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29 March 2024

Developers in Bahrain face payment defaults

Aerial iew of Manama. The inertia in the residential freehold sales market in Bahrain is likely to remain as a lack of finance, investor apathy and over supply continue to have a depressing effect on the market. (SUPPLIED)

Published
By Anjana Kumar

Bahrain's residential developers are facing significant levels of payment defaults as purchasers either cannot or refuse to make payments due to stalled construction," said a recent report.

The latest DTZ Research on the Bahrain property market for the first quarter of 2010 titled 'Property Times Bahrain Q1 2010' said: "Developers are now facing significant levels of default on staged payments as purchasers cannot or refuse to make payments due to stalled construction. The disappearance of this source of cash flow has led to the cancellation or delay of a large number of residential projects with many now in a state of inactivity."

Bob Addison, Country Manager-Bahrain, DTZ who is the author of the report, said in the report that despite the low sales volumes, many developers have not lowered their asking prices with most cancelling all marketing efforts in the hope of market recovery.

Meanwhile, Bahrain is likely to experience an increased office vacancy rate and low rents especially in the Central Business District area (CBD) area in the wake of a falling demand and increased supply of office stock in the country.

Residential market

The freehold residential market in Bahrain continues to be characterised by general malaise and negative sentiment as it struggles to emerge from the downturn. The market place has moved from the speculative investor to an end-user market, which has resulted in falling sales prices. There is also evidence of weakness in the leasehold market with rents in the apartment sector experiencing significant declines in some locations while villa rents have shown signs of easing.

"The inertia in the residential freehold sales market is likely to remain as a lack of finance, investor apathy and over supply continue to have a depressing effect on the market," said the DTZ report. Off-plan sales have disappeared from the market, eliminating the primary source of funding for the large majority of developers who were heavily reliant on staged payments from purchasers to pay construction costs.

"Developers are also now facing significant levels of default on staged payments as purchasers cannot or refuse to make payments due to stalled construction. The disappearance of this source of cash flow has led to the cancellation or delay of a large number of residential projects with many now in a state of inactivity," said Addison.

The report said despite low sales volumes, many developers have not publicly lowered their asking prices with most cancelling all marketing efforts in the hope of market recovery.

"However, developers are willing to offer heavily discounted prices on application, particularly to cash buyers or bulk investors," said Addison.

According to DTZ, transaction volumes remain very low and at reduced levels from that seen in 2008. Villas at Durrat Al Bahrain are achieving an average of BD504 (Dh4,905) per square metre, Riffa Views, BD568 per sq m and apartments at Amwaj Islands (Tala Island, Zawia II and Floating City) BD 772 per sq m.

These averages are based on the first quarter of 2010 achieved sales. Low levels of investor activity are also being witnessed in the market from investors seeking distressed sales or income generating properties with secured tenancies.

However, the freehold market is a long way from recovery and is likely to experience further downward pressure on sales prices before any substantial recovery takes place, the report said. Sales prices are likely to be suppressed more by the large volume of stock remaining in the development pipeline.

Meanwhile, DTZ anticipates around 19,300 apartments to be delivered by Bahrain's major master planned schemes between 201 and 2015, if current commitments are delivered.

Residential rents

Bahrain's leasehold residential market has also experienced a softening in demand, which has caused a general fall in achieved rents last year. The apartment sector has experienced steeper falls in rents than the villa sector with the performance of both varying across locations.

Apartments within Juffair and Amwaj Islands continue to experience the sharpest decline in rental values due to the large volume of available stock in both locations and rental declines in the region of 15 per cent and 20 per cent have been evidenced over the past year. Seef and Sanabis have also experienced significant declines driven by the large volume of stock brought to the market by Abraaj Al Lulu.

In April 2010, good-quality furnished apartments stood at BD560 per month for one-bedroom, BD740 for two-bedrooms and BD1,020 for three-bedrooms. "As the freehold market remains stalled and the residential apartment pipeline continues to deliver apartments to the market, oversupply is set to become exacerbated in 2010," said the report.

"This is likely to dampen prospects for a quick recovery in the leasehold residential market and create the potential for further declines, particularly in areas of high speculative investment such as Juffair and Amwaj Islands," said Addison.

The villa market has been more resilient but has also suffered declines. Some compounds in areas popular with high-income Bahraini nationals and Western expatriates such as Saar, Budaiya and Janabaiya, are now experiencing vacant units after a sustained period of full occupancy and landlords are reducing rents to secure tenants. Prime rents in the Saar area are currently averaging BD1,200 per calendar month for a three-bedroom villa and BD1,600 per calendar month for a four-bedroom villa. One notable development in the villa leasehold market is the emergence of a rental market at Riffa Views as parts of the development reach completion. Achieved rents at Riffa Views for three-bedroom villas are circa BD1,000 per month and BD1,200 for four-bedroom villas. DTZ anticipates these levels will rise as the development completes and matures. "In light of deteriorating conditions in the leasehold market, many landlords are now offering flexible lease terms such as rent freezes and reductions to incentivise renewal. Some landlords are willing to enter into shorter leases than the market standard of 12 months," it added.

Office market

Bahrain's office market continues to undergo significant re-adjustment. Falling occupier demand, caused by the fallout from the economic crisis, coupled with a significant development pipeline has caused increasing vacancy rates and falling rents across the Kingdom's main Central Business Districts.

According to the DTZ report, an estimate of the total office stock in Bahrain, as at April 2010, stood at approximately 630,000 sq m.

The Bahrain office market is currently experiencing a significant oversupply situation. During the past six months, about 47,000 sq m of new office stock has been delivered to the market with a further 100,000 sq m due to be delivered by end-2010 as a large number of projects near completion.

DTZ further estimates approximately 548,000 sq m of new stock will enter the market over the period between second quarter 2010 to fourth quarter 2013. "An additional stock of approximately 377,000 sq m has been put on hold or cancelled indefinitely over the past year as a result of deteriorating market conditions. Further, it is likely more projects will be cancelled, phased over longer development periods or scaled down in size if current market conditions prevail," said the report. "Take up of office accommodation in the kingdom has reduced significantly since the peak of the market, with 2009 levels down 23 per cent on the previous year," said Addison.

Leasing activity

"Leasing activity remained limited in the first quarter of 2010 and we anticipate continued low levels of take-up over the remainder of the year," he added.

Overall, the current average vacancy rates are seven per cent to 10 per cent for Bahrain's main Central Business Districts (CBDs) having risen from the four per cent to five per cent recorded a year earlier. These average figures are distorted by the relatively low vacancy rates in the established business districts of Central Manama and the Diplomatic Area, whil a number of office developments completed in recent months, particularly in Seef District, have yet to attract any occupancy at all.

"Vacancy rates are likely to increase over the course of 2010 with older stock in the Diplomatic Area and Central Manama expected to see significant rise as tenants relocate to newer buildings offering space at increasingly competitive rents," said Addison.

Office rents

The new office space, which has emerged over the past year, is now starting to create significant downward pressure on office rents across the three main CBDs with 20 per cent to 30 per cent decreases in achieved rents being recorded within some of Bahrain's highest quality office buildings.

A review of good quality stock in Central Manama shows prime rents averaging BD11 per sq m per month, with Seef at BD10 per sq m per month and the Diplomatic area at BD8.8 per sq m per month. Older stock in each of these areas achieves rents at between 15 per cent and 30 per cent lower. The market is currently experiencing a significant readjustment in rental levels as landlords lower their expectations in light of increasing vacancy rates and substantial competition from other schemes.

"We are aware that tenants are securing space at 20 per cent to 25 per cent discounts on quoted rents as landlords offer increasingly flexible lease terms to secure the limited amount of demand in the market," said Addison.

DTZ expects to see further downward pressure on office rents in 2010.