Rental market stability ends

The relative stability of residential rents across the Kingdom’s key expat dominated submarkets appears to have ended following a largely flat 2016.

2017 has marked a change in conditions, with rents retreating across the board during the three months to the end of March.

In real terms, this equates to a monthly fall of roughly BD 80. Apartments (-8.3%) experienced a sharper rate of rent corrections than villas (-6.9%). However, both segments of the residential rental market experienced the fastest rate of decline since 2009 during Q1. 

Unsurprisingly, it has been the top end of the rental market that has been the worst impacted by the stagnant economic conditions. Job security fears dominate concerns amongst households, especially those linked to the oil and gas sector. This, coupled with a subsequent tapering off in demand from oil and gas sector commuters, working across the border in Saudi Arabia, has put pressure on rents, leaving landlords with little option but to adjust rates in order to entice demand.

During Q1, average monthly rents on Reef Island and in Juffair, declined by up to BD 100, after rents in these two locations remained unchanged for almost two years. On the villa front, Saar (BD 900 per month) experienced the largest decrease in rents across the markets we monitor, while Amwaj Islands (BD 1300) registered an average monthly decline of BD 75.

Budgets retreat

The previous stability in budgets we reported on has also ended, with searches for both upper and lower limit rents slipping at the end of last year. According to data from Bahrain Property World (BPW), searched monthly upper limit budgets dipped back to BD 809, from BD 830 a year earlier, while monthly lower limit budgets fell to BD 565 from BD 692 at the end of 2015.

As we have outlined above, economic pressures, the removal of food and utility subsidies, in addition to global economic uncertainty and the looming VAT regime are all bearing down on households and organisations. Firms across the Kingdom are reining in expenses by reducing housing allowances, or removing them altogether, while households are moving to contain costs.

This has been especially noticeable at the top end of the market. In submarkets like Amwaj Islands for instance, monthly rents for three- and four-bedroom homes remain amongst the highest in the Kingdom at between BD 1,200 and BD 1,400. Unsurprisingly, the popularity of this submarket fell to 9.1% of all property searches at the end of 2016, compared to 13.3% a year earlier; this was the most significant decline across the nine submarkets tracked by BPW.

Supply surplus

Weaker economic conditions alone are not to blame for the correction now underway in the rental market in Bahrain.

There has been a surge in the number of new residential developments being sold in the market, most of which are being acquired by Bahraini, or other Gulf investors. From our experience, a significant amount of this stock is filtering through to the rental market, pushing supply ahead of demand and contributing to a widespread destabilisation of the rental market.

For tenants, of course, this positions them in an increasingly strong position as they are able to cherry pick from a range of options available on the market.

Sales market holding steady for now

The extent of this burgeoning supply surge is reflected by the fact that over 4,100 units are slated for completion within the next two years. By 2020, over 7,100 units are expected to be added to the existing residential supply.

The knock-on impact on sales prices from the sudden boost to supply appears yet to materialise, with residential values holding steady and remaining unchanged for six consecutive quarters.

At the end of Q1 2017, average residential capital values stood at BD 948 psm, with apartments on Reef Island (BD 1,233 psm) and villas on Amwaj Islands (BD 1,275 psm) remaining the most expensive in the Kingdom.

To an extent, the unique nature of these two locations and their high level of appeal amongst Bahrain’s expatriate community is likely to shield values from extreme volatility. However, it is our view that trouble may be brewing for the residential market, unless developers are able to restrict the number of sales per person and tighter regulation around the general resale of homes emerges. 

Liquidity crunch

Of course, there is still an underlying liquidity crunch across the banking system as a result of a reduction in hydrocarbon receipts.

A lack of easy access to debt nancing may deter purchasing appetite. Paradoxically, high volumes of unsold stock will also contribute to capital value volatility. For now, the difficulty around controlling supply lies in the hands of developers who are promoting favourable payment plans.

Often, investors need to amass 50% of the property’s value to secure a deal, with the remaining 50% due on completion, which means many are able to bypass the need for financing. There are also instances of payment plans stretching beyond handover, while some developers are offering to cover service charges for up to 12 months.

Stability likely to return in 2018

As outlined above, the rental market remains one that favours tenants; however, rapid capital value corrections as a result of an oversupply would deter investment activity. 

Some developers appear wary of the looming threat and are restricting sales activity until projects have been completed, while others are creating residential assets that would appeal to investors by renting out individual units, before bringing them to market as tenanted assets.

It is encouraging to see this behaviour emerging, although it remains our view that a correction in residential values is highly likely, particularly if the sales supply pipeline continues to expand unchecked at current rates.

For the rental market, we forecast rents to continue dipping back, with average rental rates likely to end the year 10% to 12% down on 2016 as the economic pressures both within Bahrain and around the region remain in place.

2018 may well mark a return to stability should the government’s infrastructure spending initiatives drive up overall economic activity levels, as we expect. 

View the full report here.