Serene Group: Office and Residential Real-Estate Rental Market Bottomed

Interview with Mohammed Younis Shafi, Director of Serene Landmark Bahrain

The EDB’s latest economic quarterly states that “in spite of general positive momentum, some sectors of the economy such as real estate still suffer. Some industry experts say that real estate investments remain as much as 50% below their previous peak which would have been in 2007 to 2009.” What is your take on the real estate investment market?

It’s not really 50% in terms of prices. It’s had a big effect but it’s more like 30 to 32%, not 50% because real estate does not work on 50%. If you go back to the original price and the structures we are doing, 50% would mean we are below the cost. Between 2006 and 2008 the market increased by 300%.

If we are talking about investments, then I would agree it is at 50% or even higher. Investments in general are not happening in Bahrain as they did earlier. Before, investors were calling us and now we are calling investors. That’s the difference. Before they were looking for opportunities and now we are telling them about opportunities and they still continue to evaluate. The market has been affected very badly.

What has been the effect of the events of the 2008 market crash and then 2011 internal crisis in Bahrain?

We have had two crises – one of which was the world economic crisis. We were slowly recovering with all the projects going at that time. Some projects have been on hold due to the crisis.

We were just starting to recover from that economic crisis and then our internal issues began developing which has been much worse than the world crisis. There were two types of business investors in Bahrain – local and attracted from outside. When things are happening inside the country, it naturally attracts investors from the outside. So when we stopped, the international investors also went away. That is the big difficulty for the economy here in Bahrain.

How have the events of the past few years affected your company in particular?

Honestly, the events have affected us very badly because recently we have been surviving on what we made in the past few years. We are not starting any new projects yet; we are waiting for things to become more stable.

As well, the local political situation in the Seef area, where we are mostly located, has affected us very badly. Even in our hotel apartments, there is a 20% occupancy. How can we survive with a 20% occupancy? At 60% you can break even but at 20%, the money has to come from our pockets to survive.

During this crisis, we are also losing skilled people. They want to leave the country and they won’t come back. If there’s no business, how long can you afford to keep them while neighboring countries like Qatar and Saudi are doing so well? They can find a better job with a better prospect rather than waiting endlessly in Bahrain. Once they’ve moved away it has a very negative affect and you can’t get them to come back to the country because the trust is gone. There are better jobs, salaries and facilities in those countries. As you know, Qatar has a deadline and to meet that deadline it will spend anything. So there is opportunity for people there.

At the moment, if you want to hire people from abroad, they won’t come to Bahrain. It is very difficult to survive and continue a business if you don’t have skilled people. We have highly qualified people but I am also talking about basic labor. This means you have to offer them a very high salary which also contributes to the instability of the business sector. It doesn’t match up.

Do you feel that this uncertainty is irrational and that the fundamentals are all good?

That’s true. There are still people who like to invest and future projects. But the general scenario and reputation still keep people waiting. Opportunities don’t come every day but come all at once and we lose the chance. We are still continuing daily comfortable lives but we also need to move forward. Things are waiting to be done. The government (public) sector is carrying out quite a few projects but in the private sector people remain reluctant.

Do you think the government should take a strong position because the basic group psychology is irrational? That’s when the government should step in strongly.

The government is already doing many things to help. For example, the Ministry of Tourism has done a lot to promote the country. They try to bring the country together.  But suddenly there is one small negative incident and the whole promotion is lost. I think the government needs to dedicate themselves to rectifying the negative impact and help people to understand and resolve the issues. There are issues everywhere but they can be settled. Overall, they need to prepare the framework to work within.

Some experts say that the prices have fallen by 20% or more in the residential rents.

It’s not actually 20%. It had fallen much more but in the last 6 months it has started to recover a little bit. We are still lower than the 2009 and 2010 values. This is because many employees have gone and many companies have packed up their operations and moved to another country. This has affected the rental prices.

I think you need a 20% drop because if you are fully capped, then the rental market will go sky-high which is unaffordable like what happened earlier. People were not just sharing a room, they were sharing a bed. It was that costly. But no, we don’t want to be in that situation but of course we need to get some return on what we are investing within some reasonable time. We are not looking for tomorrow but we need to have some return. That can only happen when the market is settled.

Tell us about office rentals.

It is the same. Commercial properties have been hurt more than residential because if the company leaves Bahrain, people will vacate the office and residential properties. Residence can be replaced with a lower rent, but in the office no  one will come. There are different criteria for the office. You need to create a business and follow all the government procedures, and this requires a lot of funds. Renting doesn’t require funds; you can just rent it out.

The market will settle only if more projects will come into the country. I’m talking about mega-projects. You really need to start a mega-project which will bring many experts, employment, and skills which will subsequently help both the commercial and residential sectors.

Retail rentals have also dropped very drastically. You can see how the malls are suffering because there isn’t much happening in the malls except for the City Center. Others like the Seef Mall are a bit quite because there are no buyers. Outside of that, they are rather quiet because there are no buyers. If you aren’t making money you can’t pay much for the rent. I also heard about companies that have reduced salaries just to survive until things get better.

At the same time, the biggest market for Bahrain is Saudi Arabia.

Yes, Saudi Arabia, Kuwait and the UAE with a bit from Oman also. There are some Omani investors but they come and go away.

These countries understand Bahrain and understand this is a stable place with a track record of 50 years of stability and gradually buildup of capacities. These are not foreign investors. How is the situation in the industry so bad?

No, these are our neighboring investors and traders. Initially, about five years ago, not much was happening in real estate in Saudi Arabia but now a lot is going on because they opened up mortgages which drive the market. Plus they allowed foreigners who have been living in Saudi for 20 years to buy a real estate property in the country. This is what has been driving the market there. Before that, the same people were buying and living over here in Bahrain. This is the difference.

Because it’s a tough market and the investors are making more money over there than in Bahrain, they prefer that market but eventually they will come back to us. That is why I say we need to prepare the groundwork for this.

What about the sales prices for retail, office and residential properties?

In Bahrain, there are very few retail offices for sale. Even though it comes up for leasing, the rental has gone down by more than 50%. There was a time that it was as low as 55 to 60% lower to just fill the empty blocks. Those companies had huge areas and now they divide into small areas. Now the local small investors have started renting those offices. But we still need the big companies to come to Bahrain and fill those offices and carry out their business.

The residential property prices are becoming more stable but there is no escalation anymore. This is the right time to buy because previously there was a little escalation in the market but now there is no escalation. The prices are coming stable and in fact now contractors and developers are moving into small segments instead of high rises. Nothing much is happening in high rises. Now people are investing in low rises and there are many things going on in certain parts of Bahrain. Maybe not in the downtown but outside areas.

Would you say that one of the major challenges is availability of financing?

Yes, this is a very big challenge. If I want to do something, I have to go through so many difficulties with those financial institutions because they do not like to do financing like they used to. Their conditions and terms are very hard, not like before when they financed up to 90%. Now sometimes I have to arrange 45% on my own. It is very hard. They just want to calculate the risk now and we don’t blame them for that. It’s a worldwide phenomenon and all the banks in Bahrain are doing this now but they have their own way of doing things.

They want to do more home work rather than to put money into the market because the return is now not going to be quick. That’s one of the reasons. But if they liquidate on easy conditions, or with a lot of availability, I’m sure there are still some brave people in town that can turn the table. We still can attract many other countries. The UAE revived back and started getting costly also if you see that. So Bahrain is very moderate. They can attract those big companies to keep their head offices in Bahrain. Operational costs will be less, offices are available, storage is available, government policies are much easier than before and if the banks can help them to finance, I’m sure they would love to move to Bahrain.

I have had a couple of inquiries from people looking at Bahrain as an option but they are just looking for the right scenario. Can you believe that Bahrain has the cheapest electricity in the region and availability of electricity as well? There are a few companies that came to the free zone area and they are putting up a business just because of electricity. We especially like to attract companies from India because there are a lot of electricity shortages in that country, as well as in Pakistan. If we can just get the market stable, a lot of investors will come from this part of the world and they will make a huge investment. Their investment volumes are not small.

Before there used to be a huge garment sector, now is the time of free trade agreements, so it’s time to avail ourselves of all those opportunities. There were 23 garment factories employing thousands of people. Unemployment happened after they moved out because when those companies closed their operation, people were unemployed and there were no other opportunities for them to work in other factories. I would really love to see more industries in Bahrain rather than tourism. Tourism is important but when you have industry, tourism will still be there because people will come, do their business, and tourism is part of it. More factories and big institutions can employ many people which would also solve the job dilemma.

The statistics indicate that the number of real estate transactions in 2012 rose by 46%.

That is true but that is basically only in the land, not in properties. People are buying land because when the price goes down, those who could not afford it during the peak time have an opportunity to buy. It is primarily Bahrainian investors making these purchases. This is what I mentioned earlier about people buying property to build low rises. There is a need for economical houses. The cost of building materials also comes down. It’s not only rent as we were talking about earlier. Previously, building supply companies were making a lot of profit but now there is a lot available which brings the price down. That is the benefit for the cost ultimately. A property that would have cost $100,000 to build can be built for much less. We pass that along to the customer so he can buy the property at a reasonable price. That is what is driving this segment.

Can you talk a bit about the company and the sectors you are involved in?

We are in many sectors including real estate, property management, and development. We are just working on the projects we started but we don’t have much in the queue. We are watching and waiting like others are doing but once the market has settled, we definitely want to move forward.

We don’t react to the market but we observe. We would like rent to be steadier. This is the link to financing from the bank. The rent is like my income from my properties. When you apply for financing, they want to see what you can get in return so if the rent is steady, it will help me in my financing. So I really need the rental market to be more sustainable.

This is not just what is helpful for me but it is needed for more employment, jobs and as the whole basis for society. Even for a person living in my property, he has to go through a lot. The company has to hire the people from abroad and before they hire people, they have to start their business over here. I am the last to benefit because they are the last to come live here and work for the company. We are hoping the market will be settled in the future, employment will increase, and it will help the real estate sector.

We are also diversifying; for example, I am starting something new in Africa. I see a huge potential in African countries, especially some countries in East Africa that are really prospering. For me, it’s the same. Either I work in Bahrain or I work in Africa. If I work in Africa, I bring the money back to Bahrain and invest in real estate. So moving out from Bahrain means we are going to make money and bring it back. Since we cannot bring the investors here, let us go there and work where it is a good market, make money, and come back home.

What is your vision for the market?

I am very optimistic. It’s the right time to buy and invest, there’s no doubt about that, because there is no escalation on the price now. So if you buy, you will not regret it. I’m very optimistic. I’ve lived in Bahrain for 36 years and I’ve seen lots of bumps in this country, up and down. Things will definitely settle down. I am positive because we don’t have any threats from the outside. Any disputes will be settled sooner or later because we are all one area. I’m pretty sure that things will settle. It just may take a little time.