Despite a challenging few years, the construction sector in Bahrain looks set to grow in 2012. In the private sector, demand has fallen off in some segments, such as high-end and mixed-use projects, but local construction and development companies have reoriented towards other areas of the market with more growth potential. Indeed, the government, which has been a major player in the sector for years, plans to make substantial investments in a variety of areas, including infrastructure and social housing, which will provide ongoing work for the country’s contractors.
A RETURN TO GROWTH: In the years preceding the global financial crisis, the construction sector grew rapidly, with its contribution to GDP rising steadily between 2004 and 2008, reaching 7.19%. During the same period, the value of retail loans for construction and real estate projects also continuously expanded, nearly doubling between 2007 and 2008. In 2009, as credit dried up and demand fell, construction activity slowed substantially. According to UK-based business intelligence firm ICD Research, the sector shrank by 24.4% in 2009, followed by a small recovery in 2010.
During 2011 construction activity slowed, with the social unrest in the early months of the year playing a role in this. In early 2012 market analysis firm Research and Markets (RAM) reported that the value of contracts awarded in 2011 declined to $788m from $972m the previous year. However, the research outfit has projected an improvement in the coming few years, with the value of contracts expected to grow from $949m in 2012 to $1.49bn in 2013.
Similarly, ICD Research has estimated that the sector will experience a compound average growth rate of 7.76% between 2011 and 2015, largely due to the government’s efforts to invest in infrastructure, which accounted for about 30% of the construction sector in 2010. Indeed, when asked to identify the major tenders coming up in 2012, Sameer Nass, the vice-chairman of Nass Group, a Bahrain-based contractor, said the company is looking forward to increased state spending in 2012, specifically in terms of road works. “The government should spend at a fast pace on infrastructure to compensate for the shortage of private developments,” he said.
PUBLIC WORKS: The Ministry of Works (MoW) is the construction arm of the government, responsible for the majority of the public works sector and capital asset formation. It has three broad areas of activity: construction, roads and sanitary engineering. The projects undertaken by the MoW include large and complex developments, such as ports, airports, hospitals, bridges and complex interchanges, which can take several years to complete. In addition, it is responsible for a number of smaller projects, such as schools, local access roads and road safety works. For 2012 the MoW has a budget of about BD160m ($422.43m) for building roads, plus an additional BD60m ($158.41m) for sanitary projects.
To tender for a project offered by the MoW, a contractor must be pre-qualified to bid. For large tenders, foreign contractors are invited to submit bids, although they often work in partnership with a local company, according to officials at the MoW. In 2011 the ministry awarded 81 tenders in total, valued at BD112.3m ($296.5m).
Roads accounted for the largest portion of this activity, with 22 tenders worth a total of BD56m ($147.9m) awarded in 2011. As of December 2011, an additional 104 contracts estimated at BD110.4m ($291.74m) were in the tendering process.
ROAD IMPROVEMENTS: Major ongoing road works include the North Manama Causeway, the Mina Salman Interchange and the widening of the King Faisal Highway from six to 10 lanes. The North Manama Causeway, with a contract cost of BD98m ($258.49m), was awarded in 2010 to Six Construct, a Belgian construction company, and Bahrain-based Haji Hassan Group. Work on the causeway, which will link Bahrain Financial Harbour and Bahrain Bay with the Al Fateh Highway, started in July 2010 and is due to be completed by mid-2013. Meanwhile, an Indian firm, Afcons Infrastructure, won the bid to build the Mina Salman Interchange, which will improve traffic flow between the King Fahd Causeway entry point to Bahrain and Khalifa Bin Salman Port. The project, awarded in August 2011, will take 28 months to complete and has been valued at BD25m ($66.01m).
LINKING UP: The widening of King Faisal Highway involves the construction of a new road parallel to the existing motorway, which will provide four lanes to carry traffic from west to east. The project is being carried out by Ahmed Mansour Al A’ali, a Bahrain-based contractor. Major road projects completed in 2011 included the BD50m ($132.01m) Isa Town Interchange. The contract was originally awarded to Sungwon Corporation, a Korean firm, but the Nass Group took over the project in early 2010. The interchange, which was completed in May 2011, handles about 6000 cars per hour at peak times and has eased traffic congestion at the intersection.
Looking ahead, one important development on the horizon is the Qatar-Bahrain Causeway, a 40-km link between the two countries. Initially it was designed for automobiles only, but plans have since been expanded to include a rail link as part of the much larger $25bn pan-GCC railway project. As of early 2012, the cost of building the automobile portion of the causeway had been forecast at $3bn; estimates for the cost of the railway element have yet to be prepared. While the project has been delayed a number of times since it was first introduced in 2008, it is expected to move forward, as Qatar is obligated to complete 40% of the infrastructure for the causeway by 2016 as part of its agreement to host the 2022 World Cup. Once construction commences, American engineering firm KBR will be the project manager, while VINCI, a French construction company, has been awarded the contract to design and build.
MOVING PEOPLE: To date the government has focused on expanding the road system, but there is increasing interest in developing a mass transit system. In delivering an address to a conference in January 2012 in Manama, Essam bin Abdulla Khalaf, the minister of works, pointed out that car ownership in Bahrain is growing quickly. As of December 2011, there were 478,193 cars, compared to 250,978 in 2002. Additionally, while each household on average owns two cars, the level of public transport usage is low, accounting for 5% of total journeys per day. The government has targeted increasing this figure to 25% by 2030, he said.
The government has accordingly drafted a strategy for reaching this goal, the core of which is a public transport master plan comprising four types of transit – light rail, monorail, tramway and buses – which will be implemented in phases by 2030. As of early 2012, the first phase of a study for this project had been completed and the ministry was in the process of soliciting bids for a consultant to supervise the development. Nine companies are already pre-qualified, and the government plans to carry out the development of a mass-transit system in partnership with the public sector.
HOUSING: The Ministry of Housing (MoH) oversees the government’s efforts to provide homes to its citizens who could not otherwise afford them. According to the state’s social housing scheme, any Bahraini family with a household income of less than BD1200 ($3168) per month qualifies for a subsidised home. Those who receive a home as part of this programme are required to make monthly payments of up to 25% of their household income, and at the end of 25 years, they take title to the home. This scheme has proved to be immensely popular, and the MoH has not been able to keep up with demand. As of 2011, there were officially 54,420 families on a waiting list, which grows by several thousand names every year (see analysis).
Up to now, the MoH has supplied homes through a design-and-build model, with tenders exclusively awarded to Bahraini contractors in an effort to boost employment in the local construction sector. The ministry uses both local and international contractors, as well as consultancy firms to prepare feasibility, environmental and engineering studies of the allocated project areas to ensure their suitability for the housing market. According to Basem bin Yacob Alhamer, the minister of housing, the ministry has been able to supply about 1313 homes per year. However, he told OBG that the MoH has targeted building 8000 units per year starting in 2012.
SOCIAL HOUSING: The social housing segment of the market represents a significant – and growing – opportunity for the country’s contractors. According to the Economic Development Board (EDB), which oversees the Kingdom’s long-term economic development plan, an additional 51,519 households will qualify for social housing by 2020, due to population growth. In terms of the value of this market, the EDB has estimated that the average cost to the government of building a home is BD43,000 ($113,529). In addition to expanding its own capacity for supplying social housing, the government has also turned to the private sector to complement its efforts, signing a public-private partnership (PPP) with local developer Naseej in 2012 (see analysis). According to this agreement, Naseej will sell 3110 social housing units to the state over a period of five years. In addition, it will build 990 affordable housing units, including both apartments and villas, which will be sold on the open market. Construction will be carried out by Chase Manara, a Bahraini joint venture company between Chase Perdana of Malaysia and Ithmaar Bank, a local financial institution. The project is also likely to create demand for domestic sub-contractors and building materials that are produced locally, such as ready-mix concrete.
Reaction to the Naseej PPP among the local real estate and construction sector has generally been one of cautious optimism. Nass told OBG that he has a “wait-and-see” attitude, saying that it is unclear how the project will be managed and how consumers will respond to the product. Indeed, one long-standing issue in the affordable housing segment has been that Bahrainis tend to “buy for life”, so they are sometimes hesitant to buy apartments, or even small villas.
According to Hasan Al Bastaki, the managing director of Manara Developments, the government should educate Bahrainis about the benefits of living in apartments and villas, such as the fact that extra amenities, including sports facilities and park areas, can be included in a housing complex.
According to the minister of housing, Alhamer, the state is aware of the challenge involved in convincing Bahrainis to move into apartments and has accordingly taken steps to make them more attractive. He said the ministry is trying to design social housing apartments so that they are larger and more acceptable to Bahrainis.
LARGE-SCALE PROJECTS: During the Kingdom’s growth period, a number of high-end residential and mixed-use developments were planned and started. While work on some of these projects has slowed over time, they continue to offer opportunities for foreign and local contractors. For example, in September 2010 the Nass Group completed construction on Arcapita Bank’s new headquarters at Bahrain Bay, a $2.5bn mixed-use waterfront development. The owners of Bahrain Bay also announced in late 2011 that they had chosen Six Construct, a Belgium firm, as the main contractor for the new Four Seasons Hotel, from among a list of 21 international, regional and local companies that had bid for the project. Construction began in November 2011 and is expected to be completed by April 2014. A number of local sub-contractors and suppliers are expected to be involved in the development process.
HEALTH CARE ISLAND: Another project currently under way is the Dilmunia at Bahrain development, known locally as “health care island”. The $1.6bn project is being developed by Ithmaar Development Company (IDC), a subsidiary of Ithmaar Bank. In June 2011 IDC announced it had completed the first phase of the Dilmunia project, including reclamation work, masterplanning and infrastructure design. The firm launched tenders for the initial infrastructure phase in mid-February 2012, with this covering work related to highways, bridges, power and water, sewage and drainage, telecoms networks and landscaping.
Meanwhile, at Diyar Al Muharraq, a $3.2bn mixeduse development that was launched in 2008, the reclamation work continues, with the first two stages 87% complete. The dredging work is being headed up by an American firm, Great Lakes, while the Nass Group is responsible for dredging, reclamation and shore protection works. Aaref Hejres, the CEO of Diyar Al Muharraq, said the company plans to offer 10 tenders in 2012 as part of the project’s ongoing development.
One major expansion plan that had been on hold until recently is Villamar, an integrated residential and commercial complex located at Bahrain Financial Harbour, a large waterfront mixed-use development. In January 2012 the owners of Villamar, Gulf Holding Company, announced they had signed a memorandum of understanding with UAE-based Al Hamad Construction and Development Company to continue work on the project. At the time of the announcement, the owners said that work was expected to take approximately 18 months. As part of the new agreement, Al Hamad will finish work on Villamar in return for part ownership of the project.
MATERIALS: Around 90% of the cement used in Bahraini construction projects comes from Saudi Arabia, where demand for the construction material increased significantly during the first half of 2011. According to Kuwaiti financial firm Global Investment House (GIH), during the first quarter of 2011, year-on-year (y-o-y) cement demand in Saudi Arabia grew by 7.6% in the first quarter, followed by 12.7% y-o-y growth during the second quarter. As a result, Saudi prices increased by 8.2% in the first half of the year, to $62.5 per tonne, the highest price since the first half of 2009. Pricing in the Bahraini market accordingly went up, with trade journal Construction Week reporting in May 2011 that contractors were paying $74 per tonne, jeopardising the viability of certain projects.
Aware of these rising prices, the government has taken steps to increase supply coming into the market. The state’s efforts include a proposal to develop a building materials terminal at the Mina Salman Port, the country’s former container and general cargo terminal. At present, all cement that comes from Saudi Arabia enters Bahrain by small vessels or barges. In theory, developing the new terminal, which enjoys a deeper draught of 10 metres, would allow Panamax-sized vessels to deliver bulk cement from further afield, perhaps from countries that can supply cement at lower prices than Saudi Arabia. However, Nass told OBG that the volume of cement demanded in Bahrain is too small for this project to make sense, and at the time of writing, it was reported that the plans had been suspended.
LOCAL PRODUCTION: While finding new sources of imports is one solution, local cement manufacturers could also increase production. At present, there are two cement manufacturers in Bahrain, Star Cement and Falcon. Capacity at the former is about 1200 tonnes per day, while capacity at the latter stands at 1000 tonnes per day. However, Hesham Al Rayes, the CEO of Falcon, announced in June 2011 that the company was planning to increase production to 4000 tonnes per day at the beginning of 2012. Suppliers of ready-mix include YK Almoayyed (National Cement), Al Kobaisai, Nass Group, Gulf Ready Mix and Awal Ready Mix.
STEEL: While there are local manufacturers of cement, the supply of steel reinforcement bars (rebar) is entirely imported, mainly from Saudi Arabia, Qatar and Turkey. Local pricing is largely dependent on global markets, which experienced a sharp fall in demand in the wake of the global financial crisis. Prices have since started to drift back up, but have yet to reach their previous heights. As of February 2012, rebar was trading at about $670-700 per tonne in the GCC.
At present, no rebar is manufactured in Bahrain. Instead, local companies bend and cut rebar and prepare it for the work site. Several construction firms in the country have divisions that do this type of work, including Haji Hassan, Ahmed Mansour Al A’ali and YK Almoayyed. However, a domestic supplier of rebar could come to the market by the end of 2012. United Steel Company, a joint venture that is 51% owned by Kuwaiti holding company Foulath and 49% by Japan’s Yamato Kogyo, is currently building a steelworks in the north-eastern region of Al Hidd. The facility will initially include a melt shop and a heavy-sections mill to produce medium-to-large H-beams and structural sections. There are plans to add a rebar mill, which would have a capacity of at least 500,000 tonnes per year. However, even with a local producer, prices will still largely be set by global and regional trends.
With construction activity in the GCC expected to grow in the next few years, this could mean higher materials prices. Contractors and developers sometimes include price escalation clauses in their agreements, although who bears the risk depends on the negotiating strength of the parties. At present, with construction activity in Bahrain generally down, contractors are typically willing to absorb increases in materials costs, according to Al Bastaki. One new trend in this area is also emerging, said Robert Lee, the CEO of Bahrain Bay. Developers are starting to purchase finishing materials, such as sanitary ware, air-conditioning units and tiles in bulk, and then storing them until needed. Those handling multiple projects are sometimes able to secure lower prices this way than a contractor may quote them on a per-unit basis.
OUTLOOK: The market has been challenging in the post-2008 period, but construction activity is starting to pick back up in Bahrain. Moreover, the government seems willing to invest in infrastructure and housing, which should provide a number of opportunities for local and international contractors. The private sector also appears to be going through a period of reinvigoration, with activity starting up again at projects that were previously on hold. For developments that can meet the demands of the market, there is the potential for growth, which in turn will produce work for construction companies.
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