Bahrain's construction industry is returning to growth as it tackles a shortage of affordable housing, which is a pressing priority for the Kingdom and a key driver for the sector. The Kingdom's construction industry is expected to grow by a compound annual growth rate (CAGR) of 7.76% between 2011 and 2015, picking up strongly from a difficult year in 2009 and a gradual recovery in 2010, according to ICD Research, a UK-based business intelligence firm.
ICD estimates an industry CAGR of 4.21% between 2006 and 2010, an average brought down by a sharp contraction in 2009. Construction was one of the most dynamic sectors of the economy in the middle years of the decade, having seen substantial government and international investment in infrastructure and property. The global economic crisis hit hard, however, with liquidity tightening and a speculative element that had contributed to past growth evaporating.
Now the sector is resurgent, as the country is making large investments in infrastructure and affordable housing to meet growing demand. Affordable housing projects worth $7bn are planned for the Kingdom, according to international press reports, including government schemes, public-private partnerships (PPP) and private sector initiatives.
While Bahrain's supply of top-end residential space has increased considerably over recent years, provision of low-cost units has not kept pace with demand. With the population growing by 2% a year, according to the World Bank's World Development Indicators, the existing stock is being put under pressure. There are currently more than 50,000 applications pending for social housing, Mike Williams, the senior director of real estate firm CB Richard Ellis (CBRE) in Bahrain, told OBG.
That situation is changing, however, and lower-cost housing is now a major focus both of public policy and of private sector activity. Earlier this year, the government announced plans to invest BD2.5bn ($6.7bn) in 50,000 new affordable homes, while in March the GCC agreed to a $10bn fund for development in Bahrain, including in new social housing projects.
In recent months, the government and local developer Naseej have reaffirmed their commitment to the country's first ever PPP in social housing. Naseej's chairman, Khalid Abdulla Janahi, has described delivering affordable housing as "arguably the most pressing socio-economic issue on the national, as well as the regional, agenda".
The first phase of the project would see 3500 social housing units and a further 1500 affordable homes "for a slightly higher income bracket" in three sites, according to the pre-bid project status. Naseej would be awarded the land free as part of the contract.
If the first phase proves successful, two additional phases, consisting of 8000 and 10,000 units, respectively, are likely to be implemented. In September, housing ministry officials urged developers and international investors to push ahead with construction in Bahrain to increase residential supply, including in the Northern Town development, which is an important component in the government's affordable housing drive.
The authorities are aware that the private sector has shown increasing interest in the affordable segment. For example, in April 2011, the developers behind Diyar Al Muharraq announced that they would be spending a further $500m to expand the affordable component of the $3.2bn mixed-used development, while local firm Manara Developments has shifted focus to low- and middle-income projects and aims to deliver around 4000 affordable units by 2015.
Challenges certainly remain, however. With construction costs relatively high, Williams estimates that even the least expensive villas will cost around BD75,000 ($199,500) to BD80,000 ($212,800), making them still out of reach for some Bahrainis. Another issue is a lack of land. While there is still a large bank of undeveloped land, many of the better and more suitable plots have already been purchased and owners are reluctant to develop them at current prices.
"There are large plots of land that are currently locked because the owners cannot make a profit on them. This is due to the prices they originally paid and what the market rates are currently," Williams told OBG. "So the landowners will just sit on them".
Over the longer term, Williams sees more development outside Manama, particularly when upgrades to the transport infrastructure are made and planning is enhanced. He also said he would like to see more mixed-use development projects to create sustainable communities. Affordable housing looks set to play a role in both trends.
Indeed, the government has given notice that it will not hold back in its drive to deliver the affordable homes that Bahrain needs. With other segments, including middle/high-end residential and offices, saturated for the time being, private developers are turning their eyes to where current demand is strongest.
© Oxford Business Group 2011
