26 March 2009
Bahrain's real estate sector has been a key contributor to the country's GDP over the past five years. Hovering consistently between 9% and 10% of total GDP, the sector has taken an inherent role in the country's continuing drive to develop income from non-hydrocarbon sectors.
In a recent report by Global Investment House (GIH), a Kuwait-based investment company, the sector's performance was put down to various factors. Oil wealth, an established financial industry and accommodating regulations - such as comprehensive foreign-ownership laws on property - have made the country the place of choice for both locals and foreigners chasing job opportunities and a convenient lifestyle.
As a result, increasing demand for high-end units continuously outstripped supply and prices increased dramatically around the Kingdom until the end of the third quarter of 2008.
Manama, the country's capital and centre of business activity, has seen price increases rise at exponential rates over the past four years. Residential areas such as Seef and Sanabis, highly popular due to their proximity to key financial institutions and retail developments, saw prices rise by 120% compared to 2005, according to figures published by Tameer, a Dubai-based real estate developer, in November last year.
However, as GIH reports, the fourth quarter of 2008 marked the start of a drop in prices - largely attributed to the global credit crunch, which has eroded market sentiment towards property investment. By the end of 2008, the Al Mazaya Real Estate Index - a regional index that monitors property movement in the Gulf Cooperation Council - showed drops of up to 20% in various high-end residential projects.
In a statement to local media in late January this year, the minister of finance, Sheikh Ahmed bin Mohammed Al Khalifa, declared that "Bahrain's real estate projects have been more concentrated on end-users and it appears that the practice of flipping residential properties for short-term speculative gain is not as widespread in Bahrain as in other markets."
Furthermore, the Central Bank of Bahrain is widely acclaimed for preventing overexposure of the real estate sector to excessive loans. Currently, banks are limited to lending a maximum of 30% of the value of the total loan portfolio to the real estate sector. As the country's banks are reporting on their 2008 figures no major problems have arisen as a result of losses in real estate transactions.
The cautious approach of both the Central Bank and the developers has prevented existing high-end developments to be caught off guard by the downturn, thus allowing those projects that are under way to continue at a steady pace.
One example of this is Bahrain Bay, a $2.5bn high-end, mixed-use project under development in Northern Manama, which earlier this month reported to local media that it had secured 16 international developers. With about 70% of available land space contracted, the project is said to be on a steady course to completion.
Another example is Durrat Al Bahrain, a $6bn island-based residential development in the southwest of the Kingdom, which saw its first residents moving into their new homes at the end of January. The remainder of the project's first phase, consisting of high-end villas, will be completed at gradual stages throughout the year.
Despite these positive signs, the tightening of liquidity on the global level does push real estate developers to proceed with caution in an attempt to secure project financing. It is argued that investors are likely to remain close to home as a general reluctance to invest overseas has grown in the market.
In the medium run, meeting the demands of the local market is likely to broaden investors' perspectives towards low- and middle-income housing. According to the GIH report, prices of these residential units remained largely unchanged as a result of continued demand.
According to figures published by the Ministry of Public Housing in October 2008, up to 55,000 families had applied for either low-cost housing loans or state-provided accommodation; a figure that was expected to rise as a result of incoming expatriate labour. The ministry also projected a 34% increase in Bahrain's population to 1.4m by 2025, which will drive local demand for housing even further.
Overall, Bahrain is well positioned to come out of the current volatile market conditions strongly, possibly even capitalising on its steady track record. As Bob Vincent, the CEO of Bahrain Bay, told OBG, "Bahrain is a small economy, but a sustainable one. It seems that investors used to only pay attention to the fact that it was small, preferring the big investor markets in the region. What they were forgetting is the second part of the equation: the sustainability."
Bahrain has been a consistent performer over the past 40 years, neither showing the booms nor the busts seen by other economies in the region. At a time when investors are looking for safe bets, Bahrain's real estate sector might provide them with the right formula.
Bahrain's real estate sector has been a key contributor to the country's GDP over the past five years. Hovering consistently between 9% and 10% of total GDP, the sector has taken an inherent role in the country's continuing drive to develop income from non-hydrocarbon sectors.
In a recent report by Global Investment House (GIH), a Kuwait-based investment company, the sector's performance was put down to various factors. Oil wealth, an established financial industry and accommodating regulations - such as comprehensive foreign-ownership laws on property - have made the country the place of choice for both locals and foreigners chasing job opportunities and a convenient lifestyle.
As a result, increasing demand for high-end units continuously outstripped supply and prices increased dramatically around the Kingdom until the end of the third quarter of 2008.
Manama, the country's capital and centre of business activity, has seen price increases rise at exponential rates over the past four years. Residential areas such as Seef and Sanabis, highly popular due to their proximity to key financial institutions and retail developments, saw prices rise by 120% compared to 2005, according to figures published by Tameer, a Dubai-based real estate developer, in November last year.
However, as GIH reports, the fourth quarter of 2008 marked the start of a drop in prices - largely attributed to the global credit crunch, which has eroded market sentiment towards property investment. By the end of 2008, the Al Mazaya Real Estate Index - a regional index that monitors property movement in the Gulf Cooperation Council - showed drops of up to 20% in various high-end residential projects.
In a statement to local media in late January this year, the minister of finance, Sheikh Ahmed bin Mohammed Al Khalifa, declared that "Bahrain's real estate projects have been more concentrated on end-users and it appears that the practice of flipping residential properties for short-term speculative gain is not as widespread in Bahrain as in other markets."
Furthermore, the Central Bank of Bahrain is widely acclaimed for preventing overexposure of the real estate sector to excessive loans. Currently, banks are limited to lending a maximum of 30% of the value of the total loan portfolio to the real estate sector. As the country's banks are reporting on their 2008 figures no major problems have arisen as a result of losses in real estate transactions.
The cautious approach of both the Central Bank and the developers has prevented existing high-end developments to be caught off guard by the downturn, thus allowing those projects that are under way to continue at a steady pace.
One example of this is Bahrain Bay, a $2.5bn high-end, mixed-use project under development in Northern Manama, which earlier this month reported to local media that it had secured 16 international developers. With about 70% of available land space contracted, the project is said to be on a steady course to completion.
Another example is Durrat Al Bahrain, a $6bn island-based residential development in the southwest of the Kingdom, which saw its first residents moving into their new homes at the end of January. The remainder of the project's first phase, consisting of high-end villas, will be completed at gradual stages throughout the year.
Despite these positive signs, the tightening of liquidity on the global level does push real estate developers to proceed with caution in an attempt to secure project financing. It is argued that investors are likely to remain close to home as a general reluctance to invest overseas has grown in the market.
In the medium run, meeting the demands of the local market is likely to broaden investors' perspectives towards low- and middle-income housing. According to the GIH report, prices of these residential units remained largely unchanged as a result of continued demand.
According to figures published by the Ministry of Public Housing in October 2008, up to 55,000 families had applied for either low-cost housing loans or state-provided accommodation; a figure that was expected to rise as a result of incoming expatriate labour. The ministry also projected a 34% increase in Bahrain's population to 1.4m by 2025, which will drive local demand for housing even further.
Overall, Bahrain is well positioned to come out of the current volatile market conditions strongly, possibly even capitalising on its steady track record. As Bob Vincent, the CEO of Bahrain Bay, told OBG, "Bahrain is a small economy, but a sustainable one. It seems that investors used to only pay attention to the fact that it was small, preferring the big investor markets in the region. What they were forgetting is the second part of the equation: the sustainability."
Bahrain has been a consistent performer over the past 40 years, neither showing the booms nor the busts seen by other economies in the region. At a time when investors are looking for safe bets, Bahrain's real estate sector might provide them with the right formula.
© Oxford Business Group 2009
