Apr 21 2013
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Bahrain real estate sector continues to wait for upward stimulus
- The commercial office and retail sectors have seen little movement in occupancy or rate as the Kingdom waits for political tensions to ease.
- The supply pipeline of premium office space in prime locations continues to slow.
- Office space requirements continue to be focused on smaller spaces with low rental rates, parking and access remaining the key issues.
- Land prices, particularly for residential plots have started to edge up again in a number of locations across the Kingdom.
The ongoing political stalemate which is still evident in the Kingdom is making it difficult for the economy to move to the next phase of recovery from the global and regional economic downturn.
Whilst it is clear that the real estate sector has 'bottomed out' in terms of rental rates and sale prices, it is also clear that huge pent-up demand is waiting to cash in on the Bahrain upturn - when it happens.
It is unclear when this will take place, but talks between the various opposing parties in Bahrain's political landscape are key to this topic and there is little indication that agreement or even meaningful discussions will take place in the short term.
In the meantime, the ratings agencies Standard & Poor's and Fitch remain reasonably sanguine about Bahrain, both currently allocating BBB 'Stable' sovereign ratings. The Kingdom has also received firm political and financial support from its GCC neighbours including the provision of a $10 billion 'Marshall Plan' financing initiative.
The Government of Bahrain has started using this money to address a wide variety of infrastructure issues including roads, schools, hospitals, social and affordable housing and it is rumoured, possibly some of the stalled real estate projects.
Even with the financial resources available, meeting the needs of the enormous waiting list that Bahrain currently has for government housing would appear to be insurmountable in the short term.
The government had set a five year deadline to clear the waiting list but has recently admitted that this is unlikely to be achieved. It is now unclear as to precisely what will be achieved during this timeframe, but significant resources have been committed to this initiative and the Kingdom hopes to see its efforts bear at least some fruit over the next few years.
When combining the government's own expenditure with the financial package offered by its supportive GCC neighbours, GDP forecasts for Bahrain in 2013 indicate growth of around 4% according to the Central Bank of Bahrain.
The total value of real estate transactions in Bahrain grew by 46% in 2012 compared to 2011. The biggest increase came from Bahrainis and non-GCC expatriates although the increase by expatriates was more down to the delayed registration of purchases they had made in previous years than new purchases.
The office market in Bahrain continues to remain stable. Few movements have taken place in or out of the market and consolidation activities have virtually ceased. Rental rates are sitting at their effective bottom rate and those waiting for further falls are likely to be disappointed. Landlords have now reached their lowest rental rates and will not go any further than the point that they have already reached, even if this means their buildings will remain empty in the short term.
When the market starts to turn it is likely to experience a period of 'soft growth' as some slack in the system is taken up, but once we get through this, the lack of development over the last couple of years will mean that those entering the market looking for new space are going to be frustrated by lack of supply. The result at this point is likely to be sharp rental rate growth, but for now, this remains some way off.
In the investment sector, the last few years have been characterised by a significant mismatch between the expectations of buyers and sellers. Buyers have been seeking quality commercial properties yielding between 10% and 12%, in the hope of picking up 'distressed' assets in this category. Sadly, none of the potential commercial property sellers in the market have been distressed enough to find this an attractive proposition and sales have simply failed to materialise. Sellers have generally considered 7% to 8% to be an acceptable yield which means that buyers and sellers have been at least 20% apart in their valuations.
Nevertheless, we are starting to see the emergence of buyers who are more realistic in their expectations as the sheer pressure of liquidity has forced them to adopt a more realistic outlook. We now have a small number of buyers seeking quality assets at 8% and negotiations are in progress. It seems that those seeking 10% yields or more will be forever disappointed.
A number of press reports indicated significant increases in occupancy rates for hotels in the Kingdom compared to 2012. For January 2013, STR Global reported that occupancy in Manama had risen by 40% compared to January 2012, the highest rate of increase in the Middle East and Africa region. Unfortunately, this increase was on the back of exceptionally low rates in 2012, and occupancy was still only 56.6% in January, a rate well below Bahrain's regional neighbours.
Nevertheless, this does indicate an encouraging trend in the hospitality sector's core markets which have historically been midweek business guests and weekend stays by Saudi and Kuwaiti leisure visitors.
The main retail destination, Seef District, has for many years exhibited success and failure simultaneously and was widely considered to be over-malled until the introduction of City Centre, which simply cannibalised the existing market.
Due largely to the social unrest that took place in Bahrain during 2011, footfall levels across all the major malls in Bahrain fell significantly, worsening the plight of some of the already underperforming malls. However, levels of visitation have continued to pick up through 2012 and the first quarter of 2013.
City Centre continues to dominate the market due largely to its scale which marks its status as Bahrain's premier 'destination mall', at least double the size of its nearest competitor, Seef Mall .
However, Seef Mall has made huge strides in recovering from the shock of City Centre's market entry by repositioning itself to meet the needs of its core market - families. The mall has worked hard to create a child-friendly environment with the result that occupancy and rental rates have both strengthened significantly from a fairly weak position in 2011.
The residential leasing sector in most areas has now stabilised in terms of their occupancy and rate. The main expatriate areas of Amwaj Islands, Saar, Hamala and central Manama have shown little movement in the first quarter although there has been some pick-up on Reef Island as relatively new properties in this location are proving very popular with the rental market due to its excellent location on the waterfront and its proximity to the Kingdom's major employment districts, retail malls and five star hotels. Effectively, with the exception of a few selected projects, residential rental rates have hit their lowest point and have been stable at these levels for several consecutive quarters. Anyone wishing to upgrade, relocate or pick up a bargain would be best advised to start this process in the very short term because it seems unlikely that there will be any further downward movement in the market.
Reef Island has proved particularly appealing to new residents to Bahrain and many of the residents of Amwaj who enjoy the lifestyle and waterfront setting of Amwaj, but are frustrated by the relative remoteness of the islands from the main commercial districts, malls and employment. We have seen reasonably significant movement from Amwaj to new properties on Reef Island in the past 6 months.
Durrat Al Bahrain continues to act as a very popular second home (weekend) destination, while the strongest project in terms of sales rates continues to be Riffa Views where mortgage lenders are reporting another 10% growth in sales prices over the past six months. Riffa Views unit prices have now risen by around 20% compared to 2011 and this has been driven largely by Bahraini families attracted to the relative peace and tranquillity of the location and the private roads within the project which make it a safe environment for families. However, it is interesting to note that most sales transactions have been for the smaller 3 and 4 bedroom units with very little demand for the substantially larger 5 bed and larger units. This would appear to indicate that transactions are very much focused on actual owner-occupiers rather than investor/speculators.
For Bahrainis, the preferred method of securing housing is to build out their own plots. Government assistance is offered in a number of ways to achieve this but we have noticed residential land plot prices creeping slowly upwards again across the Kingdom. This has been noticed in a range of areas including premium locations such as Amwaj Islands, but also lesser areas such as Juffair and Hidd. The same trend has not been continued in the main commercial areas, again indicating a return to the real estate market by individuals, smaller investors and those seeking to actually build their own homes rather than the big corporate and institutional players who have had their fingers badly burnt by their over-exuberant behaviour between 2006 and 2008.
Many of the Kingdom's funds and financial institutions were drawn into the land speculation or development game in Bahrain at that time, largely driven by high levels of liquidity and encouraged by valuations prepared by local real estate agents based on speculative trading prices rather than development value. Many of the plots bought in the main commercial districts were simply undevelopable at the prices they were bought for, but local agents, who were actually themselves in the land trading business, supported this frenzy of activity by providing ever higher 'valuations' to seemingly desperate institutional buyers.
There are moves to prevent this from happening again through the introduction of legislation to ensure that large scale valuations of commercial land bought by players in the financial sector are based on RICS 'Red Book' standards or their equivalent. This approach would effectively base land values on the actual development potential of plots based on zoning and the current and future demand and rental rate environment rather than the apparent 'pyramid selling scheme' approach employed in recent years. Anecdotally, we understand that land formerly traded in Seef District at around BD280 per square foot now remains unsold at prices of around BD100 per square foot, with fairly devastating consequences for leveraged funds and institutions that are servicing debts on non-performing assets.
The implications for returning land price speculation in the residential sector are serious for the Bahraini residential sector. The government continues to struggle with the needs of the low to middle income population whose ambitions to one day buy their own plot and build on it are diminishing by the day. Developers' attempts to satisfy this group continue to be largely thwarted by the growth in land prices and the situation may ultimately only be resolved by Government intervention.
Global Research and Consulting
This report was prepared by the CBRE EMEA Research Team which forms part of CBRE Global Research and Consulting - a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.
CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.
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CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world's largest commercial real estate services firm (in terms of 2011 revenue). The Company has approximately 34,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
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Head of Research & Consultancy
Middle East Research
CBRE Bahrain WLL
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Kingdom of Bahrain
t: +973 1655 6602
+971 4 390 1630
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© Press Release 2013
© Copyright Zawya. All Rights Reserved.
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