A number of infrastructure developments drive growth in Bahrain's construction sector

While 2017 saw the construction sector’s rapid growth slow somewhat, Bahrain has an impressive pipeline of construction projects lined up for the next few years. A strong focus on transportation and industrial infrastructure, as well as the construction of tens of thousands of affordable housing units, is expected to be among the key drivers of growth for the sector in the near future, with much of this coming from government-backed projects tied to Bahrain’s Economic Vision 2030 and from social housing developments.

Among the significant ongoing projects are the $1.1bn Bahrain International Airport expansion project, the $2.5bn upgrade at Aluminium Bahrain (Alba), with its associated $800m power station, and the new $355m Banagas gas plant. Also on the agenda, but currently delayed, are a new causeway linking Bahrain with Saudi Arabia, and Bahrain’s part in the regional rail network, which are both likely to move forward in the coming years, adding to the future pipeline of works.

STATISTICS: According to the Business News for Construction (BNC) Network, a MENA-based consultancy, the GCC’s construction market as a whole had nearly 22,000 active projects at the beginning of September 2017, worth a total of $2.4trn. This constituted 85% of all active projects in the MENA region, and 68% in dollar terms. “The governments and the private sector developers of the GCC region appear to be unmoved by the slowdown in the global economy and the lower oil price environment,” Avin Gidwani, CEO of BNC Network, said at the time the report was released.

According to the December 2017 “Economic Quarterly” from Bahrain Economic Development Board (EDB), the local construction sector increased 0.8% year-on-year (y-o-y) in the third quarter of 2017, below the overall economy, which grew 3.6% in the third quarter. However, this slowdown came on the back of rapid growth in the construction sector in 2015 and 2016 when it rose by 6.4% and 5.7%, respectively. Overall, over the first nine months of 2017, the construction sector has expanded by 1.7%. According the EDB, there were 3798 new economic units registered in the first quarter 2017, of which 1289 were in the construction sector, reflecting the rapid build-up of infrastructure activity in the kingdom. Meanwhile, according to a February 2017 report by the Construction Intelligence Centre, the construction industry’s output value in real terms is expected to rise at a compound annual growth rate (CAGR) of 5% between 2017 and 2021, after achieving a CAGR of 5.7% in the 2012-16 period.

The overall infrastructure project pipeline in Bahrain, as measured by MEED Projects, reached $81.9bn in mid-June 2017, up 12.7% y-o-y, with contracts awarded in June 2017 alone totalling $55m. These included some $30m for infrastructure works connected to the second phase of the Bahrain Investment Gateway project being undertaken by Manama Developments and $25m related to infrastructure works for the Ramli Housing Project being developed by the Ministry of Housing (MoH). In June 2017 Essam bin Abdulla Khalaf, the minister for works, municipalities affairs and urban planning, pointed to the impact of fast-track procedures implemented by the country’s Comprehensive Municipal Centre, which have cut the time it takes for construction permits to be processed and issued to 26 days. This helped the value of investments made towards construction projects rise to BD894m ($2.4bn) over the first five months of 2017, up from BD736m ($2bn) in the same period of 2016.

REGULATIONS: In August 2017 King Hamad bin Isa Al Khalifa issued a decree establishing the Urban Planning and Development Authority (UPDA), with the UPDA expected to be headed by Sheikh Nayef bin Khalid bin Ahmed Al Khalifa, who will be CEO but with the rank of undersecretary. The organisation will oversee the Human and Financial Resources Directorate, the Studies and Strategic Planning Directorate, the Detailed Planning Directorate, Land Development and Projects Directorate, as well as the Investment Directorate.

Also in August 2017, the Ministry of Works, Municipalities Affairs and Urban Planning unveiled a new pre-qualification portal for building contractors. The electronic system enables companies to submit new pre-qualification applications, as well as applications to renew or upgrade existing pre-qualification requests. It also allows companies to complete their transactions without needing to go in person to the ministry to follow-up on their applications. Meanwhile, the issuance period for pre-qualification licences has been shortened from 12 weeks to seven weeks.

Local media also reported that the ministry was in the process of reviewing pre-qualification applications for companies interested in working on ministry projects in a variety of sectors, including construction and building maintenance, roads and sanitation, and beautification and afforestation. These developments, as well as others, are likely to help sustain the momentum of the kingdom’s construction industry.

At the same time, a new infrastructure tax of BD12 ($32) per sq metre has been included in the latest set of regulations, published in August 2017, and set to come into affect in early 2018. The tax, which will likely have an impact on profits for developers, is aimed at ensuring that necessary public infrastructure keeps pace with the growth of private developments. “The BD12 ($32) tax for infrastructure puts pressure on profits, so while Bahrain has had a competitive tax environment in the past, this is no longer the case, at least within the real estate sector,” Khalil Saleh, general manager at Al Argan Bahrain Company, told OBG.

FUNDING: Bahrain’s sovereign wealth fund Mumtalakat, through its Edamah subsidiary, is investing in five major real estate developments, valued at over BD400m ($1.1bn), including the North Hawar ecotourism development, the Sa’ada waterfront development in Muharraq and the Sharwa retail strip in Isa Town.

In recent years Bahrain has also looked to utilise public-private partnerships (PPP) to help fund major construction projects, notably the upcoming liquefied natural gas terminal, a $670m project located near the Al Hidd industrial area of Muharraq. The kingdom has also agreed a number of PPPs related to industrial projects in downstream oil and gas, as well as the aluminium industry. At the same time, the MoH signed its first PPP agreement with real estate and infrastructure development company Naseej in January 2012, with the five-year PPP agreement, worth BD208m ($551.6m), encompassing 3110 social housing units and more than 1000 affordable homes in three different locations: Al Madina Al Shamaliya, Al Buhair and Al Lawzi. The agreement was the first PPP of its kind in the Gulf. The MoH has also entered into a PPP agreement with Kuwait Finance House, as one of the partners at Diyar Al Muharraq, a mixed-use developer.

GULF ASSISTANCE: While significant financing for construction projects is coming from the private sector and the government, Bahrain is also receiving financial assistance from its neighbours, via the Gulf Development Fund, to the tune of $10bn. In August 2016 Bahrain signed seven contracts, worth BD148.5m ($393.8m), related to housing and infrastructure construction with Kuwait and the UAE. These included an award of $101m from the Abu Dhabi Fund for Development to begin construction on the ambitious Al Madina Al Shamaliya, or Northern City project, a vast urban area being built on man-made islands to the north of Bahrain, which will eventually be home to an estimated 90,000 residents.

Another deal was the formalising of an agreement through which Kuwait will spend $293m on 1247 residential units in east Hidd and an additional 1645 homes, along with associated infrastructure, in Hidd.

In January 2017 Bahrain also signed a $150m contract with the Saudi Development Fund (SDF) to construct 1265 housing units in the Al Ramli housing project, with the contract awarded to Al Mezeal Construction and Services, Luqman Al Haddad Construction Company, Mohammed Saif Ajlan Al Mannai, and Al Nisr Construction Company. The kingdom has previously signed a BD57.6m ($152.7m) agreement with SDF to construct 1560 residential units as part of the Southern Town project, with the funding coming as a result of the Gulf Development Plan.

WORKFORCE: With so many large-scale projects under development, Bahrain is under pressure to maintain an adequate supply of skilled and unskilled construction workers. “There is pressure to be able to provide the necessary labour forces,” Mark Haikal, head of investment at real estate and infrastructure development company Naseej, told OBG. “We have much larger economies surrounding us – Saudi Arabia, the UAE and Qatar – and they have major projects that are sucking up a big proportion of the raw materials required, so there is competition not just on labour forces but also raw materials.”

In the second quarter of 2017 Bahrain’s workforce reached 763,618, up 1.2% compared to the same period of 2016, according to statistics from the Ministry of Labour and Social Development and the Labour Market Regulatory Authority (LMRA). Of those, 606,357 were non-Bahrainis, highlighting the importance of the expatriate workforce. This is particularly the case in the domestic construction industry, which, according to LMRA data, continues to be the economic sector with the highest number of new work permits for regular workers issued, representing 37.6% of the total in second quarter of 2017.

According to the most recent LMRA data, in June 2017 non-Bahrainis made up 93% of the workforce at 165,417, compared to 11,832 Bahrainis. LMRA data also showed that in the second quarter of 2017 the labour-cost gap between Bahraini and non-Bahraini employees in target sectors, which included construction as well as trade, hotels and restaurants and small-scale manufacturing, had increased to BD340 ($902) a month, up BD32 ($85) from one year earlier. This growing disparity is a concern as the kingdom tries to get more companies to comply with rules on employment ratios for Bahraini and non-Bahraini workers.

NEW FINES: In May 2016 Bahrain’s Cabinet approved legislation to fine companies in contravention of the kingdom’s Bahrainisation Law, which stipulates that for every four expatriate workers businesses must employ at least one Bahraini national. In the past many companies have simply kept Bahrainis on the payroll in order to secure work permits for foreign nationals, and then fired them afterwards. Under the current legislation companies will be fined BD300 ($796) for each foreign worker who is not covered by the Bahrainisation quota, the equivalent of one month’s minimum wage for a Bahraini citizen in the private sector. Companies can also have their work permits revoked. Starting in April 2017 the LMRA said it will refuse visas to companies caught breaking the Bahrainisation Law.

In August 2017 the LMRA also began issuing flexible permits to migrant workers with irregular status, allowing them to obtain work permits and work legally in the country for up to two years, with the authorities saying that the system will help to protect foreign workers from exploitation and offer them the opportunity to reside and work without a sponsor.

Those eligible include people whose permits have already been cancelled or have expired and were not renewed by their employers. Up to 2000 permits will be issued every month. However, the high cost of the two-year flexible permits, BD1169 ($3100), makes them out of reach for most foreign workers. There are also signs that more effort is being taken to ensure that workers are treated fairly by their employers. According to local media reports, in June 2017 Sheikh Khalifa bin Salman Al Khalifa, the country’s prime minister, stepped in to ensure that workers for GP Zachariades Civil Engineering and Contractors (GPZ), a leading construction company in Bahrain, received backpay, with many of the 600 staff having waited months for their salaries.

RESIDENTIAL: There are currently around $26bn in real estate projects planned or under construction in Bahrain, according to the EDB, with several major mixed-use developments standing out for both their size and ambition (see analysis). Projects under way include Bahrain Bay, a luxury $2.5bn project being created by Bin Faqih Real Estate Investment Company on 450,000 sq metres of land; Bahrain Marina, a 310,000 sq metre mixed-use development featuring residential, entertainment, leisure and marina facilities, and Diyar Al Muharraq, one of the largest ongoing development projects in Bahrain covering seven islands and featuring 40 km of beaches as well as residential, commercial and retail properties. “Bahrain has lots of opportunities that haven’t been utilised. You can make up to 30% return on investment, which is not easy in other markets. The problem is that there is no promotion,” Aaref Hejres, former managing director and CEO of Diyar Al Muharraq and the chairman of the Bahrain Property Development Association, told OBG. “Residential is strong, as well as tourism. There are lots of untouched areas for tourism in the island,” he added.

According to industry insiders, there is a great deal of potential in retail housing. “The key area of opportunity is in lower-income and social housing segments, followed at a distance by industrial real estate,” Al Argan’s Saleh told OBG. “There were 69,000 applications for residential units submitted to the Ministry of Housing in 2017. It is impossible for the government to meet this demand on its own even with the plan to build 40,000 units for social housing by 2020,” he added.

Work is also progressing on Bahrain’s largest public school, with construction on the BD10.8m ($28.6m) facility to be completed in 2019. Jaw Comprehensive School for Girls, which will be located in Manama, is being built across several phases, with construction work being implemented by a Bahraini-Saudi consortium made up of Al Moayed and Nasma Contracting. Upon completion the four-storey school will feature 48 classrooms able to accommodate 1440 students.

Meanwhile, work is also under way on the $1bn King Abdullah Medical City, a major health care project being developed in the south of Bahrain with direct funding from the SDF. The project, which will be a mixed-use development comprising academic and medical facilities, as well as a research centre, on-site accommodation and other amenities, is being built with a $267m grant from the late Saudi King Abdullah bin Abdulaziz Al Saud, with land donated by King Hamad Bin Isa Al Khalifa. Work includes a 66-KV power station, sewage treatment plant, water collection tanks and irrigation and storm-water drainage networks, not to mention roads, lighting and telecommunication connectivity. As of July 2017 preliminary designs for the project had been completed.

STALLED PROJECTS: In May 2017 Donald Bradley, CEO of Savills Northern Gulf, told industry media that he expected to see further efforts to address stalled projects, presenting new acquisition opportunities to the market, after the successful sale of Juffair Views in December 2016 for BD3.6m ($9.5m), in the first stalled-project auction. The partially completed residential tower was bought by Indian hospitality firm Ramee Group, which plans to spend an additional BD7m ($18.6m) to finish the 70% complete 26-storey project.

In 2015 Bahrain’s government created a ministerial committee, the Committee for Stalled Real Estate Projects, which sits within the Justice, Islamic Affairs and Endowments Ministry, to ensure the completion of a number of stalled real estate projects. In November 2016 work resumed, after a five-year pause, on the Landmark Cityview Tower, an 88-unit residential tower located in Bahrain’s Seef district. The tower, a joint venture between Ithmaar Bank and Ebrahim Abdulaal Al Fahad Group, is set to be completed in early 2018. In August 2017 it was reported that work on the project was 90% complete. Dheya Tawfiqi Engineering Consultancy Bureau, one of Bahrain’s leading engineering consultants, was appointed project consultant, overseeing the construction.

In December 2016 Bahrain-based Gulf Holding Company signed a final sukuk (Islamic bond) restructuring agreement with Saudi Arabia’s Al Rajhi Bank and GFH Financial Group related to the $700m Villamar, which marked the relaunch of the project. The Villamar project, which was originally launched in 2007 with a completion date of 2010, comprises three towers of 54, 52 and 43 storeys, with a mix of hotel and residential space. GFH is to provide up to $50m in financing for the project, which will now be completed in phases.

Meanwhile, in late 2016 local media reported that a bidding process to acquire and complete Bahrain’s largest stalled real estate project, Marina West, has finally opened. Work had begun on the $750m Marina West in 2007, with plans for 10 residential towers, with more than 1000 apartments in total, alongside a five-star hotel. However, work paused in March 2010 and did not restart. According to media reports, interested buyers had until the end of January 2017 to submit all relevant documents proving their technical and financial ability to complete the project.

Not all of the attempts to restart Bahrain’s stalled property developments have been successful. A first attempt to sell off the Amwaj Gateway project for upwards of BD36m ($95.5m) failed to attract bidders. However, a second auction has been scheduled for late November 2017. The beachfront project, valued at $183m, is said to be 60% complete and features retail and commercial units, seafront townhouses, apartment towers and a 143-room hotel.

INFRASTRUCTURE: With the timeframe on the new GCC-wide rail network pushed back to potentially 2021, and plans for the construction of a new causeway connecting Bahrain with Saudi Arabia still under development, the biggest infrastructure project currently under way in Bahrain is the $1.1bn Bahrain International Airport expansion project, which will see the airport’s passenger volume grow from 8.76m passengers in 2016 to around 14m. The project is one of the key recipients of finance provided by the Gulf Development Fund, with 80% of the money coming from the Abu Dhabi Fund for Development. Turkish firm TAV and UAE-based Arabtec were given the construction contract in January 2016, which includes the terminal, a services building and an aircraft bay, with the project expected to be fully completed by 2020.

The kingdom is also working to improve its domestic road networks, with the value of road, bridge and tunnel contractor awards increasing from an estimated $146m in 2017 to $226m in 2018, according to a Ventures Onsite report from July 2017.

INDUSTRIAL DEVELOPMENTS: Bahrain is also investing significantly when it comes to industrial projects, with the construction of major facilities related to liquefied natural gas, aluminium, gas processing and other focal points of the economy.

Bahrain LNG, a joint venture between Teekay LNG Partners of Canada, Bahrain’s National Oil and Gas Authority, Gulf Investment Corporation of Kuwait and Samsung Construction and Trading of South Korea, has been contracted to construct Bahrain’s first LNG terminal, complete with an offshore dual jetty, regasification module, as well as onshore facilities and a subsea pipeline to shore. The engineering, procurement and construction contract was awarded to South Korea’s GS Engineering and Construction in late 2015, with the engineering phase of the project 90% complete as of August 2017. A consortium of nine international and regional banks are helping to finance the $741m project, with Korea Trade Insurance Corporation providing commercial and political risk cover for around 80% of the loans. The terminal, which is located near the Al Hidd industrial area of Muharraq, is set to be operational in early 2019 and is being developed on a 20-year build-own-operate-transfer basis.

Other industrial projects include the Bapco Modernisation Programme, which is expected to cost around $5bn, with a consortium including Samsung Engineering, UK-based TechnipFMC and Tecnicas Reunidas from Spain reportedly submitting the lowest offer. The final execution phase is expected to begin in 2018, with commissioning and start-up of the facility in 2021. The expansion, which will strongly boost processing capacity from 267,000 to 360,000 barrels of oil per day, will be accompanied by a new $350m, 115-km Arabia-Bahrain oil pipeline, with Saudi company Al Rabie contracted to construct the 74-km onshore section and UAE-based National Petroleum Construction Project tasked with completing the 41-km subsea section.

Alba is undergoing a major expansion, with the construction of its new $3bn Line 6, scheduled to be completed in 2019. In October 2016 Alba closed a $1.5bn syndicated term-loan facility for the expansion project, the biggest corporate loan ever issued in Bahrain.

RETAIL & TOURISM: The tourism sector is also a major area of development, which is feeding increased demand for new hotel construction. According to international real estate services firm CBRE, in 2016 hotel occupancy rates in Manama were 53%, against a regional average of 60%. Even so, tourist numbers continue to rise: in the first three quarters of 2017 Bahrain saw 8.9m tourists pass through the country, a 12.8% increase y-o-y, according to the Bahrain Tourism and Exhibitions Authority. This is likely to keep developers interested in the hotel and hospitality sector, with the arrival of many new developments. By 2021 there are expected to be an additional 5100 rooms in the five-star category alone. Tourist numbers rose 14% in the first half of 2017, compared to the same period in 2016, with hotel revenues alone expected to surpass $1bn by 2018. The EDB estimates that over the next five years Bahrain will see the establishment of 15 new four- and five-star hotels, with a combined investment of over $10bn. This is in addition to the 190 hotels and resorts already in operation in the kingdom.

Upcoming properties include those being developed by global hotel brands like Wyndham, Fairmont, the Address Hotel & Resort and Ibis Hotel. These new hotels, and others, are expected to add around 4000 rooms to the kingdom’s overall hotel capacity by 2020; in fact, Cluttons, in its “Property Market Outlook for Winter 2017/18”, estimates that there are currently 6600 hotel rooms planned or under construction across 28 properties in Bahrain. This is as the kingdom targets a near doubling of the GDP contribution from the tourism sector from 3.6% to 6.6%.

On the retail side, while the 83,700-sq-metre Avenues Mall in Bahrain Bay is nearing completion, other developments are just starting up. These include the BD52m ($138m) Mall of Dilmunia, being developed by Bahrain-based Dilmunia Mall Development Company in the heart of Dilmunia Island. The mall is expected to cover an area of 26,754 sq metres and will boast more than 200 retail outlets, a gross leasable area of 47,300 square metres, as well as the kingdom’s first indoor ice rink. Bahrain-based contractor Cyprus Cybarco Tabet has been chosen as the main contractor for the crescent-shaped mall, with Singapore-based DP Architects having worked on the design.

OUTLOOK: With a strong pipeline of major ongoing and upcoming projects related to infrastructure, as well as residential, industrial and commercial developments, Bahrain’s construction sector looks to have a strong future ahead of it. Positive changes in the regulatory landscape are also likely to make it easier for companies to operate within the kingdom.