Firm foundation

Investment returns will continue to be based on supply and demand equating value against either risk or other potential returns.

The thing to keep in mind is that the economics leading up to the issues in the US and the UK are different than those in Bahrain.

The demographics including population increases, net migration and sufficient homes available to the increasing wealth being creating in the country and region also play a part in the future of home values.

A recent front page headline in GulfWeeky's sister newspaper, the GDN, stated 'Boom time for Gulf'. Bahrain and other GCC countries plan to invest $18 billion in steel production alone to meet the soaring demand in the region's unprecedented construction boom. Bahrain itself is planning four new plants. This production will meet the demands of commercial real estate and housing.

Why all of this production? There continues to be an influx of investment which not only creates physical assets in the country in such key sectors as finance and tourism but also in employment creation and expansion.

This also leads to additional wealth creation in Bahrain allowing people a greater opportunity to either purchase their first home or to make an investment in the 'buy to rent' market.

These opportunities are supported by the different demographics within Bahrain and across the region compared to that of the US and the UK.

Firstly, the population growth rate of Bahrain over the last year was 39 per cent. This unprecedented growth creates a stronger demand for housing and particularly supports a very active demand to join the 'buy to let' market.

And, real estate continues to offer a strong return in Bahrain not just in terms of appreciated value but also as investment income.

Rental increases on the island can be double digits compared to the increased inflation and GDP growth rate of 6.6 per cent. This is in contrast to the US and UK which are barely recording growth and have a rate predicted to be less than one third of that reported in Bahrain.

If you look at the return that an investor would receive if they just left their savings in the bank, it would be less than the current inflation figure of Bahrain.

However, the real estate market continues to offer returns for letting as well as appreciation. Additionally, foreign investors may see Bahrain as an ideal investment opportunity similar to that of Dubai a few years ago as it has not yet appreciated in comparison to the UAE.

If people are buying a home rather than a house as an investment, they are usually more willing to make a greater investment and buy above their affordability.

With the increases in wages, inflation and the strength of the local economy and continued cost of oil, Bahrainis and expats living in Bahrain will have a greater ability to invest.

Also, foreign investors will look at value for the money invested. In comparison, the GDP purchasing power per capita in Bahrain is very similar to that of the UK at $34,700 versus $35,300.

However, compare what you get if you invested in a nice four bedroom villa in say Amwaj, Al Areen or Durrat Al Bahrain versus the cost of buying a similar sized single detached four bedroom house in Surrey, Berkshire or Kent.

The price in the UK would be more than double that of Bahrain.

Clearly, the latest economic predictions for the UK are a bit of doom and gloom rather than boom. With the Labour housing minister accidentally revealing a confidential brief stating that the market was expected to decline between 5-10 per cent this year in the UK.

The expected decline in the UK is a similar response to that of the United States.

This is predicated on a natural correction prior unsustainable growth in the housing market.

This is not meeting supply with demand but more of bidding wars to capture homes or the idea of always being able to flip a home for a profit in a rising market.

The credit crunch squeezed funding on many homes and helped to siphon out the investors driving up the values.

Again, this is more of a correction that should not materialise in Bahrain as it did not go though such a ridiculous and unsustainable growth pattern without the supporting demographics and population growth that it maintains.

In US markets like Las Vegas or Miami, home prices have decreased by approximately 25 per cent over the last year. This decline is relative to the unprecedented increases that these markets had leading up to the decline as a natural correction.

From 2000 to 2006, these markets actually saw home values increase by over 135 per cent. With inflation in the three-four per cent range during this period, it is not economically justifiable to maintain such a growth rate and therefore, a natural correction occurs.

Anyone who has owned, bought or sold a house in the UK over the past decade can see frightening similarities to that in the US but the decline may not be as drastic as there continues to be a greater demand against the current supply compared to the US market.

In Bahrain, it is predicted that the construction industry will grow at an average rate of 4.9 per cent during 2008-12. This is matched with the economy expected to grow at approximately 5.38 per cent over the same period with the construction industry contributing over three per cent to the country's GDP.

Based on these matching types of statistics, continued population growth and need for housing, a general increase in wealth driving the supply, this additional demand appears to be more matching the needs versus history repeating itself like the US and now the UK.

Relative to the other returns in other markets or sectors/investments, the real estate market appears in better health in Bahrain.