The Covid-19 pandemic has severely disrupted the economic landscape in Bahrain and its real estate market will remain subdued for the coming twelve months, according to leading global real estate advisor Savills.

 

Residential rents across the kingdom are now facing further downward pressure as supply outstrips demand, stated Savills in its first property market indices that provides an overview of the impact of the global pandemic and a market analysis of the office and residential rental markets. 

 

The past few years have seen a readjustment of living patterns following an increase in energy costs which resulted in a shift from larger to smaller units. 

 

This is largely limited to the villa segment and even more so for those rented on an exclusive basis (utility costs not included), said the Savills report. 

 

Additionally, occupier movement has been observed given the increase in supply by approximately 3,500 apartment units in a short period of time. 

 

This is set to be further intensified with a supply of 4,322 units over the next four years when projects such as Golden Gate Towers, Oryx Bahrain Bay, Paramount Tower, Harbour Row, and Amwaj Gateway are handed over, it stated.

 

According to Savills, the kingdom was already under significant economic pressures as persistent large fiscal deficits have raised public debt from 42% of GDP in 2013 to close to 79% in 2019. 

 

With the onset of the pandemic straining government finances and a drop-in oil prices, the fiscal position continues to remain precarious. 

 

It is projected that the government revenues are set to drop by 8.5% in 2020, compared to a 2.5% growth recorded in 2019. This will push the overall debt to 103% of the GDP in 2020.

 

Overall economic output is expected to significantly slowdown in 2020 with the GDP projected to decline by 5.9% in 2020 after a 1.8% growth last year. 

 

Non-oil GDP is likely to contract by 5.1% y-o-y while the oil sector economy is set to decline by 9.9% in 2020. 

 

Savills said it expects fiscal consolidation measures under the Fiscal Balance Program (FBP) to lower the deficit in the coming years with initiatives such as the introduction of VAT, and with $10 billion in financing from other GCC countries also helping the improvement.

 

Commenting on the current state of the Bahrain economy and property sector, Harry Goodson-Wickes, Head of Northern Gulf at Savills said: "Over the past few years, Bahrain has adopted a series of positive reforms to diversify its economy and empower the private sector. Under the broader economic reforms, the government also launched the National Planning Development Strategy 2030 and established the Real Estate Regulatory Authority (RERA) to help the nation achieving an integrated approach towards urban development, increase transparency, promote investments while protecting the rights of consumers."

 

"However, government revenues have not kept pace with the overall diversification strategy and in addition to that, the onset of Covid-19 has undone a lot of progress made under the Fiscal Balance Programme (FBP)," he stated.

 

"Similar to the country’s economic landscape, the real estate sector has been under pressure for the last few years and this is now likely to continue for the foreseeable future given the challenging global economic landscape," he added.

 

Across the office sector, Grade A offices remained resilient due to the quality of stock and the type of clientele they attract (high occupancy rates of over 90%)

 

In the retail sector, retailers who adapted their strategy to create a flexible omni channel retail model will have a longer-term positive impact on the sector

 

Online shopping is having a large impact on the Bahrain retail market while it is yet to reach the level of market penetration

 

Commenting on the residential market, Hashim Kadhem, Associate Director – Head of Professional Services at Savills Bahrain, said: "The rental rates will continue to decline for the remainder of this year across apartment and villa projects with the high-end segment facing the most pressure."

 

"This is mainly due to more households constricting their budget on the back of subdued economic outlook in addition to uncertainty surrounding employment in the private sector and salary reductions," he explained.

 

"With many residents working from home, we believe this may lead to a rise in tenants looking for extra space for home offices and an increased focus on communal areas, which was historically not been a priority," he added.

 

A high volume of freehold apartments has entered the market over the past three years with a further 7,500 units expected in the next five years, leading to a supply and demand imbalance. 

 

Historically, investors would buy an entire residential floor with an intention to rent it with yield expectations of more than 8%. However, given the lack of demand in the rental market, there has been a consequential impact on the freehold off-plan sales market he pointed out.

 

In terms of capital values, high-end villas faced the steepest drop with a year-on-year price drop of 8.3% whereas mid-end villas decreased the least by 0.5% for the same period. 

 

In the apartment market, the low-end fared the best with a minor price decrease year-on-year of 0.7% compared to drops of 3.9% and 4.8% for mid and high-end apartments respectively during Q3 2020.

 

On the office sector, Savills said despite an oversupply which has stretched for several years, a number of newer developments have come online over the past couple of years such as United Tower and the AXA Building. 

 

Consequently, occupancy and rental rates have been under pressure, it stated.