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With Bahrain's property market almost static, the kingdom could expect a restructuring of the real estate market by which affordable housing would gain more attention.
The market for luxury villas, the upper end of the market has slowed down dramatically in Bahrain, even if not as drastically as in Dubai.
Property prices, rents and transactions in Bahrain's housing market were static in the third quarter, and are likely to remain so for the fourth quarter.
A study by DTZ, a top global real estate advisory firm, found that following a four year period of sustained growth, due to reduced levels of liquidity and low investor confidence, Bahrain's residential sector underwent a significant correction from Q3 2008 to Q3 2009, with transactions in Q4 2008 down 40 per cent on the previous quarter and 52 per cent year on year.
At the same time the accumulated lack of low-end housing in the kingdom is 40,000 units, increasing by between 5,000 and 6,000 units per year.
Bahrain-based Islamic lender Ithmaar in June established Naseej, a developer with issued capital of BD180 million ($477.6 million) that focuses entirely on affordable housing.
Ithmaar Development and Naseej are part of a consortium that has submitted a preliminary bid for a government tender for over 2,000 low-income units to be built under a public-private partnership scheme.
Also, the government was currently drafting plans for the construction of 14,000 low-income units.
The report outlines key drivers of a growing population, increased income and proximity to the Eastern Province of Saudi Arabia contributing to the growth in Bahrain's retail market from 185,000 sqm gross leasable area (GLA) in 1999 to 510,500 sqm GLA today. New retail development across Bahrain for the next five years (without factoring in delays or cancellations) is estimated at 412,000 sqm GLA, representing an 80 per cent increase on existing stock.
Referring to the office sector, the DTZ study notes that 270,000 sqm of planned office space has been delayed indefinitely or cancelled in the last 12 months, with a further 50,000 sqm due for delivery in the past 12 months, pushed back to Q4 2009 and beyond.
The pipeline for office development stands at 520,000 sqm by 2012, which would represent a 90 per cent increase on existing stock if all were delivered, an outcome which DTZ views as being unlikely.
However, DTZ anticipates that the backdrop of government investment into both heavy and light industry will lead to significant development activities within the industrial sector, which is currently under supplied.
With an increasing population and the need for more sophisticated logistics, the report asserts that the warehousing and logistics market across the Gulf is still relatively immature and underdeveloped, with limited speculative development activity, and thus is a potentially attractive development opportunity.
"Whilst the future remains unclear, drivers for value are beginning to re-emerge and over time are likely to lead to a stronger, more resilient property market in Bahrain," says Robert Addison, DTZ's director and country manager of DTZ Bahrain.
Meanwhile, property prices across the board have fallen by as much as 15 per cent year-on-year, says Mike Williams, senior director CB Richard Ellis.
Mortgage rates in the country are prohibitive and will stunt the market until liquidity and appetite for mortgage business returns to the banking sector.
Realising the importance of reviving the real estate sector, the Central Bank of Bahrain has suspended caps on banks' exposures to the region's troubled real estate markets.
The CBB had on August 1 introduced a 30 per cent cap on the share of real estate financing that Bahrain's banks can hold in their gross financing portfolio and also capped banks' real estate investments at 40 per cent of their capital base.
The withdrawal of caps on banks' exposure to the real estate sector might have been prompted by the need to allow banks to provide enough home loans, which are vital for the progress of the sector.
Also selling down real estate portfolios during the current bottom of the property market would have led to book value losses.
Banks would also have been in a weak bargaining position as potential buyers were aware banks need to sell due to the regulations.
Investment houses in Bahrain's off-shore banking sector were very profitable during the oil and real estate boom in the region between 2002 and 2008 partly due to higher valuations of real estate in their books.
In particular Islamic banks heavily invested in real estate as they lacked other asset classes. Gulf Finance House, Bahrain's largest listed Islamic investment house, had some 50 per cent of its assets of $2.7 billion in real estate investments and real estate financing at the end of the second quarter.
