Golden Age For Bahrain’s Tenants?

A downward trend on rental prices echo the reduction in hydrocarbon receipts, tighter fiscal policy, and the erosion of long standing food and energy subsidies. The result is a market defined by increased incentives, adjustments and service quality from landlords and developers as they fight to remain competitive in the market. This translates typically to an BD80-100 reduction a month for most rental properties.

Weakening economic conditions and an increase in real-estate supply has led to severe pressure in this sector.

With the cost of living rising – especially for expats who will be paying up to 867% more than Bahrainis for utilities by 2019 which will make them far less likely to rent villas/larger properties tenants are in the driver seat especially since there is no slowdown in properties coming into the market.

Rents have retreated across the board during the three months of 2017 from January to March. Apartments (-8.3%) experienced a sharper rate of rent corrections than villas (-6.9%). However, both segments of the residential rental market experienced the fastest rate of decline since 2009 during Q1 with luxury projects having been particularly hit, according to Cluttons Bahrain Spring 2017 Bahrain Property Market Outlook.

Job security fears dominate concern amongst households, especially those linked to the oil and gas sector. This, coupled with a subsequent tapering off in demand from oil and gas sector commuters, working across the border in Saudi Arabia, has put pressure on rents, leaving landlords with little option but to lower rates in order to entice demand. In addition, the rising cost of living has made people keen to save money when they can, instead of spending it.

To add to this, there is an oversupply of rental and property. Cluttons says that by 2020, there will be over 7,100 units added to the existing supply. Harry Goodson-Wickes, Head of Cluttons for Bahrain and Saudi Arabia said “High volumes of unsold stock will also contribute to capital value volatility”.

Residential Values

By the end of March, average residential capital values stood at BD948 per square meter (psm) with apartments in Reef Island at BD1,233 psm and villas on Amwaj Islands at BD1,275 psm remaining the most expensive in the kingdom. Cluttons forecasts rental rates to continue falling to as low as 10-12% down as the economic pressures both within Bahrain and around the region remain.

There is a renewed strong appetite for off-plan property with Bahraini developers making it easier to buy by coming up with favorable deals for investors. Payment schemes of 50% of the property’s value to secure the deal with the remaining 50% payment due on completion means many are able to bypass the need for financing. Cluttons says that there are also instances of payment plans stretching beyond handover, while some developers are offering to cover service charges for up to 12 months.

Some developers are restricting sales activity until projects have been completed while others are creating residential assets that would appeal to investors by renting out individual units, before bringing them to market as tenanted assets. However, these schemes might artificially be propping up the market and eventually leave real-estate values lower than before.

Office Rents

With a stalemate in conditions, asking rates in some submarkets are now offering the most attractive rents on record, especially with the volume of stock in the rental market. Diplomatic Area rents have fallen by up to 50%, a record low as some landlords dropped rates to BD2 psm for fitted office spaces, when not so long ago they were BD3.7-BD4. Other landlords have now begun to follow suit, positioning this submarket as one of the most affordable areas in Bahrain for occupiers. Other areas are expected to drop their rates as landlords break rank with each other to try and remain competitive in the tough market.

However, well-managed Grade A schemes retain well, with stable occupancy levels due to high quality management and facilities and limited supply, which occupiers, particularly blue chip organizations, favor and seek out. “Those developers who continue to succeed in these difficult market conditions have focused on stock that meets specific market needs, and have a strong track-record of development in the Kingdom and across the Gulf”, said Goodson-Wickes.

Favorable Outlook

There is a favorable outlook for 2018 with an expected return of stability should the government’s infrastructure spending initiatives drive up overall economic activity levels. New projects include the Avenues at an estimated cost of BD45 million, the new airport project valued at BD400 million, and general infrastructure projects worth BD240 million.

But the Value Added Tax (VAT), due to be implemented in January 2018 is a darkhorse in the properties game and will likely keep rents under pressure. Faisal Durrani, Head of Research for Cluttons said “Our concern for the outlook of the office market remains with the proposed Value-Added-Tax (VAT) introduction across the GCC, and the potential increase in operating costs for international occupiers who are already grappling with a strong US dollar. An extra 5% charge on top of rents and general operating costs may well suppress activity for longer. This does not however currently sit in our central scenario and we are optimistic for a heeded approach to allow the market some time to gain footing, with signs of stabilization, or even a recovery in 2018.”

The retail market has been a beacon of stability, the shining success in the property market with no change in rents for 18 months. This market is expected to be bolstered by the waterfront dining venue planned inside the Avenues slated to open this year as well as IKEA Bahrain which will be the biggest in the region. These projects are expected to bring more tourists inside the country. In addition, Bahrain is the only GCC country that has a free trade agreement with the US government, so it is  easier for US brands to set up business here.