PROPERTY MARKET OUTLOOK

Transcription

1 cluttons.com Bahrain, Winter 2017/18 PROPERTY MARKET OUTLOOK ECONOMIC BACKDROP Undoubtedly, as we enter the fourth year since the shock collapse in oil values, Bahrain is still working its way through a challenging period, with positive Government intervention programmes being rolled out across the Kingdom. The benefits of this intervention are however being dampened somewhat by a slight widening in the country s GDP-to-debt ratio, but there are some encouraging signs emerging. The Government is putting the pieces of its vision for Bahrain into place and we are already seeing this in many segments of the economy. For instance, with the aid of the GCC Support Fund, the non-oil sector has remained buoyant, growing by 3.7% last year, lifted by wide-ranging infrastructure and construction projects around Bahrain (Oxford Economics). In fact, in early August, the Economic Development Board (EDB) announced that some USD 80 billion worth of construction and infrastructure projects are currently underway or planned for Bahrain, which is expected to help underpin economic growth over the short to medium term. Furthermore, key to Bahrain s economic vision is developing the country s tourism and hospitality sector further, cementing the Kingdom s position not only as a gateway destination to Saudi Arabia, but a world-class destination in its own right. Our estimates suggest there are some 6,600 hotel rooms planned, or under construction at the moment, spread across 28 properties. Bahrain s GDP Growth f 2018f 2019f 2020f Real GDP Growth (% change y/y) Hydrocarbon sector Non-hydrocarbon sector Source: Oxford Economics Bahrain has often lagged behind its peers in the Gulf in capitalising on regional demand for family-friendly hotels and while the number of planned properties may exceed demand levels in the short term, the benefit to the market will come in the form of reduced average daily room rates and increased levels of service. Indeed, this expectation of lower room rates will position Bahrain as a more affordable alternative to regional hot spots such as Dubai. Hand in hand with this vision to bolster Bahrain s tourism sector is the USD 1.1 billion investment in the expansion of Bahrain International Airport, which will see the airport s passenger capacity rise to 14 million from nine million at present.

2 On completion by 2020, the Kingdom s tourism sector is forecast to contribute nearly USD 1 billion towards Bahrain s GDP. This is also expected to be supported by the planned expansion of the King Fahd Causeway which will increase traffic capacity by 132%. For now, however, while the Government s vision unfolds, Bahrain s property markets are still under pressure from a general weakness in demand, but there remain pockets that continue to outperform and we will explore these below. RESIDENTIAL MARKET Rents stable after H1 corrections After rents retreated across the board at the start of the year, we appear to be entering a period of stability, with average rents across the Kingdom firming during Q3. Rents in general have weakened by an average of 16.2% when compared to this time last year, and are down by roughly 8% since the start of In general, villas have outperformed apartments; however rents have dipped by 11% over the last 12 months. In fact, with the exception of four-bedroom villas in Adliya (BD 1,200 per month) and on Amwaj Islands (BD 1,300 per month), where average rents dipped by BD 100 per month, rates have held stable across most expat-dominated markets during Q3. On the apartment front, rental rates in Juffair have experienced some of the sharpest corrections. We have been warning for over 18 months now about the risk of oversupply of apartments in Juffair and we appear to have reached a tipping point, where supply has exceeded demand. That said, with roughly 5,000 units being completed each year, there may be the potential for these units to be absorbed by domestic buyers, provided they are priced under BD 120,000 in order to qualify for a social housing loan. As it stands, the Ministry of Housing has a social housing waiting list of approximately 55,000, so demand appears as though it may exceed supply. However, many of the schemes currently under development are geared towards the luxury end of the price spectrum. Oversupply remains an area of concern and something we continue to monitor closely. Indeed, the performance of rents in general across Bahrain has been further compounded by weaker than normal levels of demand as slower economic growth takes a toll on the rate of job creation and, therefore, overall demand for rented accommodation. Affordability key to success While requirement levels are undoubtedly weaker than this time last year, our experience in the market has shown that established communities remain the most attractive areas for tenants. In particular, those with well-managed facilities and amenities are succeeding in retaining high occupancy levels, while rents are remaining relatively stable, when compared to the Kingdom as a whole. Performance of apartment rents 950 Average residential rents during Q across key submarkets 1, , BD / month BD / month Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Juffair Amwaj Islands Al Seef Reef Island Saar Adliya Juffair Al Seef Amwaj Islands Reef Island Apartments Villas

3 For example, Saar and nearby Jasra are enjoying a resurgence in demand following the corrections that have taken place here over the last three years; Saar has experienced a 12.2% correction in average rents since Q Furthermore, benefiting these two submarkets in particular is the high concentration of schools in the area and the proximity to the King Fahd Causeway, which is helping to attract commuter tenants. Community living in high demand Elsewhere, at Cebarco Tower and Segaya Views in Manama, our residential team has registered exceptionally strong demand across the 130 units in both developments. Rents at Cebarco Tower stand between BD 650 and BD 1,500 per month, while rents at Segaya Views are at BD 650 per month. With average monthly residential rents across Bahrain standing at close to BD 650 for apartments, prospective tenants view the facilities and amenities offered at these two schemes as good value for money. This is evidenced by the rapid letting of Segaya Views, which is fully leased, while Cebarco Tower has nearly reached full occupancy. BD 786 0% Average monthly residential rent in Q Change in quarterly residential rents in Q In Amwaj Islands, one of Bahrain s most popular expat residential submarkets, while rents have ebbed by roughly BD 50 per month (for apartments) and BD 100 per month (for villas) over the last 12 months, it retains its appeal. The well-established community infrastructure, retail provisions, access to Bahrain International Airport and the rapidly emerging developments on Diyar Al Muharraq, all continue to contribute to the relatively stable demand we are recording here. Furthermore, with the rent corrections that have already taken place, we view the community as exceptionally good value for money, which is likely to support a turnaround in rental value growth sooner than other locations in Bahrain. RETAIL MARKET Retail still central to unlocking development potential The desirability for developers to select existing communities for new schemes has also been fuelled by the strong penetration of retail developments in many of Bahrain s established residential areas. We have noted an upturn in the number of community retail developments in locations such as Juffair, while larger shopping malls such as the BD 45 million The Avenues is progressing to schedule and will be a game changer for the Kingdom s retail scene with its outdoor waterfront dining concept. Including The Avenues, we expect some 500,000 sqm of new retail space to be delivered across Bahrain this year, dipping to approximately 220,000 sqm in 2018 and in excess of a further 140,000 sqm in Performance of retail rents across Bahrain s key submarkets BD psm Q Q Q Q Q Q Q Al Seef Amwaj Islands Isa Town Riffa

4 Separate to the development of retail malls, the Gulf s largest IKEA is on track to open next year at a cost of BD 47 million and is expected to create up to 600 new jobs. Retail remains a significant area of growth in the Kingdom s property sector and the renewed confidence amongst retail occupiers and retail developers is reflected in the fact that retail rents across all locations we monitor have remained stable over the last six months. The depth of developers confidence in the sector is reflected in the fact that we are currently tracking 21 retail schemes spread across in excess of 1.05 million sqm, being developed at a cost of over BD 277 million, all due to complete between now and the start of Retail is playing a central role in helping various areas in the Kingdom realise their full potential, with residential tenants being drawn to areas that offer high levels of retail penetration. Developers are conscious of this ever strengthening appetite for community living in Bahrain and we are starting to see a handful of such schemes trickle on to the market. Eagle Hills, for instance, recently launched Marassi Boulevard in the Marassi Al Bahrain area of Diyar Al Muharraq. The development, consisting of four low-rise buildings, will have over 240 homes, alongside 700 sqm of retail and access to a 2km private beach and waterfront promenade. The success of the development is likely to be further enhanced by its proximity to the 180,000 sqm high-end Marassi Galleria retail development. It is our expectation that the development s position, adjacent to Amwaj Islands, in addition to the strong community infrastructure being provided, is likely to result in keen interest from both buyers and tenants. OFFICE MARKET Subdued demand Elsewhere in Bahrain s commercial market, demand for office space remains lacklustre and static, with a very limited number of enquiries. Encouragingly, rents for both fitted and shell and core space have remained stable since the start of This is in part linked to the sharp rent corrections that have been recorded since 2010; shell and core space is down by roughly 40-70%, while rents for fitted space are down by a third to half over the same period. While overall demand remains weak, start-up businesses are active in the market, many of which have been supported by the Tamkeen initiative. Space requirements by this subset of the office market often hover at around 100 sqm, with budgets of between BD 4 psm to BD 6 psm. The only noteworthy activity amongst international occupiers has been Amazon s decision to make Bahrain a regional hub for its cloud computing services, which will see the creation of three data centres in the Kingdom by Adequate parking provision remains central to any relocation decisions, particularly in areas like Al Seef. Most occupiers relocating are looking for what they perceive to be better value for money and are mostly seeking fully fitted space that offers a higher standard of accommodation than that which is currently occupied. Some of those deterred by the high cost associated with an office move are turning to subletting in an attempt to generate extra cash flows. This is being achieved through the reconfiguration of existing space. In many instances, such sub-let space is often in a high-quality Grade-A building, fitted out to a high standard, with very well maintained facilities and parking provisions, which is proving to be attractive to prospective occupiers who wish to relocate. Performance of office rents across Bahrain s key submarkets in Q BD psm Filled out space Al Seef Shell & core space Bahrain Financial Harbour Diplomatic Area Bahrain Bay

5 RISKS AND OUTLOOK Downside risks outweigh upsides for the market Clearly the property market in Bahrain is under pressure from weak oil prices, which has undermined overall economic growth, both in the Kingdom and across the GCC. Aside from the clear risks to overall demand levels for both residential and commercial property that stem from any further weakness in oil prices, there are a few downside risks that we are monitoring: Value Added Tax (VAT): While Saudi Arabia and the UAE have forged ahead with plans for VAT, commencing on 1 January 2018, Bahrain is yet to declare its intentions on the formal roll out of a VAT regime. The implications of VAT in Bahrain are likely to be a spike in inflation, which may dent consumer confidence and spending. This would, of course, come in addition to the gradual erosion of state food and energy subsidies, placing household finances under further strain. The impact on the property market is still unclear, but if the Kingdom followed in the footsteps of the UAE by taxing all commercial sales and lease transactions, demand is likely to weaken further, driving down rents from their current low levels. While the UAE has left residential leases and sales transactions exempt, developers will be able to reclaim VAT on the cost of construction materials, should they sell their developments within three years of completion. This suggests that the market in the UAE will see better due diligence done before new schemes are launched and a similar approach may well help insulate the Bahraini market from a residential oversupply, which is a growing risk, if left unchecked. Should the Kingdom follow the Saudi Arabian authorities decision to tax buy-to-let residential property, we may see a weakening in Bahrain s second homes market. Qatari diplomatic crisis: While we are not too concerned about the direct impact this will have on the Kingdom s property markets, we remain cautious about the potential disruption to regional capital flows and a possible weakening in international investor sentiment when looking at the region as a whole. Infrastructure levy: The new tax introduced on 9 July 2017 at a rate of BD 12 per square metre of a development has the potential to upset the development and delivery of new real estate projects across the country as it appears to have caught many off guard. While on one hand the rate has been perceived by the market to be unaffordable, it may have the positive effect of helping to limit the number of unplanned developments across Bahrain. The revenue from the new infrastructure levy will support Bahrain s long term infrastructure development programme through the creation of a sustainable revenue stream In the long run, the new levy has the potential to promote better market due diligence by developers and insulate the market from extreme volatility as the appetite to speculatively develop real estate is likely to weaken. At the same time, the revenue from the new tax will support the country s long-term infrastructure development programme through the creation of a sustainable revenue stream, which would be very positive as the Kingdom embarks on a long and challenging economic diversification road map. Residential market outlook With these potential risks in mind, our central view is that the residential rental market in Bahrain is likely to remain stable for the remainder of 2017, following the steep corrections recorded so far this year. We expect 2018 to see a continuation of stability, as the market absorbs the falls registered this year. This is, of course, predicated on the residential market being exempt from any form of VAT. Office market outlook For the office market, as outlined above, the sharp corrections that have occurred in recent years have driven rents to all time lows in many locations and so the prospect of any further drops remains unlikely, at least in the near term. This is why our view for 2017 is for flat growth may well see further falls in headline asking rates should VAT be imposed on the commercial office market, as is the case elsewhere in the GCC. Retail market outlook While our expectation is for rents to remain firm this year, the retail market is expected to remain a bright spot in the Kingdom s property market for the reasons outlined above is likely to see rental rates remaining firm once more as more supply comes online to match anticipated demand.

6 For further details contact Harry Goodson-Wickes Head of Bahrain & Saudi Arabia T: Faisal Durrani Head of research T: Leanne Lobo Head of agency T: Hashim Kadhem Senior surveyor - professional services T: hashim.kadhem@cluttons.com Cluttons LLP 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. 1807