PROPERTY MARKET OUTLOOK

Transcription

1 cluttons.com Bahrain, Spring 217 PROPERTY MARKET OUTLOOK RESIDENTIAL MARKET Rental market stability ends The relative stability of residential rents across the Kingdom s key expat dominated submarkets appears to have ended following a largely flat has marked a change in conditions, with rents retreating across the board during the three months to the end of March. In real terms, this equates to a monthly fall of roughly BD 8. 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 29 during Q1. Unsurprisingly, it has been the top end of the rental market that has been the worst impacted by the stagnant economic conditions. Job security fears dominate concerns 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 adjust rates in order to entice demand. During Q1, average monthly rents on Reef Island and in Juffair, declined by up to BD 1, after rents in these two locations remained unchanged for almost two years. On the villa front, Saar (BD 9 per month) experienced the largest decrease in rents across the markets we monitor, while Amwaj Islands (BD 13) registered an average monthly decline of BD 75. Budgets retreat The previous stability in budgets we reported on has also ended, with searches for both upper and lower limit rents slipping at the end of last year. According to data from Bahrain Property World BD / month Performance of residential rents in key submarkets during Q1 1,4 1,2 1, Apartments Juffair Amwaj Islands Villas Al Seef Reef Island Saar Adliya

2 Bahrain Property Market Outlook, Spring 217 (BPW), searched monthly upper limit budgets dipped back to BD 89, from BD 83 a year earlier, while monthly lower limit budgets fell to BD 565 from BD 692 at the end of 215. As we have outlined above, economic pressures, the removal of food and utility subsidies, in addition to global economic uncertainty and the looming VAT regime are all bearing down on households and organisations. Firms across the Kingdom are reining in expenses by reducing housing allowances, or removing them altogether, while households are moving to contain costs. This has been especially noticeable at the top end of the market. In submarkets like Amwaj Islands for instance, monthly rents for three- and four-bedroom homes remain amongst the highest in the Kingdom at between BD 1,2 and BD 1,4. Unsurprisingly, the popularity of this submarket fell to 9.1% of all property searches at the end of 216, compared to 13.3% a year earlier; this was the most significant decline across the nine submarkets tracked by BPW. Supply surplus Weaker economic conditions alone are not to blame for the correction now underway in the rental market in Bahrain. There has been a surge in the number of new residential developments being sold in the market, most of which are being acquired by Bahraini, or other Gulf investors. From our experience, a significant amount of this stock is filtering through to the rental market, pushing supply ahead of demand and contributing to a widespread destabilisation of the rental market. For tenants, of course, this positions them in an increasingly strong position as they are able to cherry pick from a range of options available on the market. Sales market holding steady for now The extent of this burgeoning supply surge is reflected by the fact that over 4,1 units are slated for completion within the next two years. By 22, over 7,1 units are expected to be added to the existing residential supply. The knock-on impact on sales prices from the sudden boost to supply appears yet to materialise, with residential values holding steady and remaining unchanged for six consecutive quarters. At the end of Q1 217, average residential capital values stood at BD 948 psm, with apartments on Reef Island (BD 1,233 psm) and villas on Amwaj Islands (BD 1,275 psm) remaining the most expensive in the Kingdom. To an extent, the unique nature of these two locations and their high level of appeal amongst Bahrain s expatriate community is likely to shield values from extreme volatility. However, it is our view that trouble may be brewing for the residential market, unless developers are able to restrict the number of sales per person and tighter regulation around the general resale of homes emerges. Approximately 4,1 residential units are due to complete in Bahrain over the next two years

3 Bahrain Property Market Outlook, Spring 217 Forecast residential supply pipeline 2,5 Average capital values in key submarkets during Q1 1,4 Number of units 2, 1,5 1, 5 BD psm 1,2 1, Juffair Apartments Villas Amwaj Islands Al Seef Reef Island Liquidity crunch Of course, there is still an underlying liquidity crunch across the banking system as a result of a reduction in hydrocarbon receipts. A lack of easy access to debt financing may deter purchasing appetite. Paradoxically, high volumes of unsold stock will also contribute to capital value volatility. For now, the difficulty around controlling supply lies in the hands of developers who are promoting favourable payment plans. Often, investors need to amass 5% of the property s value to secure a deal, with the remaining 5% due on completion, which means many are able to bypass the need for financing. There are also instances of payment plans stretching beyond handover, while some developers are offering to cover service charges for up to 12 months. Stability likely to return in 218 As outlined above, the rental market remains one that favours tenants; however, rapid capital value corrections as a result of an oversupply would deter investment activity. Some developers appear wary of the looming threat and 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. It is encouraging to see this behaviour emerging, although it remains our view that a correction in residential values is highly likely, particularly if the sales supply pipeline continues to expand unchecked at current rates. For the rental market, we forecast rents to continue dipping back, with average rental rates likely to end the year 1% to 12% down on 216 as the economic pressures both within Bahrain and around the region remain in place. 218 may well mark a return to stability should the government s infrastructure spending initiatives drive up overall economic activity levels, as we expect. Estimated number of units under construction by submarket 1,6 1,4 1,2 Number of units 1, Diyar Al Muharraq Central Manama (CBD) Juffair Bahrain Bay Al Seef Dilmunia Durrat Marina Um Al-Hassam

4 Bahrain Property Market Outlook, Spring 217 OFFICE MARKET Performance of office rents in key submarkets during Q1 Stable was another stable year for Bahrain s office market, with no movement in headline rents reported across the Kingdom s key submarkets, both for fitted, or shell and core space. This was in line with our forecasts and underpinned by the fact that office rents in the Kingdom have been hovering at, or close to, record low levels for just over two years. Lease rates have in large part been held up by landlords holding their ground, remaining committed to stabilising the market. While this has prevented sharp volatility in office rents across the board, it has to an extent hampered the emergence of an occupier driven market. BD / month Al Seef Bahrain Financial Harbour Diplomatic Area Bahrain Bay We reported previously on some occupiers being encouraged into relocation because of the prevailing low rate environment, but this activity has slowed as landlords have moved to retain tenants through active management. This has translated into a very limited amount of overall occupier activity New historic low for office rents With a stalemate in conditions, landlords have begun to break ranks and have, for the first time in over two years, reduced headline rents. As a result, asking rates in some submarkets are now offering the most attractive rents on record. Fitted out space Al Moayyed tower Grade A schemes remain well let Shell & core During the first three months of 217, in the Diplomatic Area for instance, some landlords dropped rates to BD 2 psm for fitted office space. Other landlords have now begun to follow suit, positioning this submarket as one of the most affordable areas in Bahrain for occupiers. Golden age for occupiers? In addition to lowering rents, landlords are also now willing to offer incentives such as free parking. Grade A schemes however remain well let, with stable occupancy levels, and are likely to withstand the current downturn more effectively due to high quality management and facilities, which occupiers, particularly international blue chip organisations, favour and seek out. Al Nakheel Tower (89%) for instance, is an example of a well managed and therefore, well-let office building in Seef. In an environment where economic growth is being curtailed by tighter fiscal policy and the subsequent erosion of long standing food and energy subsidies, overall occupier activity is likely to remain subdued as operational costs continue to mount. This has inevitably put downward pressure on rents. Clearly this presents a golden opportunity for occupiers who have a commitment to remain based in Bahrain and for those who perhaps have a longer-term view on the market. Occupiers have never been in a stronger negotiating position and we expect this will drive a significant amount of churn activity in the market over the medium term.

5 Bahrain Property Market Outlook, Spring 217 Performance of rents in the Diplomatic Area Performance of retail rents in some of Bahrain s key submarkets BD psm BD psm Q1 215 Office fit out Q2 215 Q3 215 Office shell Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Al Seef Amwaj Islands Isa Town Riffa Improving medium term prospects Subsequently, as we have experienced in other global markets, there is likely to be an upturn in commercial occupier requirements, which usually materialises six to nine months after large scale projects are commissioned. With several projects underway, particularly hydrocarbon infrastructure upgrades and a number of other high profile infrastructure projects, the medium-term prospects for the commercial office market appear relatively bright. It is our expectation that other landlords across the Kingdom will follow the example of those in the Diplomatic Area, with widespread rent reductions in the region of BD 1 psm to BD 2 psm likely during 217 as the office market finds its base. This will offer occupiers a chance to capitalise on the conditions by renegotiating contracts, or relocating and locking in lower lease rates for longer. Retail sector still buoyant The retail sector remains resilient, with year on year rents unchanged in most locations we monitor. New schemes such as The Avenues, which is being developed at a cost of BD 45 million and is slated to open later this year; in addition to the region s largest IKEA store, scheduled to open in mid-218, underscore the confidence being placed in the sector by occupiers as Bahrain continues to strengthen its retail offering. This has been achieved by drawing on appetite from weekend tourist traffic from Saudi Arabia, while also catering to domestic appetite for a more sophisticated retail offering. The downside risk during 218 will be the emergence of a 5% Value Added Tax across the GCC. Its exact impact on the commercial office market is still too early to speculate, but an additional 5% surcharge for international occupiers, particularly those from the UK, or Europe, who are already grappling with a strong US dollar, may well peg back an upturn in rental value growth by a few quarters. This does not currently sit in our central scenario as we are still waiting for clarity to emerge on the new VAT tax regime. The retail sector remains resilient, with year on year rents unchanged in most locations we monitor.

6 For further details contact Harry Goodson-Wickes Head of Bahrain & Saudi Arabia Faisal Durrani Head of research Cluttons LLP 217. This publication is the sole property of Cluttons LLP and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication. 1538