The local real estate sector has yet to return to the strong growth of the past decade, but more forward-thinking investors have realised that under the current market conditions, there are still plenty of opportunities for development in Bahrain. Given the recent overall slump of the market, there is less demand for luxury property, including high-end residential, commercial or office space, which are typically found close to the Bahrain Financial Harbour or the World Trade Centre. Indeed, these areas have all seen a significant decline in build-up in recent years. Yet there are encouraging signs that the real estate market for office space will expand as the broader economy within the kingdom returns to growth. Much of this growth will be buoyed by high oil prices. Bahrain’s Economic Development Board (EDB) has announced that the economy expanded by 3.9% in 2012. Early EDB predictions for 2013 held that GDP will grow by 6.2% in 2013, though the leadership of the Central Bank of Bahrain (CBB) has signalled that growth will likely fall in the 3-4% range in 2013.

PRICE CHANGES: The areas of Seef and Juffair in Bahrain’s capital, Manama, were two of the biggest destinations for investment in the kingdom over the past decade. However, today property that was once valued at BD200 ($526) per sq ft is now being sold at BD100 ($263) per sq ft. Faisal Abdulwahid Faqeeh, the chairman of Bin Faqeeh Real Estate Investment Company, told OBG, “Land prices in the kingdom have dropped significantly since their peak in 2007. For example, prices in Juffair, a popular expatriate neighbourhood, have dropped by almost 70%, while prices in Seef and Amwaj have fallen 50% and 60%, respectively. The opportunities for developers, investors and banks are now. If banks go back to the market, they will do well. Land prices coupled with reasonable prices for building makes the timing right.”

So, while these areas are seeing a decline in demand, places like Tubli and Muharraq are demonstrating an uptick, although growth will likely remain limited in the absence of regulatory changes. While there has been some depreciation in property values on a per-square-metre basis, forced selling has not been a problem, as most properties are held by solvent property developers or individuals. Declines in property values are usually due to the lack of feasibility for a given venture. Despite land’s status as a non-performing asset, owners in Bahrain are traditionally content to sit on empty plots until the market begins to recover.

Depreciation in the Manama real estate market is making it increasingly difficult to sell developments “off plan”. Realistic expectation would suggest that while the next few years may be shaky, a recovery is ahead. Indeed, in 2012 Mohammed Mansoor, vice-chairman of the Manama Municipal Council, predicted that a full recovery of the market would not happen before 2015.

MORTGAGE EXPANSION: Bahrain’s real estate sector is likely to receive a boost from EDB predictions that the non-oil sector will grow 4.5% in 2013. According to the Ministry of Labour, while unemployment spiked to nearly 5% in the summer of 2012, by the beginning of January 2013 it had returned to roughly 3.4%, its lowest level since 2010.

Eskan Bank, a state-backed mortgage lender in Bahrain, is primarily focused on funding investments in social housing with the goal of boosting homeownership in Bahrain. With homeownership at the top of the government’s agenda, affordable housing is also one of the main target of the GCC development funds for Bahrain. As such, Eskan’s mandate is stronger than ever. According to the bank’s own financial statements, at the end of 2012 its total assets were valued at BD533m ($1.4bn). Figures from the CBB suggest that as of December 2012 Eskan was willing to provide consumers personal loans secured by mortgages as low as 2.8% per annum. The most competitive rates offered by private sector banks came from Jordan-based Arab Bank and were nearly double that rate, at 5.5%.

Eskan Bank said it posted 17% year-on-year profit growth in the first half of 2012 after it approved new housing loans worth BD23.2m ($61.05m), more than twice as much as in the year earlier. The bank has delivered 17 community projects and started the construction of an additional four projects to be completed by the middle of 2014.

HOMEOWNERSHIP DRIVE: While the residential market has been the most volatile real estate segment in Bahrain in recent years, some areas are showing signs of recovery. Many residents of villas in Western Region have left for other areas. Interest in developments such as Muharraq, Amwaj Island and Riffa Views has increased due to their perceived safety. With the emphasis on social and affordable housing in the market, some firms are looking at new consultant opportunities with the government. While a number of projects are planned, it can take over a year to build a home locally. This is in part due to the fact that construction in Bahrain and the wider GCC is heavily reliant on concrete even for internal walls.

In the social housing sector, the government is planning to provide housing to 54,000 Bahraini nationals who are waiting for a subsidised government home. Real estate companies that have emphasised social and affordable housing have been successful in current market conditions. Tasheelat Real Estate Services, an arm of Bahrain Credit, reported a net profit of BD1.6m ($4.2m) in 2012 against a profit of just BD85,000 ($223,670) in 2011. The uptick came as the company, with a view to market trends, began focusing on affordable housing projects in Saar. Other firms concentrating on affordable housing projects have made for a flowing pipeline of developments, like those of Tubli Gardens, which began handing over homes to owners in December 2012. Data from the CBB also suggests that home loans within Bahrain continue to grow. By the end of 2012 the total value of home loans stood at BD713m ($1.9bn), or 10% of the overall market – more than double the BD355.4m ($935.2m) recorded in the second half of 2011.

OFFICE SPACE: The current emphasis in the market is on smaller spaces with premium facilities and good access to major thoroughfares. While there is a current overstock of prime office space, the market in Bahrain has also stabilised. A report by Cluttons, a UK-based real estate consultancy, suggested that the end of the third quarter of 2012 had seen a “significant increase in activity” in Bahrain’s office real estate market, indicating the market is stabilised. Projections from global real estate services firm CBRE also noted an uptick in the market, with 5% growth over the fourth quarter of 2012. “There has been a limited increase in take-up of commercial office space. This has only been enough to reverse the downward movement in rents, but not push them back into positive territory,” Harry Goodson-Wickes, head of country in Bahrain for Cluttons, told OBG. Bahrain is home to more than 400 financial institutions. While a number left during the crisis, several have downsized their presence in the kingdom and are looking for smaller spaces.

Renters are seeking ample parking, fitted-out offices and other incentives, such as rent-free periods, according to CBRE. Parking is increasingly an issue in many of the existing commercial properties in Seef, the Diplomatic Area and Juffair. Most of the current parking space in these districts are informal lots on empty plots of land likely to be developed as the market begins moving again, with this likely to eventually leave many buildings in these areas with a parking shortage. Access is also a key issue for offices in the central business district of Manama. In this regard, the expansion of the Sheikh Khalifa bin Salman Highway to a six-lane road is will be a boon to many workers in Bahrain Financial Harbour and the central business core.

“Commercial renters are taking advantage of the current market to upgrade their facilities, often paying roughly the same for a premium location,” Mike Williams, senior director of research and consultancy at CBRE, told OBG. A host of long-term leases signed in the boom years of 2003 to 2008 have come up or are expected to come up for renegotiation in the coming months.

INDUSTRIAL: The industrial segment is currently one of the more promising in Bahrain’s real estate market. Indeed, industrial real estate is primed for a new period of growth, given the number of projects that have recently come on-line or are nearing completion. Bahrain’s current logistical facilities are helping drive growth in this sector. The 2012-13 “Global Free Zones Rankings” report by fDi Magazine gave high marks to Bahrain’s infrastructure, ranking three of its facilities in the top 20 out of 150 such zones globally. The report ranked the Khalifa bin Salman Port and Industrial Area 16th, the Bahrain International Airport 19th and the Bahrain International Investment Park as high as 15th; while the Bahrain Logistics Zone was ranked 30th. Bahrain’s rankings may improve even more with the future harbour and airport expansions slated for the coming years.

However, most of the kingdom’s industrial activity has taken place to the south of where a great deal of this new infrastructure has been completed. The port of Sitrah Al Nuwaydrat and areas closer to the traditional sites for oil and gas infrastructure are ageing, and businesses are hoping to move their operations closer to some of the new developments despite the higher costs of renting in these areas. Interest in warehouse space also remains high.

With the completion of new industrial areas and increased spending on the oil and gas sector, the demand for warehousing and industrial infrastructure facilities is likely to continue to grow. The success of the $45m Majaal project in Bahrain Investment Wharf is indicative of a wider need within the market. After successfully renting out the first phase of the project in 2011, First Bahrain, the sharia-compliant real estate company behind the project, is looking to finish its final two phases in 2013. Amin Al Arrayed, general manager of First Bahrain, explained to OBG that he has not been surprised by the expansion of the project. “There is demand for small, high-quality industrial spaces,” he said. The 2012 Cluttons report noted that BFG International purchased a large, 18,000-sq-metre standard warehousing in Baytik Industrial Oasis in the Bahrain International Investment Park (BIIP) in 2012. To date, warehousing units in the areas have achieved 71% occupancy.

Alongside light industry, health care and education are sectors that will see continued expansion of new real estate in the coming years. The government of Bahrain is also keen to boost small businesses, and has not hesitated to act to support business in underperforming districts as well. Construction Week reported that in early March of 2013, in a bid to help small enterprises, the nation’s parliament had reached a deal to reduce rents by 50% for businesses that rent properties from one of the five municipalities in Bahrain.

RETAIL SHOPPING: The perception within the general retail sector is that the market is experiencing a shift from large malls and high-end shopping destinations to smaller developments focused on communities and neighbourhoods. Here again the market appears to have bottomed out, with CBRE figures assessing the third quarter of 2012 showing that retail market rents declined 0.3%. Even with prices lower than they were a decade previously, the high property values of prime locations such as Juffair and Seef mean that new malls in central Manama are unlikely. The Seef area is already home to the 135,000-sq-metre Seef Mall completed in 1997 and the 450,000-sq-metre Bahrain City Centre finished in 2008. These two facilities are the largest shopping centres in Bahrain.

The focus in the near future will be on smaller spaces designed to meet the needs of specific local communities, rather than those of weekend or destination shoppers from neighbouring states like Saudi Arabia. Ambitious malls offering 100,000 sq metres of leasable retail space are unlikely to be launched in Bahrain until population growth reaches 1.5m. “There is a general perception in the market that Bahrain is ‘over-malled’, and that we will see a shift to more strip mall projects and smaller local retail projects,” Goodson-Wickes said. As such, the biggest shopping complex currently under development is the BD18.7m ($49.21m) Muharraq Seef Mall project.

Seef Properties, which currently manages Seef Mall and the Isa Town Mall, holds a 50% stake in the project. The firm will also be responsible for the leasing and management of the mall, which is projected to open by late 2014. This mall will primarily service the 200,000 people of the Muharraq and the Amwaj Islands. The Muharraq Mall will have a total leasable area of 30,000 sq metres spread across two levels and will be roughly half the size of Seef Mall. The Muharraq Mall Company WLL, which is developing the project, is a 55:45 joint venture between Malls Real Estate Development and Haykala Investment.

One of the keys to the retail sector’s real estate over the medium term will be matching projects to meet the needs of smaller communities. “The region has survived the global recession and there is still plenty of interest from retailers in other GCC markets to expand into Bahrain. This is part of the reason we are involved in the new mall in Muharraq and perhaps other projects of a similar scale in the future,” Robert Addison, general manager of Seef Properties, told OBG.

Smaller-scale spaces aimed at high-end tenants are also likely to have some success in the current climate. Cluttons recently oversaw the development of Seef Corner, a small-scale retail project located near City Centre Mall in the Seef district. Within the first two months of launching the leasing campaign in January 2013, 75% of the available units at the site had been leased. Recovery of this sector, particular with new projects in areas of Muharraq, will help boost residential real estate as well.

REGULATION: The secondary market, particular for residential properties, is not well developed in the kingdom. While developers are content to sit on property until conditions improve, Bahrainis tend to purchase a property once and for life. However, this is changing over time as more foreign nationals are beginning to buy property in Bahrain, especially in the various free holding areas of the kingdom. The principle of free holding is incorporated in a number of Bahrain’s mega-projects and luxury developments. In these areas, foreign nationals own their property in perpetuity and can transfer it as they see fit at anytime. Ownership is also maintained after death.

Under the terms of Legislative Decree No 2, which was approved in 2003 (subsequent to a 2001 royal decree), the purchase of land was initially restricted to a few areas: Ahmed Al Fateh, Hoora, Bu Ghazal and much of northern Manama. However, many other developments have been subsequently added to the permitted free holding areas, including Amwaj Islands, Dannat Hawar, Bahrain Bay, Reef Island, Riffa Views, Durrat Bahrain and Al Areen Desert Resort.

Those who purchase property are also entitled to a residency visa as long as they maintain ownership. As such, the kingdom’s realtors are closely watching how Dubai and other markets deal with escrow law reform. One change might be to force realtors and developers to use some of the money collected for down payments immediately towards the development of the projects. Such a law could encourage foreign ownership and build confidence in the market. In March 2012 Bahrain’s Shura Council struck down a proposed law that would have limited ownership rights of GCC nationals in Bahrain. The council stated that such a law was against the interests of further integration amongst the GCC countries. The government has also sought to encourage urbanisation by allowing the construction of additional houses on individual land plots as well as the expansion of pre-existing homes through extensions.

In some areas of Bahrain landlords have rented properties to third parties who in turn “over-rent” the units to expatriate workers, according to CBRE. A regulatory push to end this practice may formalise a large sector of the market, which could have an impact, especially with increased rental rates in Adilya, Mahooz, central Manama and Muharraq.

OVERSIGHT: Large numbers of Bahrain’s government institutions have involved themselves in the regulation of the real estate sector, the oldest being the Survey and Land Registration Bureau (SLRB), which has a mandate to ensure stable real estate property ownership and to support property reliance. The organisation also tracks real estate acquisitions.

The SLRB is responsible for maintaining title deeds to all property within Bahrain. The kingdom’s various property transactions are recorded in case files. After the payment of a fee, property transactions are recorded in the SLRB archives and on the relevant parcel maps. While some of the SLRB’s archives date to the 1920s, the system has been digitised since 2005.

Traditionally, the organisation charged with monitoring the financial side of real estate transactions has been Bahrain’s Ministry of Finance. Yet Eskan Bank has been increasingly involved in projects and seeks to help the population meet its housing needs. Mumtalakat, Bahrain’s sovereign wealth fund, also plays a role and has voiced interest in beginning to fund installed projects. The Ministry of Municipalities Affairs and Urban Planning deals with building permits and maintains the land registry. The ministry was also heavily involved in approving the kingdom’s array of land reclamation projects.

The Ministry of Work plays a central role in the housing market as well because of its involvement in the various social housing schemes in Northern Town and other areas of the kingdom. The government is keen to promote innovations in the housing sector and has held a series of international conferences on housing issues, the most high-profile of which being the Middle East Affordable Housing Development Summit held in 2012. On an international level, the Sheikh Khalifa bin Salman Al Khalifa UN Habitat Award was established in 2007 to promote equity in housing and sustainable urban growth. The reward includes a $100,000 cash prize and is given to winners from around the globe.

LONG-TERM GROWTH: As stability is achieved, investors will begin showing confidence in Bahrain again, as Addison explained to OBG. “While the banks are being cautious right now, there are increasingly positive signs that things are turning around. Bahrain is a small market and once the corner is turned, growth in the market will take off very quickly,” Addison said. The government’s heavy investment, particularly in infrastructure, will benefit the growth of the real estate sector in coming years.

In particular, the expansion of the King Fahd Causeway will reduce commute times for expatriates who work in eastern Saudi Arabia but live in Bahrain. Even more long term is the not-yet-started Bahrain-Qatar Causeway. The project, which is set to be completed by 2022, will be hugely beneficial for Bahrain, as expatriates will be able to live in Manama and commute to Doha via car or even by high-speed train once the $25bn inter-GCC railway, still in the planning stages, is completed. Each connection will generate new business opportunities and attract more residents to Bahrain. Even without the causeways, the kingdom is an attractive centre for businesses, as it offers competitive rates for office space and is a one-hour flight from other major cities in the region.

OUTLOOK: New businesses are once again setting their sights on Bahrain and choosing the country as their base of operations. Rotana Group, a large media conglomerate, will be moving to Bahrain from its current base in Cairo, according to a recent report by AFP. Additionally, Saudi business mogul Prince Alwaleed bin Talal bin Abdulaziz Al Saud has also announced plans to launch a new Arab language news channel to rival Al Jazeera in Bahrain. Bahrain’s government has stated it plans to boost hydrocarbons production by 2020, which will bring additional expatriate residents. Until the new revenues come on-line, the economy is likely to be driven by state spending on large investments in infrastructure and other areas. As the economy recovers, there will likely be absorption of the office and residential space built during the boom years. As this happens, Bahrain’s real estate market will reach a plateau of mature growth.