Compared with many of its Gulf neighbours, the boom years of 2003-08 were fairly quiet for Bahrain. Despite some ambitious construction projects such as Bahrain Bay and Bahrain Financial Harbour, the kingdom never had the building frenzy that real estate developers and contractors became used to elsewhere in the region, particularly Dubai.
And the market remains quiet today. According to regional projects tracker MEED Projects-CMI, Bahrain has awarded just $100m worth of construction and infrastructure contracts so far this year. In total, there is little more than $9bn worth of projects under way.
But Bahrain is benefiting from its more measured approach. While real estate developers may be struggling to move ahead with new projects, the number of projects that have been cancelled has been minimal.
The only high-profile project to be put on hold is a $450m, mixed-use development in the Seef district planned by the local First Bahrain Real Estate Development Company.
The 21,000-square-metre development would have featured a hospitality complex including a five-star hotel, as well as serviced apartments, offices and residential towers. But it was postponed in early June “in light of prevailing market conditions and in order to maintain the company’s sound financial position”, according to a statement issued by the developer at the time.
“Bahrain’s market was never out of sync with salaries. The hope today is it does not have as far to fall”
Mike Williams, senior director, CB Richard Ellis
The land has now been converted in the company’s accounts to investment property and it is reviewing several options for the most effective use of the real estate.
The proposed scheme was a big project for Bahrain, but was still relatively modest compared with some of the multi-billion-dollar new cities planned elsewhere in the Gulf, such as the Dubai Waterfront and Palm Deira developments that were scaled back or shelved in Dubai at the end of 2008.
The fall in property prices since their peak in the summer of 2008 has also been less dramatic in Bahrain than elsewhere. The real estate bubble did not burst as dramatically because the market was never over-inflated in the first place, according to industry observers. “If I had to put a figure on it I would say [property values have fallen by] about 15 per cent, but it is complicated and it varies depending on where and when a property was bought,” says Mike Williams, senior director of CB Richard Ellis, a UK-based property consultant.
“Bahrain’s market was never out of sync with salaries. It was two years behind Dubai, where there was a frenzy of speculative activity. The hope today is that Bahrain does not have as far to fall and the market is in a better position to return quickly.”
Developers are still waiting for that revival to start, however. There have been virtually no sales of off-plan properties this year, and although there have been some sales in the secondary market, the numbers are small. The difficulties have been amplified by the fact that developers have been reluctant to cut the price of their off-plan properties simply to raise cash.
There is some hope that sales activity may pick up at the end of the year. “During 2009 we have been bouncing from quarter to quarter,” says Williams. “The third quarter has been especially quiet with the summer and Ramadan. We are looking for it to pick up in the fourth quarter. Speaking to banks, they feel that interest is picking up as people come back from the summer.”
Without evidence of any definite recovery, developers have begun to look at opportunities in sectors they had shunned over the past six years, when they concentrated on luxury, waterfront developments.
The largest potential market is the development of low-cost housing, which the government is prioritising. In total, the authorities want to build 50,000 new low-cost homes by 2014 and, unlike previous government-led housing schemes, these new houses will be built by the private sector.
As part of the Vision 2030 strategic development plan for the country, the Public Works & Housing Ministry plans to sign a series of public-private partnership agreements with private sector firms to build these houses, the first of which the government plans to tender to developers in October.
Government involvement is crucial because market forces currently prevent many low-cost housing projects moving ahead. Land valuations in most parts of Bahrain have been driven so high in recent years that the private sector cannot make a profit by building low-cost houses. The only exceptions are where a developer bought land before the price rose significantly, or for land in more remote areas.
Another sector that offers opportunities for developers is tourism. Despite the economic downturn, the number of tourists visiting Bahrain in the first half of 2009 increased by 4 per cent to 4.5 million people compared with the same period last year, according to the Central Informatics Organisation, a government body.
The World Travel & Tourism Council, a UK-based trade group, estimates that the tourism sector directly employs 23,000 people in Bahrain, 6.4 per cent of the country’s total workforce, and generates about BD1.2bn ($3.2bn) worth of economic activity.
Developers hope to capitalise on this by creating more accommodation for visitors, and many are now planning to build hotels instead of the residential towers they have been more used to building in recent years.
But for the tourism industry to be a success in the long term, Bahrain needs to develop its facilities and attractions to entice more visitors. The biggest existing attraction is the Bahrain International Circuit at Sakhir, 20 kilometres south of the capital Manama, which hosted the region’s first Formula One Grand Prix in 2004 and acts as a marketing tool for the entire country.
“The Bahrain circuit opened in 2004 and 2010 will be its seventh Grand Prix,” says Martin Whitaker, chief executive officer (CEO) of the circuit. “There is lots of focus on it. Some 500 million people watch it on TV and you have to do something special for that to occur.”
Although the Formula One race itself only attracts about 36,000 people, over the course of the year the circuit welcomes closer to 100,000 visitors for corporate gatherings and other motorsport events such as drag racing.
Several other projects are being planned to exploit the market for conferences and exhibitions. The largest and most ambitious is the @Bahrain development next to the Formula One circuit. When completed, it will be able to handle more than 3.5 million visitors a year and could create up to 2,500 new jobs.
The 1 sq km development, which includes business parks, an indoor arena, a cinema, a retail area and a hotel, is being targeted at tourists from around the region looking for sports and entertainment. It is hoped that many will come from Qatar once the new road and rail link, known as the Friendship Causeway, is finished by 2013. Others could come across the existing King Fahd Causeway from Saudi Arabia.
“The new causeway will give us access to 1-1.5 million people in Qatar, and there are 29 million people in Saudi Arabia who need a centre for entertainment, culture and sport,” says Nicola Pero, CEO of @Bahrain.
“We don’t believe that is currently being delivered in the GCC.”
Crucially, the development will also include an exhibition centre capable of handling events the country is unable to host at the moment because of the lack of a suitable space.
“We will develop a new exhibition centre for Bahrain,” says Pero. “Bahrain turned away 47 events last year, so a new venue is vital for the growth of the sector.”
Such new facilities should help Bahrain maintain its position as one of the main business hubs for the region. This in turn could support the market for commercial real estate, which is currently heading towards oversupply as new projects such as the Bahrain Financial Harbour and the World Trade Centre are completed at a time when there is little additional demand for office space.
The market for existing office space is going through a transitional phase. The old central business district of Manama, which is located in the diplomatic area, has become unpopular with tenants, who now prefer to rent space in the Seef district. This has been reflected in rental prices. In Seef, office space is let at BD11 a square metre, whereas in the diplomatic area the cost is about BD8.
The popularity of the Seef district among businesses means many residential buildings in that area are now being leased out as office space. Although this has been successful in the short term, it has created some indirect problems, such as a lack of parking spaces, suggesting it is not a sustainable solution in the longer term.
While demand for office space may not be growing rapidly any more, neither is it falling sharply. The steady nature of the market means Bahrain should not suffer the chronic oversupply that has been a problem elsewhere in the Gulf. When economic activity does begin to pick up, it should also mean that, in the medium to long term, Bahrain finds it easier than its neighbours to start building again.