Real estate sector hit

Landlords are being urged to lower rent expectations to keep their properties occupied ... and legislators must tighten the rules surrounding developers to boost market confidence into buying into the Bahrain dream.

Tim Glover, CEO of Cluttons Bahrain, said that the real estate market is continuing to suffer as supplies of commercial and residential properties outstrip demand ... and the kingdom's current political upheaval is not helping matters.

He said: "There is an imbalance between what people think properties are worth and what they are really worth. There is not an awful lot of transacting going on; very little is happening and people are sitting tight.

"Fundamentally property has to be occupied for it to add value. The drops in rent have been because there are too many buildings coming on to the market.

"Our advice would be to get tenants in. If you get people contributing to the service charge the building is being managed and maintained and has a life.

"If you want to hang out for the top end, which is currently not there, then your building will be empty."

Mr Glover's advice comes alongside statistics published in the recent Cluttons property market update that estimates current commercial office markets' average occupancy rates at just 60-70 per cent with roughly 300,000 square metres of built property vacant.

Supply of commercial property is also set to increase when approximately 200,000 sq/m of 'lettable' space, currently under construction, will be available for occupation in the coming two to three years.

The report also stated that while asking rates for prime commercial buildings remained at BD11 per sq/m, per month, deals are occurring much lower at BD5 per sq/m, per month in Sanabis and at BD7 per sq/m per month in Seef.

More worryingly, the report warns of the possibility of landlords taking drastic measures like one in Dubai who recently let out his property on the basis of the tenant paying the service charge only! "This has yet to happen in Bahrain but would be a potential solution for landlords who are currently accumulating running costs," the report suggests.

Rents in retail malls have also come under increased downward pressure with sales of standard inline units down by 50-60 per cent and food and beverage units down by up to 40 per cent.

Mr Glover said: "Property values are generally cyclical. The trend in the long-term is always up. However, the markets over here will take longer to get back to their peak because of the significant oversupply."

He also believes the country has to introduce stringent new rules to protect investors willing to buy into the Bahrain property sector. "The country has to sort out legal issues otherwise it will continue to suffer," he said. "For example, a system of depositing the first 10 per cent of the purchase cost of a building into an international escrow account has not yet been established."

Escrow generally refers to money held by a third-party on behalf of transacting parties. It is best known in the US in the context of real estate. In the UK escrow accounts are often used during private property transactions to hold solicitors' clients' money, such as the deposit, until such time as the transaction is completed.

"Developers have been starting schemes without proper financing and funding in place," said Mr Glover. "And, there is no method or methodology to place a developer into administration ... so everybody suffers and the word spreads.

"If proper mechanisms are not in place then people are not going to come here and buy - they will simply not have confidence to do so.

"The current political protests are also not helping and with Bahrain being so small, any level of inactivity is not going to help the economy.

"Our view, a month ago, was that the markets would be unlikely to recover before the end of 2012. What impact the troubles are having on the property market is, at the moment, pretty difficult to assess."