According to the World Bank’s recent Regional Economic Outlook entitled “MENA Sustaining the Recovery in Times of Uncertainty”, the pace of economic recovery in the MENA region has been less vigorous than in other developing regions.
Growth in the MENA region is expected to average 4% during 2010 which compares with an average of 5.6% in advanced economies and 4.5% in developing nations.
Within this context, the Bahrain economy is expected to post growth of 3.5% in 2010 and 3.9% in 2011. This compares with GDP growth of 2.6% in 2009 and 6.3% in 2008.
The weakness of the banking sector has also caused a small reduction in Bahrain’s rating from Moody’s which dropped by one point to A3 in August 2010. The Kingdom’s sovereign rating from Moody’s is “stable”, but the banking system is subject to a “negative outlook” largely as a result of its significant exposure to a weak real estate sector.
Government income is largely dependent on oil income and with a rising break-even price required to meet infrastructure cost challenges, the Government has little room for manoeuvre after the huge downward shift in prices since 2008.
In this context, rising production represents very good news for the kingdom and its people. Production is set to rise from the current level of 262,000 barrels per day to around 600,000 barrels per day during the next year or two and this will have a huge impact on the Government’s financial resources.
Another key news item that will have a significant impact on the future of the Bahrain economy is an update on the proposed “Friendship Bridge” linking the Kingdom to Qatar.
The on-off saga that has caused significant uncertainty among commentators has been updated as part of the Qatari World Cup bid. The Qataris announced to FIFA’s inspection team that a rail link between the two countries will be in place by 2017 as part of a US$43billion network which will include a metro network in Doha, an inter-GCC rail link and a rail freight network.
The link would connect Qatar through Bahrain to Saudi Arabia and has huge implications for Bahrain in that it places the tiny Kingdom between the two powerhouse economies of the region. The ability to set up businesses and live in a relatively low-cost and moderate environment while serving both Saudi Arabia and Qatar will likely provide a significant boost for non-oil economic growth in Bahrain.
GDP Growth, Bahrain - 2000 to 2010
The confluence of summer and Ramadan resulted in an extremely quiet Q3. Very few transactions and virtually no completions or major office moves took place during this period. Despite a slowdown in construction rates, the supply of new quality office space in Bahrain is likely to far exceed the growth in demand in the short term. The sheer volume of new quality space due for completion in 2010 and 2011 is likely to be in the region of 280,000 square metres. This represents growth of 73% in local Class A office space in a market that is virtually static in demand terms.
The vast majority of this space is being prepared in Seef District, where around 200,000 square metres of local Class A space will be added to an existing stock of around 110,000 square metres. This is likely to completely overwhelm demand levels in the short term and it is anticipated that the market in this area will either see wholly vacant buildings or a price/incentives war amongst landlords.
Given past experience in Bahrain it is likely that we will see a bit of both, typically landlords in Bahrain prefer to protect rates at the expense of occupancy but some will inevitably crack and we are likely to see some rational behaviour drive prices down.
In recent years the Kingdom’s CBD, Diplomatic Area, has become deeply unpopular as parking and circulation problems have reached chronic proportions. Rental rates have already been under severe downward pressure for the last two years and with substantial further development of local Class A space taking place in this area we can only assume that there will have to be even further downward movement.
Development currently taking place in Seef District is largely following the path of Diplomatic Area in that office properties are failing to adequately address the key need of office tenants for car parking spaces. Individual towers typically offer the minimum legal requirement of parking spaces and in the short term are reliant on available vacant plots surrounding each property. This was precisely the path that was taken in Diplomatic Area and the results are now clearly evident. As vacant plots are built out, these buildings simply don’t function and suffer either low levels of rent or demand, or both.
In Dubai for example, this was addressed by the imposition of requirements to build associated car parking towers such as those constructed on Sheikh Zayed Road or in low-density business park environments such as Dubai Internet City. Neither of these paths appear to have been considered here in Bahrain (with the exception of Almoayyed Tower in Seef District), but this approach would appear to be inevitable in the medium to long-term.
Average Class A Office Rents, Bahrain - 2008 to 2010
The supply pipeline of housing in Bahrain has slowed significantly to take into account the more pressing financial circumstances of both the Kingdom’s buyers and its developers. With off-plan sales coming to a grinding halt in mid-2008, the weak cash flows of developers have worked their way down to contractors and there have been several high-profile fallouts with contractors upping sticks and walking off site.
Whilst developers have sought to reassure buyers and investors that the construction of their home is still in progress, it is difficult to disguise the lack of activity taking place on some of the highly visible, half-built and distinctly lonely looking building projects dotted around the Kingdom.
This cycle has served to highlight the dangers of a virtually unregulated development industry in which developers are free to use funds that they have gained in off-plan sales to shore up other, often unrelated projects, sometimes in other countries. The upside is that it is likely that buyers will in future, be much more circumspect in their purchases and developers will actually have to complete their projects before they are able to sell them.
Naturally, the cash flow burden placed on developers in this scenario would be enormous, and this will ultimately stifle the number of new development projects in Bahrain in the coming years. As this becomes an issue that increasingly exacerbates the existing shortfall in housing, the Government will have to step in to regulate the industry and force through (for example) escrow laws that will create some comfort for potential buyers. The reputation of the major housing developers in Bahrain is at present somewhat tarnished, and it is likely to take some time and legislation for reputations and confidence to be restored.
The “hot” topic of the moment remains that of “affordable housing” which dominates most real estate discussions and forums in the Kingdom. The Government social housing list currently has households on it that have been waiting over 20 years, during which time the number of expectant households has reached over 53,000 and is growing by around 4,000 per annum.
The recent Government-sponsored PPP bid process will realise the construction of 4,500 homes by 2012 but this really is a drop in the bucket compared to the current shortfall, estimated to be around 90,000 units when social housing and “affordable” housing requirements are combined. Meanwhile, the “luxury” housing sector remains massively oversupplied and sales and rental rates continue to soften.
Residential Rental Rates in Key Locations – Bahrain (BD/per month)