Cluttons in Bahrain: Positive outlook for Kingdom's economy as stability improves

The planned $1bn GCC aid will also contribute towards the nation's social and infrastructure development program.

During Q2 and Q3 2013, the residential lettings market is expected to experience a surge in supply, as several major residential developments will be brought to market, including the government's housing program. It is estimated that over 6,000 government-built homes will be completed by the end of Q3 2013, helping to relieve some of the pressure off the waiting list which, according to Cluttons' research, has received almost 54,000 requests.

Despite perceptions that the sharp upturn in residential supply may place downward pressure on prevailing rents, analysis suggests that rents will remain stable. This is due to there being sufficient domestic demand to absorb the new residential units, coming predominantly from the US Navy, which continues to relocate personnel to the island. Tenant demands are centered on the quality of finishing, with a preference for furnished properties and with modern amenities topping the wish lists. There is a heightened level of interest in Amwaj Islands, with Zawia 3, the Address Villas and Amwaj Waves all expected to be completed towards the end of the year.

The residential sales sector is seeing a spike in foreign investment from the GCC, which perceives the market to have 'bottomed out.' This renewed interest in investing in property in Bahrain has created a window of opportunity for some landlords to exit investments made at the peak of the market, with manageable losses.

Following a low level of activity in Q4 2012 in the commercial sector, 2013 has got off to a significantly better start, with an increase in occupier enquiries, predominantly from companies expanding and requiring new space, rather than new entrants to the market. In 2012, a combination of improved economic outlook, coupled with a slowdown in the number of new occupiers in the market helped minimise rental increases, whilst fostering an environment for the expansion of existing businesses.

Landlords remain under pressure to remain flexible on the lengths of rent-free and fit-out periods given the oversupply in the office market, therefore Cluttons is not anticipating any significant upturn in office rental rates in the medium to long-term. The Economic Development Board of Bahrain (EDB) is in talks with neighbouring Saudi Arabia, in an effort to foster increasing cross border investment, while creating opportunities for Bahrain-based firms to diversify its revenue streams. However, post Arab Spring, the UAE and Qatar continue to attract the lion's share of new companies entering the region.

A stabilisation in national tensions is likely to translate into a slow, but steady upturn in the number of GCC tourist arrivals, which will help lift demand for retail space over the course of the year. Bahrain City Centre remains the primary hub of retail activity, but with limited vacancy, retailers are turning their attention to smaller retail malls. Seef Corner, opposite Bahrain City Centre, which is let by Cluttons, has benefitted tremendously from over-spill from the City Centre; 75% of the available retail units were let within two months of coming to market. Due to the limited number of vacant prime retail units in Bahrain City Centre, there has been a rise in asking rental rates in surrounding submarkets, which are now hovering around the BD12 per sq m mark, a level not recorded outside Bahrain City Centre for over two years.

The industrial market has seen a slight upturn in performance, although this is underpinned by a lack of stock, rather than an increase in requirements. The low supply levels are translating into increased landlord negotiations, as they are aware of market conditions and are trying to maximise potential returns. Despite this, rents are expected to remain stable between BD2 and BD3.5 per sq m this year; a figure that remains unchanged from the second half of 2012. The Bahrain International Investment Park is still the most desirable location for industrial space and, according to a survey published by the Financial Times, is currently the top location for foreign direct investment in Bahrain and one of the top 15 FDI magnets across the GCC.

New supply is expected to come to market during the summer, which will help satisfy some of the demand, with the second phase of First Bahrain's Maajal development at Bahrain Investment Wharf expected to be completed by mid-2013. The rising demand for plots of land has led to a gradual increase in freehold and leasehold values.