Bahrain emerging from 2011 with ‘cautious optimism’
Jan 8, 2012

JEDDAH: As a troubled 2011 ended, the outlook for Bahrain appears to be one of cautious optimism. The unresolved protest movement in Syria continues to unsettle Bahrain as the “”Arab Spring”” maintains the remnants of momentum, and the region as a whole juggles deep rooted problems centered around unemployment, housing, education, and other increasingly pressing socio-economic issues, according to a report prepared by the CBRE Bahrain research team.

The Bahrain authorities took the almost unprecedented step of facilitating a fully independent review of the troubles that were centered on Pearl Roundabout earlier last year. The Bahrain Independent Commission of Inquiry (BICI) was indeed critical of the role of the government in the way it dealt with the protestors, but as the government has attempted to assemble cross-party bodies to implement reforms, there has been steadfast refusal from the seven opposition political parties to take part in the process. This leaves Bahrain at something of an impasse for now and has even led to pro-government demonstrations outside the offices of opposition parties.

The unresolved nature of the political landscape has led ratings agencies such as Moody’s to continue to define Bahrain’s prospects as “”negative””, the CBRE report said.

However, Moody’s rating has been tempered by its comment: “”…systemic risks will be mitigated by the domestic retail banks’ healthy liquidity and relatively strong capital positions.”” In short, even the ratings agencies have a foot in each camp, positive and negative.

Despite what can only be described as a difficult year, the Moody’s report noted GDP growth in Bahrain of around 2 percent in 2011 and 3 percent in 2012 – rates that many European countries would be proud of.

In the context of reduced levels of foreign direct investment (FDI) the long-underplayed oil sector is fast emerging as key to the Kingdom’s economic future. While investment in real estate and the financial services sector wane, Tatweer Petroleum has drilled more than 200 new wells since handover of the Bahrain Oil Field in 2009, and is engaged in a fast track program to drill another 3,600 wells over the next 20 years, the report said.

The hospitality sector has also suffered exceptionally weak performance throughout the year, exacerbated by the suspension of cruise liner visits earlier in the year. However, the cruise season restarted on Dec. 14 and is expected to contribute 32,000 visitors by its conclusion in March.

OFFICE MARKET

The local Class A office market continues to be dominated by significant oversupply and weak demand. Despite this, rental rates appear to have bottomed out as landlords have now reached rental rates below which they are unwilling and unlikely to go. Incentives remain relatively rare even in largely unoccupied properties in good locations.

“”It is perhaps surprising how little movement there has been in a market where we might have expected a large degree of rationalization, consolidation, renegotiation and upgrading. Despite the opportunities for all of these, the market has remained largely static as it has suffered both new supply and demand contraction simultaneously,”” the CBRE report said.

The less-preferred prime locations such as Diplomatic Area, which suffers from chronic traffic access, circulation and parking problems has suffered the most, with new supply lying idle and existing tenants seeking to relocate to new districts such as Seef on expiry of their current contracts. However, the costs of moving in terms of fit-outs, IT, legal and even stationery are proving barriers to movement for most businesses which have become extremely cost-sensitive in an albeit temporarily, uncertain political and economic climate.

The opportunities to create low-density business parks that would go some way to easing Bahrain’s daily traffic commuting problems still exist, but need to be very carefully considered in the current climate, where the lack of pressure does not enable strong momentum to be created for new projects.

The Class B and C office space that typically occupies residential apartment buildings has been less affected by market conditions over the last few years with smaller movements in rental rates and occupancy. These offices are not unsurprisingly located close to residential areas and benefit from their proximity to the homes of staff who do not need parking spaces and other facilities associated with the Class A market. There has been virtually no construction in this sector over the last decade while the demand pressures for price-sensitive and centrally located accommodation have intensified during this period.

The future of office space remains dominated by the absorption of both existing supply and new supply under construction in the major office zones of Diplomatic Area and Seef District together with new locations such as Bahrain Bay. Most planned office projects have been postponed but several remain doggedly determined to enter an extremely competitive market, hoping presumably, to meet the next cycle of demand growth.

RETAIL SECTOR

The retail mall sector in Bahrain has historically been dominated by the collection of “”regional”” malls in the Seef and Sanabis areas which were the home for most of the Kingdom’s hypermarkets and cinemas, and benefited from Saudi weekend visitors.

However, the malls in this area have largely been “”cannibalized”” by City Centre which was not only able to attract many of the key tenants from the other malls, but at almost double the rental rate. The remaining malls have been faced with increasing vacancy rates and lower profile tenants and in some cases rates have fallen by almost 75 percent as mall management have sought to maintain both occupancy and footfall levels.

However, according to CBRE, the growing trend across Bahrain has more recently been in the field of “”neighborhood”” centers anchored by hypermarkets such as Lulu. As these centers have increasingly opened throughout the country, visitation levels to the major malls has fallen even further, and it remains to be seen how events in this sector will unfold over the next two or three years.

COMPOUND MARKET

The compound sector, which has historically been based in the northwest corner of Bahrain is undergoing a fundamental shift. This has resulted in an unsettling environment for those with young families and there has been a gradual migration out of the area to nearby, less troubled areas such as Hamala. Consequently, both rents and occupancy have tumbled in compounds to varying degrees throughout the year. At worst, rents and occupancy have dropped by around 30 percent but many compounds have been able to sustain occupancy through rent reductions. While occupancy levels are low, many compound owners have taken the opportunity to refurbish units and common areas in the hope that the problems will subside while other, more ageing compounds are entering into periods of sustained decline.

RESIDENTIAL SECTOR

Talk in the residential sector remains dominated by the “”affordable housing”” market although there remains a lack of clarity by many developers as to what this actually means. It would seem that many of those thinking of entering this arena believe that it will be enough to build units as cheaply as they can and hope the market takes care of the rest.

This may lead to some poor outcomes as land prices, which remain high due to rampant land speculation in recent years, have skewed total development costs to a point where it is almost impossible to meet the pricing requirements of the “”affordable”” housing market.

Even when developers build housing units at prices that meet market expectations in the form of apartments, sales profiles remain weak due to a general resistance to apartment living by Bahraini nationals, which is itself borne out of a lack of secondary trading in the market, compounded by the lack of equity necessary to obtain finance. Although little discussed, the Bahrain real estate sector continues to wrestle with the reality of part-sold, part-built residential projects such as Marina West, Villamar, Amwaj Gateway and masterplanned areas such as Dilmunia, Nurana, Al-Areen and Marsa Al-Seef which have failed to regain traction since momentum was lost at the outset of the global financial crisis.

The sheer liquidity that drove many of these projects is now noticeably absent from the Bahrain market, and a wide variety of both investors and developers have been left high and dry. There has been little reaction from the government to the pleas of significantly out of pocket buyers and the situation remains simply “”unresolved””.

The government has enough problems handling domestic social and affordable housing pressures, but a failure to resolve these problem projects creates a poor precedent for those considering an investment in Bahrain. Without any apparent protection from legislation or the government itself, potential investors will likely be drawn to those locations in the Gulf that are either more stable, transparent or more willing to protect the rights of buyers and investors, the report said.

In order to meet the pressing housing needs of its lower income population, the government has embarked on a multi-faceted approach including a public private partnership venture with preferred bidder Naseej, a program of repairs to dilapidated homes across the Kingdom and a strategy to build a series of “”satellite cities”” on both existing and reclaimed land around the country, the CBRE report said.