Islamic banks dominate the first wave of investment in major real estate developments in Bahrain. From Durrat al-Bahrain in the south to the Bahrain Financial Harbour in the north, future residents and visitors will owe their luxurious property to the particular suitability of real estate investment to sharia-compliant structures. Arcapita, despite being based locally, is a more recent player on the scene.

The bank has made its name investing in private equity and real estate in the US and Europe. However, it is returning to its roots and is now developing two major projects in the kingdom - the $1,500 million Bahrain Bay, to be built on reclaimed land off the north coast of Manama, and the $300 million Riffa Views, a residential community centred around an upgraded golf course at Riffa. "Our plan was always to invest first in the US, then in Europe, then in Asia," says Asim Zafar, executive director and head of real estate investment at Arcapita.

Bahrain has its particular attractions. "The kingdom has the lowest land prices in the Middle East," says Zafar. "It also has a very large catchment area through the Saudi Arabian causeway and increasingly through Bahrain International Airport." The logic applies especially to Bahrain Bay, just a short drive from the causeway, as Arcapita’s chief executive officer Atif Abdulmalik emphasised at the project’s formal launch in early December. "The demographic changes within Bahrain, its proximity to the rapidly growing Eastern Province of Saudi Arabia and the location within Manama’s prime northern corridor make this a compelling project," he said. The site is close to the Diplomatic Area and to the Financial Harbour and World Trade Centre, both under construction.

Freehold property

Another advantage of the site is that it is within one of the designated areas where foreigners are allowed to own freehold property. Unfortunately, the popularity of the strip for development also creates problems. Traffic congestion is worsening throughout Manama, and the corniche is a particular black spot. "We are not worried but we do need a plan in place," says Zafar. "We have been discussing the issue with the Works & Housing Ministry for more than a year, which shows the importance attached to it." Bids were submitted in late October for a government contract to carry out dredging and reclamation in preparation for a project known as the North Manama Causeway, to expand both King Faisal and Al-Fateh highways along the coast.

Bahrain Bay will be carried out in three phases. The first covers reclamation and infrastructure. The second entails construction of the buildings for the project’s anchor tenants - a Four Seasons Hotel and Arcapita itself, which will relocate its global headquarters to plush new offices in the bay on completion in 2008. Finally, investors will develop various ‘sub-projects’, including residential, retail and commercial elements, for completion by the end of 2010.

The US’ Turner Construction International is the project manager; Skidmore, Owings & Merrill (SOM), also of the US, drew up concept designs, while the UK’s Atkins prepared detailed designs. Arcapita is keen to stick to an overall plan. "We want to preserve the integrity of the masterplan," says Zafar. "Investors’ expectations of returns need to be balanced with our desire not simply to sell off all the land as quickly as possible and make quick returns. We want to avoid the whole plot sales process. Instead, the project will be developed in about five ‘sub-projects’, which will be launched in January. They will be themed in the sense that they will each be distinct within the overall masterplan." Discussions are already under way with potential investors.

December was a busy month for Arcapita. Not only was Bahrain Bay launched, but Riffa Views gained government approval and opened its sales office. The project is a joint venture with Bahrain International Golf Course Company and will consist of 900 villas in three areas - the Wadi, the Lagoon and the Park - arranged round an 18-hole PGA championship standard golf course designed by Arthur Hills and Steve Forest. The London office of the US’ EDAW prepared the masterplan and landscape designs - a good omen, since another of the firm’s recent commissions was to prepare designs for the successful London bid to host the 2012 Olympic Games.

Again, the investment was carefully chosen. "The first golf course development in any region or city tends to do very well," says Zafar. "In addition, there is a growing demand for closed, planned communities and for single-family residences." Although the development falls outside the designated foreign freehold zones, government permission will be sought to sell land to expatriates.

Equity financed

Arcapita will finance the projects primarily through equity. Additional funding for Riffa is coming from a simple bank murabaha, while a debt financing strategy for Bahrain Bay is about a year off. "A sukuk issue is a possibility but nothing has been decided," says Zafar.

The Bahrain scheme is the third of Arcapita’s GCC real estate projects. The bank’s first was Victory Heights, another golf-centred development within the Dubai Sports City complex. Further investment could be on the cards. "We might look at another single-family project in Dubai, Doha is interesting and of course the big market where everyone is looking is Saudi Arabia," says Zafar. "Potential real estate investments are assessed as part of our global franchise. The Middle East is looking good at the moment in terms of demographics and available finance."