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Jul 20 2011

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30% Drop

Like the rest of the economy, Bahrain real estate sector has suffered on account of the country's political and social unrest. With the economy expected to grow at a snail's pace - indeed some analysts expect Bahrain's GDP to contract this year - growth in most sectors will be hard to find. As the country's political dialogue in limbo, the economy appears to be in a depressed state
Bahrain's rent has seen a 30% drop in certain areas due to the unrest in the country. The tiny Kingdom had come to a standstill earlier this year after Shia protestors clashed with Bahraini and GCC forces, which led to the deaths and imprisonment of many protestors. A state of emergency was imposed immediately in the country and lifted in June, but by that time the damage to the economy was clear.

With many of the protestors and opposing leaders in jail, dissension has been subdued and the streets of Manama bear an uneasy calm.

"The recent unrest greatly affected the residential market across Bahrain. There has been a shift in demand in the leasehold market, which has caused rent reductions of up to 30% in certain areas forcing landlord to offer incentives to tenants in a bid to maintain occupancy levels," notes Cluttons in a recent report. "In the short term it seems as though the market will remain tenant friendly as rents look set to stabilize at current rates."

But Bahrain has also proved to be a far resilient that it was given credit for. Observers were dreading that the political instability in the Kingdom would compel many of the 430 financial institutions that have set up shop in Bahrain to leave for the safer shores of Dubai and Doha.

But local reports record that four financial institutions have left Bahrain in 2011, although it seems two of these had long-planned a move away and the other two were merely functions from within banks (that are still in Bahrain), that have moved to Singapore, notes real estate consultant CB Richard Ellis.

"Despite the best efforts of Dubai and Qatar to attract the banking sector from Bahrain when the recent political turmoil took hold, the industry has proved that it is not merely driven by the availability of new, quality office space," notes CB. "The fundamentals borne of more than 430 financial institutions, strong track record, well regarded regulatory environment and the presence of the largest market in the Middle East just across the causeway (Saudi Arabia) remain key."

Still, it is still early days, and the Bahraini Government has not resolved its issues with the opposition - merely suppressed it.

Bahrain's main Shiite party, the Islamic National Accord Association (Wefaq) continue to demand that the government be led by a parliamentary majority. The latest round of talks between the main political parties have also broken down as Wefaq pulled out from dialogue.

Khalil al-Marzooq, who led the bloc's delegation to the talks, told AFP that Al-Wefaq had decided to pull out. "We have tried but without success to make it a serious dialogue," he said.

Investors are bound to worry about lack of progress on the political front, as no dialogue means the situation could flare up any moment, similar to the meltdown witnessed in March.

In May, Moody's downgraded Bahrain to from the prestigious A3 to Baa1 with a negative outlook.

"Political tensions in the country remain high and there seems little prospect of the underlying causes of the unrest being peaceably resolved, at least over the short term. The political outlook is therefore highly uncertain," said Moody's as it downgraded the country's sovereign rating much to the dismay of the Bahraini authorities."

While the Central Bank of Bahrain expects GDP growth of 3% in Bahrain, Bank of America Merrill Lynch expects the economy to contract 2.2%.

Bahrain's oil exports in the first quarter rose 22% on the back of high oil prices, rising $3.36-billion, but other sectors have fared poorly. Moody's believes that these events are likely to have damaged economic growth significantly, especially in services sectors such as tourism, trade and financial services.

"These sectors had previously been championed by the government in its effort to diversify the economy away from oil. The timing and pace of any economic recovery will very much depend on political developments," said Moody's. "In any case, the negative effect on consumer and investor confidence will likely linger."

Bahrain also approved a $16-billion expansionary budget for 2011-2012.
"The budget is a total package that takes into consideration income and spending, and the government currently is spending more than what it has and there is a huge budget deficit that we should consider lowering not increasing," said Shaikh Ahmad Bin Mohammad Al Khalifa, the Finance Minister.

Read the budget story: Bahrain to spend more than $16b in next two years

The budget forecasts show a deficit for both years for the Kingdom as it hopes to stimulate the economy. Moody's is concerned that the rise in the break-even oil price for the budget, which it estimates exceeded $100 per barrel in 2010 [the break-even oil price is the average annual oil export price necessary to balance the budget, all other things being equal].

Despite historically high levels of oil prices, the government has posted wide deficits during the past two years. The subdued economic growth since the crisis unfolded is already having an impact on real estate.

"This naturally translates into a reduction in demand for office space, and the requests for new space are once again typically for smaller units of 100 to 150 square metres or for serviced offices," notes CB Richard Ellis. "Some businesses that find themselves struggling as a result of the global and local economic environment are rationalising their requirements, cutting staff and making cost savings by moving into less expensive, less prestigious accommodation."

Unfortunately, the general sluggishness in demand is being met by a significant increase in quality office supply, with absorption of new space likely to be a problem for at least a couple of years. Consequently, there is likely to be some repositioning in the market, some clearance of bottom-end properties ripe for redevelopment and refurbishment programmes, says CB Richard Ellis.

Residential Rents

Cluttons reports that after dropping 30%, rents appeared to have found a bottom over the past few months and especially as the state of emergency was lifted. Places like Amwaj have benefited from their improved security and good quality.

In other areas, tenants have taken advantage of the reduced rents to upgrade or moved to newer villas, especially as maintenance remains an issue with landlords.

However, expatriates are putting purchases on hold until the political situation is clearer. "In contrast more Bahrainis are looking to purchase units to live in, thus benefiting from the lifestyle and security on offer. Sales rates remain consistent at BD 800 per square metre for bigger units and BD 1,000 per square metre for smaller ones," says Cluttons analysts.

Retail rents have also suffered as the citizens are hardly in a mood to spend.
According to some estimates, the cancellation of the Bahrain leg of Formula One cost the Kingdom's economy $700-million, and no doubt some of that would have been spent on shopping in the country's many shopping malls.

Seef Properties recently helped outs its Seef Mall tenants by offering one month free rent as a goodwill gesture. Such a gesture may help the landlords in future as new supply comes online and retail real estate turns into a 'tenant's market'.

"With approximately 450,000 square metres of additional retail space planned to come on line by 2015, the Bahrain retail market looks set to suffer from a continued supply / demand imbalance in the short to medium term," notes Cluttons.

While supply in office space, retail and high end residential estate remains sufficient, affordable housing for Bahrainis remains an issue.

In the throes of the protests, Bahrain had committed $6.6-billion to affordable housing, while King Hamad bin Isa Al-Khalifa disbursed $2,660 to each of Bahrain's 136,000 households.

A $10-billion aid from Gulf states as part of the Gulf Development Programme could also jump start sectors such as construction, retail and services.

However, beyond the announcements not much has been revealed how and where the money will be spent and how the authorities intend to plan the housing programmes for Bahrainis.

It is clear that the initiative lies with the government - whether it is initiating a more concerted dialogue with the opposition or to revive the economy.

Conclusion

The real estate sector is a good gauge of the overall health of the economy, and that gauge is showing that growth is going to be anaemic as Bahrain picks up the pieces after the political fallout. But while lower rents also suggest lower cost of living, in Bahrain it is also a sign of economic turbulence and lacklustre demand.