Real-Estate in Bahrain: Analysis of Bahrain Real-Estate Sector

The Hardest Hit Sectors

The three sectors hardest hit by the unrest of the past year have been real estate, tourism, and the commercial retail sectors. 

Real Estate Sector

In three years, the real estate market has been hit with a double whammy. The first punch to the solar plexus was the world financial crisis of late 2008. For the previous decade, the successes of Bahrain’s diversification program in developing the trade and banking sectors to become the primary financial hub in the Middle East, and the expansion of the manufacturing sector to become industry giants, had spurred a boom in real estate speculation, with high end developments and projects spurring prices to increase almost exponentially, especially in the period 2005-08. The global financial crisis of late 2008 punctured this bubble, with many real estate projects being cancelled or postponed, and real estate prices falling by as much as 40-60% in a matter of months. By late 2009 or early 2010, however, the market was able to stabilize, and construction began to recover.

The current unrest, however, has come as an uppercut to the jaw, giving a second jolt to real estate sales and investment. Overall, the real estate prices were reported to be down another 5% in the second quarter of 2011.

However, Dr. Omar Al Mardi, Managing Director of Bahrain Financial Harbour argues that “a multitude of factors have affected real estate in Bahrain. Before the political crisis, Bahrain was faced with the global financial meltdown that emanated from the US sub-prime crisis. 

The crisis had an adverse effect on liquidity and its availability, among other things. This negatively affected the real estate globally because people were reluctant to invest. Bahrain was also affected by the crisis and the value of real estate market dropped. 

However, Bahrain is different from the other Gulf countries. There is a greater demand because of higher population density (600-700 people per square kilometer) and thus the local demand is enough to push the construction market in the future.“

The office and commercial rentals market was similarly hard hit, with rents decreasing as much as 30% from 2009 to 2010. Then, for the first half of 2011, rent declined an additional 25%. Global Investment House estimates that commercial occupancy rates range from 60-70%, with approximately 300,000 m2 of built supply, with as much as 200,000 m2 of new office and commercial space still in the process of completion.

The residential real estate market, however, has posted mixed results. Overall the trend has been down, with price bargaining becoming stiffer and some high-end projects being shelved. But there exists a large backlog of demand for housing that is keeping the market still developing.

The luxury residential market was relatively small in terms of demand even prior to the current unrest, but unrest has had an effect, with both investors and potential tenants looking to safer locations. However, many expatriate families have begun looking to move from more urban areas to quieter neighborhoods to avoid the unrest, thus spurring demand for higher-end units in these areas. On the other hand, some professionals laid off during the current unrest are seeking to downsize their housing budgets, making more medium and high-end units available, while increasing the squeeze on low-end housing.

The good news, however, for realtors and tenants is that the government has announced plans to aggressively assist the housing market. It has announced a goal of obtaining 50,000 new units of affordable housing, and has dedicated funds of USD $1.27 billion to help this happen.

Affordable Housing to Drive Bahrain Real Estate and Construction

These funds will be available for low interest loans, and free plots of land to enable affordable construction costs. Certain low-income families will qualify for social housing. Many of the promised 50,000 units will be provided by government subsidies to help sell units in already initiated developments, such as Diyar Al Muharraq.

Bahrain to Focus on Middle Income Housing at Diyar Al Muharraq

Despite the general decline in the residential real estate market, Aaref Hejres, CEO of Diyar Al Muharraq, the biggest private urban development project in Bahrain, is optimistic about 2011:

“I think that 2011 is an excellent year for Bahrain, especially in the real estate development because of so many things. The government doubled the budget of the housing project this year – the biggest real estate budget to date in Bahrain. On the Bahrain market there is always a high demand for the real estate development due to the scarcity of the units and the demand. “There are more than fifty thousand families who want to move into new houses and there are about eight thousand families every year who want to own their house. Another reason why we think this year is good is that we have just finished our first landsite in Diyar and we sold a land worth $260 million to a private developer who will build affordable housing.”

Similarly, Amin Al Arrayed, General Manager of First Bahrain, is similarly optimistic. Despite the hits suffered by the high-end residential sector, he says,

“there has still been strong growth on the industrial side which has helped counter the slump in the rest of the market. Industrial real estate, warehousing, industrial parks and logistics facilities; this sector is still performing well. Looking forward, I think you will see significant growth within industrial real estate and middle income housing. These are two sectors that were somewhat neglected during the boom period. But I think that now that you have a slower economy, demand from the local population, more than outside speculation, will be driving the sector. Middle income housing, low to middle income residential communities, development of Bahrain’s industrial and logistics centers; these are sectors with high demand.”

In addition, several other areas of the real estate market have done quite well. According to Amin Al Arrayed, General Manager of First Bahrain, while

“. . . the investment sector and commercial sectors have been impacted quite heavily [and] the residential sector has also suffered . . .. there has still been strong growth on the industrial side which has helped counter the slump in the rest of the market. Industrial real estate, warehousing, industrial parks and logistics facilities; this sector is still performing well.
Looking forward, I think you will see significant growth within industrial real estate and middle-income housing. These are two sectors that were somewhat neglected during the boom period. But I think that now that you have a slower economy, demand from the local population, more than outside speculation, will be driving the sector.

“Middle income housing, low to middle income residential communities, development of Bahrain’s industrial and logistics centers; these are sectors with high demand.”

Industrial Real-Estate and Middle Income Housing to Drive Bahrain Real-Estate Sector

First Bahrain under Al Arrayed’s leadership has pioneered several successful real estate/industrial/financial packages. One of its most profitable is Majaal. According to Al Arrayed,

“Majaal is the first SME-focused warehousing facility in Bahrain. It had never existed previously. If you were a large company involved in trade activity you would build your own warehouse, because you’d have the necessary resources. Smaller companies usually either resort to sub-standard warehouses, or buy a villa and turn it into a warehouse, which causes all sorts of problems regarding safety. “We found a very big supply gap in this area. We built Grade A specification warehousing with . . .  smaller unit sizes to accommodate small companies better. Nobody else on the market provided such small units with such high specifications. And that’s why we were able to lease out over 70% of the space in 2010. We consider this result to be a very big success story. We identified a gap in the market and were able to fill it. Now we are looking into other GCC countries’ markets and are finding similar opportunities.

Lastly, Bob Vincent, CEO of Bahrain Bay, the $2.5 billion mixed-use waterfront development says

“It has been a very interesting 2-year period, beginning with the commencement of the financial crisis in late 2008 right up until the recent Arab Spring. I think it is fair to say we had greater concerns and about the financial crisis than about the unrest, largely due to people taking a long-term view of where we have been in business and where we’re going. Democratic change as far as economic development is concerned is occurring everywhere in the world on a daily basis, not just in the Middle-East. And despite some of the negative impacts that have come from the social outburst, the Middle-East still represents a very big investment opportunity…Regarding economic growth and maturity, we are at the bottom of the curve and long term investors recognise that to do business it is necessary to ride that curve and, despite the hiccups that occur along the way, the curve is definitely on its way up in terms of opportunity, in terms of investment and in terms of returns on that investment. Real-estate in general goes through five, seven, and even nine-year cycles, and it is not different here at Bahrain Bay. In general success depends on when you start your project, the timing is crucial. Experienced investors try to time themselves to get the maximum opportunity. It is fair to say that Bahrain Bay has timed itself perfectly.”

Demographics to Drive Bahrain Real-Estate

Largest Real-Estate Companies in Bahrain