Improved regulations and increase in affordable housing shore up Bahraini real estate sector

Real estate development is a significant contributor to the Bahraini economy and 2017 saw the sector post its strongest growth rate in years, though activity slowed in the first half of 2018. Nevertheless, a major government initiative to expand the stock of affordable housing has stimulated activity in the sector. In addition, rising demand from both industry and the leisure and tourism segment has boosted the kingdom’s commercial real estate offering. Furthermore, in order to ensure sustainable long-term growth, the authorities have recently implemented several regulatory reforms, including the creation of a new regulatory authority for the industry.

Size & Performance

The sector’s value added was worth BD507m ($1.3bn) in 2017 according to data from the Information and e-Government Authority. This was equivalent to 3.8% of the kingdom’s total GDP for that year. Furthermore the sector grew by 3.4% over the first half of 2018, with the number of real estate transactions up 7% to 3705, according to the Economic Development Board.

Nevertheless, the value of sales fell by 16% over this period, to BD445m ($1.3bn). This drop was driven by a 22% fall in purchases by Bahraini citizens, to BD389m ($1bn), while sales to foreigners rose. Furthermore, while sector growth appears healthy for 2018, it is below the 4.6% registered in the first half of 2017 but up from the negative growth registered during previous year.

General Trends

While much of the GCC real estate market has experienced volatility in recent years, industry players state that local factors have kept the Bahraini market on more level ground. “Generally speaking, the Bahraini real estate market is quite stable, especially compared to other parts of the region,” Mohammed Chowdhury, head of the Financial Management Group at sharia-compliant investment company Arcapita. In explaining this stability, Chowdhury cited factors such as the lower proportion of expatriates in the Bahraini population, though he noted that the importance of Saudi Arabia to the kingdom’s economy meant that developments there would have a substantial impact on local real estate trends. In a move that could further boost the stability of the market, the authorities in late May 2018 were reported to be preparing an edict for a new self-sponsorship visa system for expats with a maximum duration of 10 years – three years longer than the current longest residence visa. The announcement followed the UAE’s launch of a 10-year visa, made the same month.

New Regulation

The industry has undergone a number of important regulatory changes in recent years. August 2017 saw the publication in the kingdom’s Official Gazette of a new Real Estate Law No. 2 of 2017, which officially came into effect at the beginning of March 2018. Foremost among the changes brought about by the law was the establishment of a new body, the Real Estate Regulatory Authority (RERA), to oversee the sector and resolve disputes arising within it. Its roles include the licensing of industry actors such as developers, property managers, evaluators and real estate brokers. Under the law, all industry actors were required to become licensed by the end of August 2018. The authority’s other main initial priority is dealing with issues related to off-plan sales – that is, projects in which units are sold to buyers before having been built. Indeed, the decision to establish the authority was the result of a benchmarking study carried out on behalf of the authorities by the global auditor KPMG, in which it pointed to the need for an organisation to address problems relating to such activity.

In keeping with this, another change introduced under the Real Estate Law is a requirement for developers of off-plan projects to keep sales revenues in an escrow account that they cannot access until the units have been completed. Alternatively, developers will soon be able to purchase an insurance bond for between 3% and 5% of the project’s value, an option on which the RERA and the Bahrain Insurance Association are currently working. The changes are meant to ensure that developers are not only relying on sales revenues to complete projects but also have their own funds to do so. This is intended to reduce the risk of a project not going forwards should sales dry up, while also ensuring consumers are able to gain refunds in the event that a real estate project stalls.

Reforms

Concerns about such eventualities emerged from the stalling of several significant local real estate projects in the wake of the international financial crisis. In response to the problems, the authorities passed a law in 2014 to establish a process to deal with such projects, establishing the Judicial Committee for the Settlement of Stalled Real Estate Projects. As of mid-2018, three of the six cases referred to the committee had been successfully auctioned off to new backers, allowing for work to resume, leaving three still to be dealt with.

The largest unresolved project is the $750m Marina Gateway development, the resolution of which has been hindered by a dispute between the developer and the project contractor. The committee decided against auctioning it off as the developer planned to refinance the project, denying reports that it had decided to open it to bids from other developers after all. Furthermore, there have been five attempts to auction another of the three stalled developments, Amwaj Gateway, the most recent of which took place in October 2018. However, these attempts have so far been unsuccessful.

“The changes will help ensure that developers have sufficient funds in place, and do not start work on projects that are not going to work in the market,” Richard Botham, senior director and general manager for Bahrain at international real estate services firm CBRE, told OBG. “The establishment of the RERA will boost the transparency of the market and ensure developers can access the right information, which is exactly what you need for investment.”

This impression was echoed by other industry players. “The reforms were necessary,” Chowdhury added. “Some developers will have a hard time meeting the new financing requirements, but that is a good thing, as firms should not be entering the market without being able to put up money of their own.”

Another change brought about by the government is a requirement that private developers pay a fee of BD12 ($31.80) per sq metre towards the cost of installing infrastructure and utilities for new projects. This policy, which was introduced in July 2017, has increased development costs but has also received support from many sections of the business community. “You cannot expect the government to provide you with infrastructure so that you can make more money,” Botham told OBG. “The fees will push costs up somewhat, but that is only fair.”

Major Developers & Projects

Notable local developers include Naseej, which was founded in 2010 by a group of local banks including Eskan Bank and BBK. The company is perhaps best known for becoming the first real estate developer to enter into a public-private partnership (PPP) agreement with the Ministry of Housing (MoH) for the development of social and affordable housing.

The project, which was agreed in 2013, envisages the construction of 30,000 units and is being financed by the Abu Dhabi Fund for Development. The new housing is expected to be primarily located in Salman Town, a development project on 10 manmade islands off the country’s northern coast that will eventually house 100,000 people. Naseej is now moving into the higher-value end of the residential market, starting with a mixed-use project known as Canal View located on Dilmunia Island. The project is set to consist of 264 apartments and 6000 sq metres of high-end retail space. Ground was broken on the project at the beginning of 2018, with work due to be completed in the second quarter of 2020.

Another prominent local developer is Bin Faqeeh Real Estate Investment Company, which was founded in 2008. Projects on which the company is currently working include the BD85m ($225m) development of 465 villas in Diyar Al Muharraq and The Treasure, an apartment project on Dilmunia Island.

The domestic investment company Arcapita also acts as a real estate developer. It is principally active in the market through its $2.5bn, mixed-use Bahrain Bay development, a master planned waterfront project located on two man-made islands located off northern Manama. Work on the 450,000-sq-metre works, which is home to a Four Seasons hotel and provides the headquarters of several financial institutions, began in 2007. The firm was also behind the Riffa Views golf course community, and is currently planning the development of a second Bahrain Bay project, also to be constructed on reclaimed land.

The only other developer listed on Bahrain Bourse – the local stock exchange – is Seef Properties, of which the kingdom’s Social Insurance Organisation (SIO) pension fund is the largest shareholder, with a stake of 26.7%. The firm was originally founded by the government in 1999 to manage state real estate assets, including the Seef Mall in Manama, and continues to focus primarily on the retail, leisure and tourism segments. In April 2018 the company announced plans to establish a new firm, in which it would take a 25% stake, to develop a new mixed-use waterfront development in the capital. Other projects currently under way at the company include the 120,000-sq-metre Liwan project in the kingdom’s Northern Governorate, which has been valued at around BD50m ($132.5m) and is due for completion by the end of 2019.

The government is also active in the segment through Amlak, the property investment arm of the SIO, which began operating in 2014. The firm is currently working on five development projects, all in the residential and retail segments. The largest of these is the 46,100-sq-metre Residenze development, a tower comprising 193 apartments and ground-level shops and restaurants. The firm is also actively looking to expand into projects in the social housing segment, including through PPPs.

In addition, Bahrain’s sovereign wealth fund Mumtalakat also acts as a developer through its real estate arm Edamah. The firm is leading the $119m mixed-use Saada West project that is being built on 18,000 sq metres of reclaimed land in Muharraq, among other developments. Furthermore, stateowned housing finance bank Eskan Bank also acts as a property developer. The bank is currently working on projects including Danat al Lawzi and Danat al Baraka, which contain 303 and 210 villas, respectively, and plans to commence work on Danat al Yufoor, a 150-villa development, in early 2019.

In addition to these domestic players, foreign-owned firms are also active in the Bahraini market. These include the Kuwaiti sharia-complaint financial institution Kuwait Finance House, which is the major shareholder in the Diyar Al Muharraq project. Reclamation work for the project began in 2006 and around 8000 housing units should have been completed on the man-made islands as of the end of 2018, with room for around 30,000 in total. Other projects being developed by the Kuwaiti firm in Bahrain include the Durat Al Bahrain waterfront villas development, which is jointly owned by the Bahraini government. As with Diyar Al Muharraq, the development consists of man-made islands, in this case located off the kingdom’s southern coast.

Residential

One of the industry segments in which demand is strongest is residential real estate. The kingdom had a deficit of around 75,000 residential units in 2017 according to estimates by CBRE, particularly concentrated in the lower and middle-income segments, with demand increasing by around 5000 units every year. Despite this, residential rents fell by 3.7% in the first three months of 2018, according to real estate services firm Cluttons. This followed a largely flat second half in 2017, which had appeared to suggest the market had stabilised. On an annualised basis, the drop stood at 12.8%, an improvement from a drop of 17.3% across 2017. Apartments saw less of a fall in rents, and the firm noted that some high-demand areas were more robust to the downturn, including the Amwaj Islands development and Seef District.

According to data from Cluttons, apartment rents in the in-demand areas of Manama vary, on average, from BD575 ($1520) a month to BD683 ($1810). In contrast to rents, residential purchase prices remained stable during the first quarter of 2018, with an average of BD839 ($2220) per sq metre, following an 11.5% decline in 2017, though the secondary market in residential sales is small. According to Cluttons, Reef Island was the most in-demand location, with average purchase prices above BD1000 ($2650) per sq metre.

Affordable Housing

With demand for affordable housing particularly high in the kingdom, the government has made efforts to boost supply. In 2016 the MoH announced a programme to deliver a total of 25,000 new housing units by 2020 as part of previously announced plans for the construction of 40,000 units by 2022, with 5000 of the houses having already been delivered by that date.

As of December 2018 the ministry was working on projects for a combined 8250 new units. By far the largest of these undertakings is the Al Ramli project, which involves the construction of 1266 houses and 2360 apartments in the kingdom’s northern governorate. The government has also engaged in a number of PPPs with developers to build social housing projects, starting with Naseej.

In recent years the authorities have increasingly focused on financing affordable housing built by private developers. This primarily happens through the Mazaya subsidised mortgage programme, which was introduced in 2013. According to a report by the Bahrain News Agency, some 2650 homebuyers have benefitted from the programme between its launch and 2018, receiving subsidies worth a total of BD15m ($39.7m). “Mazaya is functioning well, and it is a better strategy for the government than building villas itself, from both a feasibility and cash flow point of view,” Mark Haikal, head of investments at local real estate developer Naseej, told OBG.

However, Haikal also noted challenges to making social housing projects work commercially. “It can be tough to ensure profitable margins for developers in the segment, as land is expensive and raw materials prices have been going up,” he added. Ensuring that local expectations are met also requires a balance. “Cheap land is available, but it may not be where buyers want to live. The challenge is to design something that Bahraini families will want, with the right location and the right design, all while managing costs as much as possible.”

Financing

The value of personal lending secured by property mortgages stood at BD1.76bn ($4.7bn) as of June 2018, according to the CBB, equivalent to 44.9% of total personal lending. The figure was up from BD1.57bn ($4.2bn) a year earlier.

Speaking in August 2018, Haikal said that there was still a lot of opportunity to secure financing, both for developers and mortgage borrowers. “We receive offers all the time and banks currently do not seem to be in any danger of running up against the regulatory buffers for real estate lending,” he told OBG. “The market is softening, so firms’ ability to secure loans may face a little more scrutiny going forward, but that is healthy for the market.”

One development that may boost the availability of financing for developers in the kingdom is the fairly new arrival of real estate investment trusts, a form of property-based investment vehicle listed on stock markets in which investors can buy and sell stakes like shares (see Capital Markets chapter). State-backed housing bank Eskan Bank launched the first such instrument on the Bahrain Bourse in November 2016, following regulatory changes allowing these earlier that same month.

Commercial Real Estate

When it comes to commercial space, industry players say that a glut of development projects in the late 2000s led to oversupply in the office market, leading to a slowdown in activity of the segment in the years following. Underscoring the shortage of demand relative to supply, office rents have fallen sharply since 2015, with those in the Diplomatic Area of Manama having halved over the last few years, according to Cluttons, exacerbated by the economic impact of lower oil prices during the 2014-16 period.

Despite this, the market looks set to turn a corner. In its “Spring 2018” outlook report for Bahrain, Cluttons noted that rents appeared to stabilise in 2017 – albeit with some deals being done below advertised rates – and were expected to stay stable throughout 2018. With some office rents not far above warehouse rents, researchers stated that there was little room for further falls. Moreover, Botham told OBG that there was growing demand for certain types of office spaces. “There is a perception of a lack of demand due to low uptake at some buildings, but buildings with good amenities such as car parking and easy accessibility are actually very popular at the right price,” he said.

Industry

Conversely, demand is high in the industrial segment, with availability tighter than in other markets. “Generally speaking, quite a bit of land supply has come on-line over the last five years, but industrial land remains hard to get a hold of,” Abdulla Nooruddin, director of investment and strategic planning at Amlak, told OBG, adding that land in or close to Manama was especially prized. “Investors would be keen to see more land made available for industry and logistics activity in Muharraq, in particular.” Bahrain Industrial Investment Park – which is located on reclaimed land in the Al Hidd district of Manama and entirely focused on manufacturing – was 80% occupied in 2018. The kingdom is home to eight industrial areas in total, which have a combined surface area of approximately 10m sq metres (see Industry chapter).

Leisure, Tourism & Retail

Retail has been one of the most active real estate segments in terms of new projects in recent years, which has led to concerns of oversupply of mega-malls and other large-scale retail establishments.

Despite this, Botham told OBG that there are opportunities in other areas of the market. “Small, local malls are popping up all over the place and usually tend to be popular and successful,” he said, adding that there was a need for more of these developments in certain locations.

As is typical, recent rental performance in the retail segment has varied by area. Asking prices rose at the Amwaj Islands development from around BD12 ($31.80) per sq metre in the first quarter of 2016 to BD16 ($42.40) during the first three months of 2018, while simultaneously falling in Seef from a little over BD12 ($31.80) per sq metre to around BD10 ($26.50), according to Cluttons.

A possible threat to the leisure and tourism segment is the process of social reform under way in neighbouring Saudi Arabia. Saudis account for 57% of visitors to the kingdom and a large share of footfall in malls, attracted in part by Bahrain’s more liberal environment. Some have voiced concerns that recent moves to expand recreational activities in Saudi Arabia, such as legalising cinemas, could affect tourism flows to Bahrain.

Chowdhury, for his part, is confident that the changes are unlikely to prove problematic. “People in the Gulf like to travel generally and take weekend breaks in different environments, and Saudi tourism in Bahrain is about more than just going to the cinema,” he told OBG. “Some of the reforms may even increase Saudi tourism here, such as allowing women to drive, which will make it easier for Saudi women to reach Bahrain.”

Outlook

Although rents remain under pressure in much of the market, some segments, such as office space, are starting to show signs of turning around. Furthermore, regulatory reforms such as the establishment of the RERA and the requirement for off-plan developers to put cash in escrow accounts or buy bonds are set to help consolidate the stability of the sector, as should moves towards longer visas for expatriates. The recovery in oil prices, as well as the agreement of a $10bn aid package with other Gulf states (see Economy chapter), should provide further support to the kingdom’s real estate industry in the coming years, maintaining its position as one of the key drivers of national economic growth.