Bahrain is among the GCC’s smallest retail markets, ringing up sales of just $3.2bn in 2011, according to consultancy Planet Retail. This reflects the kingdom’s tiny population and comparatively modest gross domestic product (GDP) per capita, which, at $24,141, is the second lowest in the Gulf.

Despite its small size, Bahrain’s retail industry has seen significant changes in recent years. Traditional markets have given way to high-end malls, allowing foreign stores to enter the market. The kingdom plays host to luxury brands such as Gucci, Saks Fifth Avenue and Burberry, alongside mass retailers such as French chains Geant and Carrefour. In 2010, retail trade comprised 7.2 per cent of GDP, according to Dubai-based investment bank Alpen Capital.

Wealthy tourists

The sector owes much to Bahrain’s close ties with Saudi Arabia, the wealthiest Arab economy. Millions of Saudis cross the causeway to the more liberal island state each year, offering rich pickings for shopping centres and hotels.

The political unrest that engulfed the kingdom in 2011 took its toll on the retail sector, however. Tourism dwindled and the influx of visitors from Saudi Arabia diminished. Stores and banks were forced to close temporarily, and the turmoil put downward pressure on retail rents as footfall tumbled, leading some mall operators to renegotiate leases.

The outlook for retail brightened in 2012, aided by an uptick in tourism and fledgling economic recovery. More than 276,000 Saudi tourists visited Bahrain during the Eid al-Adha holiday, in a sign of returning stability. GDP grew 0.7 per cent in the third quarter, according to Bahrain’s state news agency BNA, up from a 1.3 per cent decline in the previous quarter.

Shopping centres have also reported renewed growth. The UAE’s Majid Al-Futtaim, operator of Bahrain City Centre, the kingdom’s largest mall, said tenant sales rose 23 per cent in the first half year-on-year. Foreign retailers are also seeking to expand in the market. UK grocery chain Waitrose launched its second Bahrain store in March, while UAE electronics trader Sharaf DG opened its second outlet in October and unveiled plans for a further two.

This recovery, however, has exposed fresh weaknesses in the retail sector. As large, newer malls thrive, Bahrain’s smaller, regional malls have seen rents slide and vacancy rates spike. In early 2012, property consultancy CBRE warned the 150,000-square-metre City Centre mall was ‘cannibalising’ its smaller rivals, prompting up to 75 per cent declines in retail rents.

This trend could see Bahrain develop a two-tier retail property market, where older malls attract lower-profile tenants at cheaper rates, a shift likely to be exacerbated by continued mall building. The kingdom has $730m-worth of retail projects planned, being commissioned or under way, according to regional projects tracker MEED Projects, including the proposed $80m Chinese-themed Dragon City, announced in May.