Bahrain’s construction sector is used to being overshadowed by the volume of development in the UAE. But the kingdom’s bid to expand its residential and tourism sectors has driven its own real estate boom in recent years.

Developments such as Bahrain Bay, Diyar al-Muharraq, Bahrain Financial Harbour and Durrat al-Bahrain are just some of the projects under way in the kingdom.

But Bahrain, like all Gulf states, is not immune to the systemic problems in the global real estate market, and has specific difficulties of its own. As an island state, the kingdom faces a severe shortage of land for development, with about 90 per cent of its residential and tourism projects being built on reclaimed land.

Between 1981, when Bahrain started to record land reclamation statistics, and 2007, the island increased in size by 11.4 per cent, from 665 square kilometres to 741 sq km.

Launched in June 2008, the 12 sq km Diyar al-Muharraq is a mixed-use city that will add 40km of coastline to Bahrain when completed. The project has an estimated investment value of $3.2bn and Islamic bank Kuwait Finance House (KFH) is its major investor. The number of planned properties stands at 30,000 and the project aims to accommodate more than 100,000 residents.

Affordable housing

The development not only addresses Bahrain’s land shortage, but also another shortage: affordable homes. Al-Muharraq is unlike most private developments in Bahrain as the plots are being sold in different sizes to ensure there will be small, medium and large properties priced to accommodate all income groups. Affordable housing will account for 20-25 per cent of the available accommodation.

“Most developers go for high-end property development because that is how they can make the most money,” says Aaref Hejres, chief executive officer of developer Diyar al-Muharraq Company. “This is a socially driven project for the people of Bahrain - that was the vision.”

Developments such as Diyar al-Muharraq cannot be completed quickly enough for the Bahraini authorities. In April 2008, the Bahrain Centre for Human Rights sent a report to the UN’s Office of the High Commissioner for Human Rights claiming the kingdom was facing a housing crisis.

According to government figures, up to 40,000 families are registered with the Works & Housing Ministry for low-cost housing loans or state accommodation. But some observers claim the number of people in need is closer to 55,000.

“There has been no catering for low and mid-income groups,” says David Anthony, general manager of the local Nass Contracting, which carried out construction works valued at $25.7m on phase one of the Durrat al-Bahrain project, which started in 2004.

Modelled on the world-renowned Palm islands project in Dubai, the $1.2bn residential project will comprise 13 man-made islands, covering an area of 20 sq km, when it is completed in 2014.

Yet while developers recognise the need for more affordable housing, there is little incentive for them to meet the demand. “The prices paid by developers for the land are still too high, which limits the type of development to high-end luxury residential and commercial,” says one Bahrain-based property consultant.

But with the global financial turmoil engulfing the region, many industry insiders are concerned that this will only exacerbate the oversupply of high-end properties in the market as developments with low-cost accommodation will struggle to find funding.

Although the Bahraini property market has suffered little from the effects of the global credit crunch to date, Anthony concedes that clients are beginning to review their spending plans. “We have met several clients that are thinking about suspending or stopping projects,” he says.

Indeed, with the project finance market drying up across the Gulf, it is only a matter of time before Bahrain’s real estate market feels the impact. “Our order books are certainly healthy for 2009 and most of 2010, which meant that only a few months ago, we were pushing work away,” says Anthony. “But now we are starting to question the jobs we thought we had, and we are fearing the worst as contractors.”

With lower demand for high-end real estate, and a shortage of finance to fund new, more affordable housing, Bahrain’s contractors are right to fear for the short-term future of the state’s construction and real estate sector.