InterviewsNovember 30, 1999

Bahrain Real Estate Bahrain Real Capita Real Estate Company in Bahrain

: Published: November 30, 1999

How do you assess the global and Middle Eastern real estate sector? What is the outlook?

I’m not the authority on global real estate, but I can certainly convey what I understand from analysts around the world. Real estate is not the favorite market nowadays, it is going through a terrible time, probably fueled by the U.S. housing market. But then again, the negative effects from that market trickled down to almost all the markets in the world whether they have subprime mortgages or whether they don’t. I think the reality of the matter is that it’s not only the US real estate market that has caused everybody else to have problems, all the markets were overvalued. Overvaluation and over-optimism is probably something that is very common in most other markets. We all would like to blame the US for our problems but deep down we all understand that each real estate market in the gulf and around the world also had their own problems, and not just imported problems from the US. In the Middle East the market has a slightly different appearance, we are coming from a low starting point of the Middle East real estate market; if you take the housing market which has traditionally been a large sector in real estate is not as developed as in the West. We still have a lot of standalone and one off developments unlike the West where you have the large community developers, and only the large community developers, hardly anyone builds his own house in the West. We still have that culture in Bahrain in the Gulf. You buy a plot of land, you build your own house. And if you can imagine how that works in the housing market which is the bulk of real estate, it gives an indication of how the market is fragmented and unorganized to some degree. We are starting from behind in a sense. We’re developing to catch up with the West. Our markets real estate-wise have been suffering because of the global trust crisis. We have a lack of trust and confidence in the market. A lack of trust and confidence and vision has also trickled down to our markets and to the real estate in the Gulf, and the Middle East as a whole is struggling from the lack of funding because banks are too scared. There is a lack of active sales because buyers are too scared to buy in this market even though there are opportunities. Very few buyers, banks, those who are a bit more courageous are still active in the market and are making amazing deals. They are capturing unique opportunities, undervalued assets, distressed assets which they will probably make a lot of money out of in a few years to go. But the general market sentiment is very scared from the real estate market. The general investor sentiment and tenant sentiment is very cautious. They’re mostly deploying an attitude of wait and see until things clarify in the U.S. and Europe and then maybe we will go through our correction phase.

According to the chief executive of one of the Kingdom’s Islamic mortgage holders, “real estate prices in Bahrain could fall as much as 25% in 2009.” In your opinion, by how much do think we can see the prices fall, or when do you expect the prices to stabilize and rebound again?

It’s very difficult to make any comments about real estate because you have many types of real estate, you have the commercial, the residential, you have retail and office, and industrial. Not all car prices have gone down. Luxury car prices are still holding up in this market today. But mass production brands tend to accept price depreciation because they need to move volumes, and mass oriented will have to make adjustments and come down. Unique projects targeting the upper and middle, small number of units, don’t need to do much, they might need to make a few adjustments. Within the 10% margin, plus minus, that is negotiation so I don’t think it is fair to say that this is depreciation or devaluation of market prices. In Bahrain there are areas that have gone down by more than 20%, be it in land prices or built up space prices, you know, finished apartment prices. But there are areas that are still holding up and even showing small appreciation, but to make one general comment I think is unfair. Some pockets have declined in Bahrain, and the reason for that decline is that they were overvalued to begin with. So it is only natural that they come back to what is reasonable. What is reasonable is a price that can fetch a reasonable yield. If land is too expensive to build on it is something that can be leased out at market rates. It is too expensive, it needs to come down to a rate to where you can build something on it and make a project to develop and yield some rental income that fetches you 10%. If it is barely yielding 3%, it is overvalued. Same thing with an apartment or office. If an office is for sale at a price that is too high such that a person that buys it cannot find a renter or tenants who would pay a reasonable market rate to generate a yield of 10% then it is overvalued. Of course with the deposit rates in Bahrain approaching the 6% real estate needs to fetch 12%. Fetching 8% or 10% is not attractive anymore because the risk free deposit rate is 6%. The risk rate in real estate has to generate more than 6%, it has to generate 12 or 13 or 14%. But the notion of what you invest in needs to give you that yield. So areas that are overpriced where you cannot get the 12% need to come down a little bit.

With a portfolio of more than 21 projects, Real Capita is certainly feeling the effects of the global economic downturn. What are your emergency plans and strategies to try and mitigate the effects of the crisis and how much have you actually been affected?

Our immediate strategy was to start talking to the most important stakeholders. And right now the most important stakeholders in my view are the financial institutions, not the buyers. The buyers are the least of our concerns right now. Buyers naturally-speaking are the category of stakeholders that are most prone to market fluctuation. Their sentiment is ready to switch from negative to positive. They are influenced by a variety of reasons from marketing to news of a flu in Mexico. But banks are a bit more scientific about things. So our immediate action was to go and talk to the banks which are financing our projects and determine from them what their concerns are and how can we mitigate things, how can we address your concerns and reduce your risks in our projects. Because we will continue to build. Maybe now it will continue to build at a slower pace, smaller units instead of building bigger units that are too expensive. So banks are our main source of Plan B and that I think is the right strategy because these are the guys who are stakeholders with us and are entrenched with us in this investment. Understanding their concerns and meeting their concerns is our ultimate objective, because that is what allows is to complete the project until the end. To get to the end you need a bank to trust in your vision. Once you have a completed a project, tenants then come in. People are easy to convince once they see a finished product.

What is the balance of power between you as a supplier of a product and the final buyer, and what is your relationship with your stakeholders?

The balance of power in the Middle East still resides with the developer, the suppliers, unlike in the West. In the West, end users or consumers exert a significant influence on the nature of the supply, the volume of the supply, the price of the supply, and the timing of the supply. Here, there aren’t the institutions that organize consumer power to become a formidable force. So they are fragmented, not unionized. So the control is still in the hands of the suppliers. We decide when to build, went to rent, went to offer and so forth. That does not mean that we do not take into consideration consumer feedback, but in places like Europe, consumer influences is a very important factor, that has to be factored into your business model from day one. Here you can wait until day 10, close to completion and then start bringing in the consumers. So their influence is still limited in the Middle East.

Do you go to the client or does the client really come to you?

Now we are finding ourselves going more to clients. We were not doing that in the past. In the past, as I said, you complete your package and tenants come in. There was plenty of demand coming to you. Now with demand shrinking and slowing down, with scared consumers, you need to chase them more than before. Still there are the customers who know what they want and come after you and want to buy something from you, but we’re finding ourselves being more market oriented, we’re proactive on the marketing front, going after not necessarily individuals but groups of buyers, and that seems to be a workable scenario nowadays, that many developers are seeking not just us.

Since the beginning of the global economic downturn, have you witnessed a change in your customer base? Do you now have different investors or customers than you did in the past?

In the past we noticed a significant share of our customers being speculators as opposed to end users. That mix is now shifting slightly towards the end users category. Speculators have no room in this market. There’s no upside or at least no immediate upside. They cannot buy something and sell it the next day. We all know the Dubai scenario, where things are traded within hours three or four times. That never happened in Bahrain, and will never happen, thank God, although some developers might not like that comment. I think realistic buyers, end users coming in are the best way to go. Yes, now we do not have bulk buyers who buy 10 or 20 units, that is fine, we need to do 10 times the effort to sell the same number of units to 10 different buyers as opposed to one single buyer. But that is the natural way of how business is done. We are customer oriented at the end of the day. We are selling the largest investment to a family, their house. We need to put some effort into that. If we’re not willing to put some effort into that then we are in the wrong business. That is why we’re finding ourselves chasing more after consumers, building and presenting our case and the differentiating factors between us and the competition so they are convinced that with us they have a better solution.

When we interviewed Bob Addison, he mentioned that one of the major challenges in the Bahraini market is transparency. How many real estate developers are not being transparent with their end user or customers? How do you adjust this issue in Real Capita?

Bob is definitely on the mark there; a lot of developers are not transparent in many ways, and the proof is that many developments were sold and thereafter canceled, and they are still on paper. Money it was collected, down payments were collected, and it was still on paper. In Real Capita we adopt a totally different strategy. We never stop marketing to end users or to customers, until we are on site and contracts are signed with the main contractor and some of the subcontractors, construction has taken some visible shape, and immediately after that we start working on our mockups, where customers come in and see exactly what the end product will be. There’s a limit on what you can sell with a brochure; a brochure is just images, and sometimes they’re not even realistic images, they are rendered images from a computer. Once a customer steps in to your project and you have prepared the mock up, real furniture, a real view, real services and utilities, they then understand exactly what they’re buying into. So we adopt a totally different approach, we do not start selling from day one. We have to fund our projects for a few months until things come up, then start the selling. So when customers come in, we have a half-built product and they can see it coming up as they are buying; with every new installment that I collect with them they can see some progress on site. Without that, I understand that customers will always be scared and they have the right to be so. Unfortunately during the hype of the market, customers and developers were bit more aggressive in the way they approached this issue, they were selling off plan, in some cases sales didn’t generate enough interest and developers cancel their projects. Then there are court cases of customers asking for refunds when the developer has maybe spent the money somewhere else. Our money is in the ground, it is in the concrete, it is in the construction, it is their invisible in front of everybody.

What about the transparency when the developers say 90% is sold or 95% or 100% is sold, when in fact it is not because there’s a phase two?

As you said it is a classic scenario. We are very conscious about the numbers we put out in the press; we are very conservative even. We admit that we have not completed 100% of our projects when we have not; today we have a project in Umm Al Hasa where we have achieved a 100% lease. We don’t have any apartments to offer tenants who come in, but we have another building there that is being offered and they can go there and seek tenancy. But for all our projects we never said we achieved 100% in a few days or months. We are selling and we have actually even had some cancellations from some people, and we admit that. After those cancellations we doubled up our marketing efforts and operated new sales to cover the cancellations. We are trying to maintain our sales pace at the same rate. Naturally, all products do not go to 100% sold out from Day 1, and I understand how that works because I’m a developer on one hand and a customer on the other. I buy to resell. And I will always make sure that my payments to a developer will not be 100% and the project’s not done. I will only pay the last installment when I move in, and that’s what we expect from our customers.

Can you describe who your customers are; are they from Bahrain, the GCC, Europe, all over the world?

Most of our customers are GCC-based, up to 95%. There is a good 30 to 40% Bahrainis and the rest are from the rest of the Gulf. It depends on the nature of the project itself; sometimes they are high end customers, sometimes middle and low end. We have a project in Morocco that is for social housing, this is for the lower income brackets. Totally different from Amwaj Gateway, a luxurious project on the sea on Amwaj Island, a high end community. With that we’re targeting the upper end of the community. Our project in Umm Al Hasa is a tenant, a leasing project. Our tenants are sometimes GCC students studying in Bahrain, or families, Bahrainis, looking for the first house or apartment to rent. So we have a wide mix but the majority is 30-40% Bahrainis, the balance is all GCC tenants.

You have achieved annual capital returns of 21% over a 27 months period from your inception. Would you be able to comment on your numbers in 2009, and what are your expectations for 2010?

We have to accept lower returns on capital and profitability rates. We have to change our objective from profit-seeking to capital protection, capital preservation, and reasonable returns. As I said, real estate is no longer in the hype stage where it used to be a few months ago, so we cannot expect the same returns obviously. As a company and as shareholders we have to accept lower returns. In the long run, those developers who survive this economical downturn are the developers who will sustain a solid business, because that is only by going through tough times that you learn to do the tough things, and this is a tough period. If we survive this period and we are confident that we are in the right shape and size and mindset even to survive this period, I think we will come out on the other end much stronger, and much more aware of how this business model can be perfected. Most of the people behind Real Capita have a long number of years in experience of real estate, but very few of them have gone through a downturn. We have all come to the real estate business in the good days, so this is a great learning experience for all of us, how to maneuver in the tough and difficult days. I think we’re very capable of surviving this period, and coming out on the other end profitably.

From more than 21 projects, have you cancelled any of them? How has this crisis impacted the projects and due diligence you are doing? How do you assess the risk?

We have not cancelled any projects so far; we have delayed some projects, we have deferred some of them to future dates. We have modified some projects to accommodate market demand. Some projects we have even reshaped to create earlier exit with lower return. Investors are now seeking capital preservation more than profit generation. With that mindset, we are looking at earlier exit on some projects, even though our rate of return was not as expected. We are also looking at something else. Most of our projects that are on the ground are continuing. We are putting a hold on any future projects, which I think is the right thing to do in this market condition, until there’s a bit more clarity as to how the market is shaping up, then we will announce new projects. For the time being, we have active projects, here and around the world, that are going ahead, new ones that we announce will probably be delayed, but no totally new concepts will be entertained at this time.

From your portfolio of projects, which one of them stands out the most? Which one is the flagship for your company?

Probably Amwaj Gateway is the flagship for our company. It is our largest investment in Bahrain, and I think it gives the right tone and perception for Real Capita in the market. But outside Bahrain we have a very large project in Morocco, which we are very proud of. It was conceptualized during the high tide period in real estate, but it actually matches exactly the market demand today. Our project in Morocco is a social housing project, and today social housing is a very protected domain. Whether you have an upside or downside in the economy, social housing continues because it’s a government supported program. This is in Morocco or Bahrain or any other country, it is usually government supported with a lot of incentives and a lot of support, because on its own it’s not very profitable, you have to give incentives for developers to act in it. We are very proud of it because it is generating reasonable profits, and at the same time is creating solutions for a very large scale social problem in Morocco, which is shanty towns.

We are delivering an award for the greenest company of those that we are interviewing. Your president has basically announced a green building council in Bahrain. What is your policy and strategy towards the environment and sustainable development?

The environment is a major concern for Real Capita. That factor is a very important factor in most of our projects. I will give you a case in point. The Amwaj Gateway is the first project we have conceptualized in Bahrain. We have designed it in a way that qualifies it to be a green building; in fact, it is one of the first green buildings in Bahrain. From that exercise, we realized that we would like to be involved in other green projects, thus the idea for the council. But let me assure you, it’s not a beautiful experience, it is not an easy experience at all, it is very challenging. The culture of environment protection is not very strong in the Middle East. We still do not recycle, we still do not sort our waste, so to come up with the concept of green buildings is a new challenge. In Dubai I am aware of a Green Building Council, and the government has made it a mandate that any new building has to be pre-approved by the council. I think they backed away from that now. Now they will accept buildings that are not very green. In Bahrain we are just coming up with this concept, we are just developing it, and there are not many projects on the island that have a green design. But I think from our experience, there are many misconceptions with environmentally friendly investments in general, be it real estate or other. We always assume that they are difficult to achieve, people assume that it is costlier. It is not always costlier. Actually, in some cases it is cheaper to do something more friendly to the environment if. In others it is a bit more expensive though. So all in all it could be a balanced approach where you do not harm the environment, and at the same time you do not incur significant losses in doing so. But you need to be smart about how you adopt the right methods and technologies. Once again we do not have the culture of an environmentally focused society. Many things that happen in the West are not yet institutionalized in the mindsets of people, so to expect people to switch 180 degrees is virtually impossible. It will take time and a lot of education. In the West, green buildings sell faster. Buyers who hold a lot of power and influence force developers to only develop green buildings, and if it is green, I will buy into it more than if it were not a green building. In Bahrain that does not exist. We’re in a field all alone, we are trying to educate the market but it’s going to take time.

How do you see Real Capita in 2015? What message would you deliver to the international community about Bahrain?

Real Capita in 2015 should be a much stronger and bigger company, whether I am involved in it or not, because that is what the company is focused on achieving. But what I would really be proud about in Real Capita and what I personally proud about from my past experience is not really creating skill or gathering knowledge within our company, quite the opposite. I hope I will be very proud in 2015 to see Real Capita ex-staff taking up significant responsibilities in other companies. I would like to be a beacon for training people who are in the right mindset, deploying them in the market, benefiting from their skills, and once they reach a certain skill, trying to grow outside the company. I have experienced personally that creating that community of contacts of people that you work with creates so many business opportunities. We know how to work with each other because we have worked with each other in the same company some years ago and we know each other very well. That is one real objective I would like to see personally. On the other hand, I would also like to see Real Capita adapting to the market conditions, and that’s what we are doing. Big ships are not very easy to turn, and Real Capita is a big ship; it is not very easy to turn it suddenly to go with the direction of the tide. It will take some effort from us. But I hope that we will have turned it by that time, focused it, and are really ahead of the pack, because we started in this field of being a real estate developer ahead of the rest of the market, we are smaller but we are nimbler and more dynamic. I would like to continue on that track. I would also like to see Real Capita developing projects that are meaningful, not just financially but meaningful psychologically and socially, that have an impact on how people’s lives are. And we are trying to do that; we are trying to build communities that have a sense of community, people working and living in that community and feeling proud about living in that community. Very few projects in Bahrain have that idea in their mind of creating a spirit. I believe that a place has a soul; you need to know what that soul is and you need to convince people that they are proud to be in that place, not just that they are able to afford it. My message is very brief: hold on tight; it’s going to be a rough ride for the next few years, but if you hold on tight there is a lot of merit and value and upsides that we all can experience if we hold on tight for this ride. After the downturn there is definitely a strong upturn, and that upturn will only be there for the benefit of those who last. So adapt and do whatever you need to to just survive this period, and good things are coming. In fact, good things are happening right now. We all understand how the US economy influences the world, and the US economy is kind of shaping up and reducing the negative sentiment. There are good things happening there and I hope that they translate into good things here also. Bahrain is the best place in the Gulf! I can’t say anything more. I am convinced Bahrain is one of the best places, socially speaking, work-force speaking, you can employ people from whatever skill in Bahrain, and you will find local Bahrainis. They come cheap, they are not as expensive as other places, and they are well-trained, they have the capability and the know-how. We have been blessed by having this huge financial community in Bahrain. And those financial institutions that are set up in Bahrain graduated many skilled people; they are training institutions in their own right, and we cannot forget their benefit because that’s how Bahrain became a place where people like myself were trained and work. Bahrain has a great lifestyle, so when you choose your investment location, think of the lifestyle of your employees, not just the cost of living. The lifestyle itself also matters.