain has witnessed strong growth over the last decade, driven by the expanding population but also the rise in the number of Saudis and other GCC nationals travelling for a day trip or for a weekend of shopping.

As the population has grown, demand for commercial spaces has correspondingly risen: according to the standard calculation, for every 3000-5000 units of residential housing, 1000 sq metres of commercial retail space is required by the market.

New retail spaces on the horizon or that have recently opened include several mixed-use developments as well as stand-alone retail developments like the 83,700-sq-metre Avenues Mall in Bahrain Bay, which opened its doors in October 2017 and has room for 130 retail outlets, with half of the space allocated to restaurant and cafés overlooking Bahrain Bay. Official approval has been obtained for the construction of phase two of the project, which will add another 30,000 sq metres of leasing space. Meanwhile, Swedish furniture and home accessories company Ikea is currently building a 37,000-sq-metre store close to Salmabad, which is set to open in late 2018. “The big story at the moment in Bahrain is the retail market,” Harry Goodson-Wickes, head of Bahrain at Cluttons, a real estate consultancy, told OBG. “The Avenues project will be a real game changer for Bahrain. Bahrain Bay is starting to flourish now. The Ikea mall is also coming in soon as well, and it will be the largest in the region. There are also many pockets of street retail doing well.”

The retail sector has so far proven relatively resilient, with year-on-year rents unchanged in most areas, according to Cluttons’ “Property Market Outlook Winter 2017/18”. Retail rents varied from roughly BD7 ($19) per sq metre in Isa Town to BD12 ($32) per sq metre in Al Seef in the first quarter of 2017, largely unchanged from 2016.

LIGHT INDUSTRY: According to CBRE, there is a steady demand for additional industrial land, especially in investment parks and those with pre-built facilities of between 250 sq metres and 10,000 sq metres available with flexible short-term and serviced options. These facilities had an average occupancy rate of 85% in 2017, according to CBRE, with many of these facilities now based in the Salman Industrial City area of Hidd.

OUTLOOK: Though outside pressures and rising supply on the market have put downward pressure on rents in many segments of the real estate market, there continue to be reasons for optimism in the short- to medium-term outlook for the sector. Among these are the ongoing demand for affordable housing and a significant level of investment across the board, creating opportunities in a number of areas.