RESEARCH

BAHRAINMARKET REVIEW 2019

On the back of reforms, easing of regulations, continued investment in large scale projects and higher oil prices, GDP growth is expected strengthen to 2.8% and employment is expected to expand by 2.5% in 2019.

Over recent years Manama’s o cemarket has become favoured towardstenants. As a result of the more tepideconomic backdrop we have seen subdued demand, with rents across all market segments seeing signi cant declines. In 2018 we have witnessed rents remain relatively stable.

Bahrain’s hospitality sector hastraditionally attracted regional GCCvisitation, particularly from Saudi Arabiavia the King Fahd Causeway. As a result of Bahrain’s overnight stay sources, its hospitality market has historically had challenges in relation to driving occupancy rates.

Looking ahead we may begin to see international visitation from outside the region increase as the country’s national airline expands its network alongside Bahrain International Airport’s expansion.

Key ndings Macroeconomic overviewAcross the GCC nations a range of economic diversification efforts are starting to pay dividends, with sectors such as business and financial services, Fintech, industrial and manufacturing starting to become integral to regional economies.

This pivot was required post 2014, where the collapse in oil prices exposed weaknesses in the economic structure of many GCC countries. From 2011 to 2014 the average annual GDP growth rate of GCC nations stood at 5.0%; post the collapse, in the period from 2015 to 2018, we have seen average GDP growth slow to 2.2%. As most GCC nations relied on revenues from the hydrocarbon sector as the main source of funds for government spending, the resulting impact on spending and debt to GDP ratios has been profound.

This has been the case for Bahrain more so than any other GCC nation, where the gross general government debt increased from 44% of GDP in 2014 to an estimated 88% in 2018. More so, as a result of this indebtedness raising additional debt has become more challenging. These factors have had a marked impact on economic activity, with GDP growth expected to have slowed again in 2018. Initial

estimates expect Bahrain’s GDP growth rate to register at 2.6% in 2018, down from 3.8% a year earlier.

Given the strong challenges the Kingdom faces, Kuwait, Saudi Arabia and the UAE stepped in to provide a US$10bn aid package in late 2018. The money will support a new fiscal program designed to eliminate the country’s sizeable budget deficit by 2022.

In addition to this, the government of Bahrain has enacted a range of reforms to help ease the fiscal burden and help diversify the economy. These reforms range from the implementation of Value Added Tax (VAT) at 5%, public sector reforms to reduce the wage bill burden, long-term investor visas and legal reforms to help reduce the cost of doing business.

Please refer to the important notice at the end of this report.

“Bahrain continues to be an attractive and cost e ective location for rms looking to setup a base in the GCC. Particularly as the region’s largest economy, Saudi Arabia continues to open up, Bahrain will increasingly be considered as a hub location given its direct access to Saudi Arabia.”

MATTHEW DADDPartner, Occupier Services andCommercial Agency

FIGURE 1Economic indicators

Source: Knight Frank Research

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%

-4.0%

GDP, YEAR-ON-YEAR % CHANGE (CONSTANT PRICES)

EMPLOYMENT, YEAR-ON-YEAR % CHANGE

CPI, YEAR-ON-YEAR % CHANGE

JUNE

201

8

Q2 2

017

2019

(F)

YoY

Q3 2

018

2017

2016

2015

2014

2013

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

2019

(F)

JULY

201

8AU

GUST

201

8SE

PTEM

BER

2018

OCTO

BER

2018

NOVE

MBE

R 20

18

DECE

MBE

R 20

18

Q1 2

017

Q2 2

017

Q3 2

017

Q4 2

017

Q1 2

018

Q2 2

018

Q3 2

018

Q4 2

018

POLICY RATES

TotalPrivate sector

Bahrain, CBB Key Policy Rate

Public sectorUnited States, Federal Funds Target Rate

RESEARCH

BAHRAINMARKET REVIEW 2019

OutlookOn the back of these reforms, easing of regulations, continued investment in large-scale projects and higher oil prices, GDP growth looks set to strengthen to 2.8% and employment is expected to expand by 2.5% in 2019. Additionally, the fiscal situation is likely to improve given the introduction of VAT alongside

BAHRAIN MARKET REVIEW 2019

2018 2019

FIGURE 2Ease Of Doing Business: Distance To Frontier Score 2019

Regional competitivenessBahrain continues to be an attractive location for firms looking to setup a base in the GCC. Particularly as the region’s largest economy, Saudi Arabia, continues to open up. Bahrain will increasingly be considered as a hub location given its direct access to Saudi Arabia via the King Fahd causeway.

International firms are attracted by Bahrain’s favourable business environment, which offers effective regulations, lack of Free Zone restrictions alongside a favourable tax regime.

Figure 2 highlights the competitiveness of doing business in Bahrain, where in the World Bank’s Ease of Doing Business rankings Bahrain ranks 62nd out of 190 countries, up from 66th in 2018. Bahrain’s trading across borders and protecting minority investors scores have also improved over the last year. Starting

Source: Knight Frank Research 2015 2016 2017 2018 2019Source: Knight Frank Research

FIGURE 3GCC Countries, Ease of Doing Business Rank

2015 2016 2017 2018 2019

UAE

Bahrain

Kuwait

Oman

Saudi Arabia

32

61

100

77

84

34

66

98

69

96

26

63

102

66

94

21

66

96

71

92

11

62

97

78

92

fiscal consolidations. Finally, whilst the introduction of VAT is likely to increase the rate of inflation, we do not expect this to be a substantial increase given the relative consumer friendliness of the VAT regime in Bahrain compared to other GCC nations.

“The introduction of VAT is likely to increase the rate of in ation, however we do not expect this to be a substantial increase given the relative consumer friendliness of the VAT regime in Bahrain compared to other GCC nations.”

TAIMUR KHANResearch Manager

a business, dealing with construction permits, registering property, trading across borders and getting electricity are all areas in which Bahrain scored well. With the broad range of reforms enacted in 2018, we expect Bahrain’s ranking to continue its ascent.

The main areas where Bahrain must continue to develop in the future are the areas of resolving insolvency, getting credit and enforcing contracts – the World Bank has highlighted that performance in most of these areas has already begun to improve since 2016.

Finally, the island is a firm favourite with expats, with the Expat Insider’s 2018 survey ranking it as the best place to live and work for the second year in a row.

Overall DTF, total

100%

80%

60%

40%

20%

0%

Protecting Minority Investors, DTF

Registering Property, DTF

Resolving Insolvency, DTF

Starting A Business, DTF

Trading Across Borders, DTF Dealing with Cinstruction Permits, DTF

Enforcing Contracts, DTF

Getting Credits, DTF

Getting Electricity, DTF

Paying Taxes, DTF

BAHRAIN MARKET REVIEW 2019

Real Estate market overviewCommercial Bahrain’s commercial office market continues to be dominated by weak occupier demand coupled with oversupply, a legacy of the 2001 to 2007 construction boom. This supply-demand imbalance has endured since 2010 when the full effects of the global economic downturn hit Bahrain.

Starting in 2010, Manama’s office market become increasingly favourable to tenants with headline rental rates falling by circa 45% to 50% from the peak in 2008. However, 2018 saw the market stabilise with rent falls abating, a sign that the market has bottomed out, though it remains to be seen when rental growth will return to the market due to the elasticity of the supply pipeline.

As a result of the economic backdrop, the rate of completions has slowed dramatically since 2014 which has avoided any compounding effect of the supply-demand imbalance.

Al Seef Bahrain Financial Harbour Diplomatic Area Bahrain Bay

BHD/

Mon

th/S

QM

FIGURE 5Bahrain, Indicative Office Rents

10.00

8.00

6.00

4.00

2.00

-

Source: Knight Frank Research HighLowAverage

“Commercial rents are 60% and 61% lower in Bahrain compared to ADGM and DIFC respectively.”

Demand for commercial office space continues to be limited and largely centred on small, fitted out units as tenants look to avoid cap expenditure. This trend has been prevalent for the past seven years and looks set to remain in the short to medium term.

Vacancy rates across the market continue to hover around the 40% mark with best in class schemes commanding better occupancy levels. Conversely, older buildings with inefficient floorplates and poor parking arrangements look set to suffer from lower occupancy levels and higher falls in rental rate.

As a result of these market conditions and the lower cost of doing business in Bahrain when compared to other regional financial centres, the Kingdom is well placed to take advantage of new entrants to the market that are seeking access to the GCC.

Using KPMG’s cost of doing business in Bahrain (Financial Services) 2018 report it can be seen that on a total costs basis, when looking to accommodate one CXO, two Heads of Department, two Directors, five Managers and 10 Analysts, Bahrain is 35% cheaper than Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC). Commercial rents for accommodating these 20 employees are 60% and 61% lower in Bahrain compared to ADGM and DIFC respectively (Figure 6).

Whilst the market has shown signs of stabilisation throughout 2018, this has come as a result of dramatic falls in rental rates. This stability looks set to continue in the short to medium term though it is unlikely to translate into rising rents or capital values in the foreseeable future as the market struggles to absorb existing stock.

FIGURE 4Key Market Indicators

Market Sentiment

Prime Rents: 8 BHD/ Month/ Sqm

Grade A Rents: 6 BHD/ Month/ Sqm

Grade B Rents: 3.5 BHD/ Month/ Sqm

Vacancy: 40%

Total cost Commercial rent (RHS)

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

-

250,000

200,000

150,000

100,000

50,000

-

FIGURE 6Average annual cost of operations in USD (2018)

BAHRAIN DIFC ADGM

Source: KPMG Cost of doing business in Bahrain, 2018

BAHRAIN MARKET REVIEW 2019

Demand generatorsBahrain is considered to be a well-regarded leisure destination and Manama has been established as a trading outpost for the Middle East since the early 1970’s. As the government continues to diversify

the economy and promote the location as a credible tourist and leisure destination, it will be able to drive demand beyond its traditional base.

The expansion of supply, where there are several key tourism related projects that have already been completed, are highlighted in figure 10.

FIGURE 7Key Performance Indicators

Source: Knight Frank Research/ STR Global

2015 2016 2017 2018

ADR Year-on-Year % Change Occupancy (RHS) RevPAR Year-on-Year % Change

KUWAIT CITY

JEDDAH

MANAMARIYADH

MUSCAT

MEDINA

FUJAIRAH

RAS AL KHAIMAH

DOHA SHARJAH

ABU DHABI

DUBAIMAKKAH

AL KHOBAR/DAMMAM

ADR

(USD

)

Occupancy (%)

FIGURE 8Trading performance by GCC City - 2018

JAN

FEB

MAR AP

R

MAY JUN

JUL

AUG

SEP

OCT

NOV

DEC

Devia

tion

Bahrain Manama

FIGURE 9RevPAR seasonality - 2018

Hospitality Bahrain’s hospitality sector has traditionally attracted regional GCC visitation, particularly from Saudi Arabia via the King Fahd Causeway. From an international perspective, demand has largely been attributable to corporate visitation and the Bahrain Grand Prix, which is the largest inbound demand generator in the Kingdom. Looking ahead we may begin to see international visitation from outside the region increase as the country’s national airline expands its network and improvement works are completed at Bahrain International Airport.

Due to the nature of visitation in Bahrain, the hospitality market has historically had challenges in relation to driving occupancy rates. Over recent years we have seen average occupancy decline from 56% in 2014 to 52% in 2018. Over the same period, ADR and RevPAR decreased by 23% and 28% respectively.

This softening in key performance indicators (KPIs) was attributable to falling oil prices which not only impacted the domestic market, but also the wider gulf economies, which in turn has resulted in subdued corporate demand. Leisure

demand has been impacted by the rift between Qatar and Bahrain (among other nations). More so, in the medium to long term we expect demand will be further impacted as entertainment led destinations are delivered in Saudi Arabia.

As of year-end 2018, Manama’s hospitality supply consisted of 13,000 keys (11,000 hotel keys and 2,000 serviced apartment keys) primarily composed of 4 and 5 star hotels which account for 40% and 39% of the total room supply respectively.

Looking towards the future, 3,300 keys have been announced to come online by the end of 2022. This represents a supply increase of approximately 25%. As more quality internationally branded properties enter the market, we expect locally operated and less centrally located properties will ultimately lose market share.

The short to medium term outlook for the market remains subdued as a result of additional supply scheduled to enter the market and the implementation of VAT which is likely to create further pressure on KPIs. The expansion of supply, where the total key count is expected to grow 25% by 2022, is likely to impact the top end of the market most given that the vast majority of additional keys set to be delivered are in either the 4-star or 5-star segment of the market.

Source: Knight Frank Research/ STR Global Source: Knight Frank Research/ STR Global

Knight Frank Research Reports are available at KnightFrank.com/Research

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

Global Outlook

GLOBALOUTLOOK

2019

FORECASTS FOR REAL ESTATE IN THE WORLD’S LEADING CITIES.

The Wealth Report

201913th Edition

The global perspective on prime property and investment

Urban Futures ME

1

2019

U R B A N F U T U R E SAFFORDABLE LIVING SOLUTIONS FOR ECONOMIC LONGEVIT Y

SAUDI ARABIA EDITION — 12019

Makkah Hospitality 2018

RESEARCH

MAKKAH HOSPITALITY2018

A REVIEW OF THE HOSPITALITY SECTOR IN THE HOLY CITY OF MAKKAH

Dubai Office Market Review 2018

COMMERCIAL RESEARCH

DUBAI OFFICE MARKET REVIEW Q3 2018

Due to increasing supply and a slowdown in new market entrants,

Macroeconomic overview

FIGURE 1 Economic indicators

Source: Knight Frank Research, Oxford Economics *Note: A reading of 50 equates to no change, above or below representing growth or decline respectively

5%

4%

3%

2%

1%

0%

57.9

57.4

56.9

56.4

55.9

55.4

54.9

54.4

Dubai UAE UAEUAEDubai DubaiDubai

Please refer to the important notice at the end of this report.

“Whilst current activity remains subdued, there is a reasonable level of pent-up demand which is being restricted currently.”

MATTHEW DADD Partner, Occupier Services and Commercial Agency

UAE Real Estate Investment 2019

RESEARCH

UAE REAL ESTATE INVESTMENT MARKET REPORT 2019

KSA Commercial Market Review 2018

COMMERCIAL RESEARCH

SAUDI ARABIA OFFICE MARKET REVIEW 2018

In Saudi Arabia, market wide rents and occupancy levels have been under pressure since 2016, with the trend continuing into 2018 amid increasing levels of supply and subdued occupier demand.

outperforming the market as a result of a historic lack of quality stock. A major headwind is that a large portion of upcoming supply falls within this category, which could put pressure on performance in this segment.

Although there was an improvement in business sentiment in 2018, on the back of higher oil prices, this has yet to result in an increase in demand for

cities.

Long term demand drivers include: an acceleration of growth in the non-oil sector, an increasingly attractive business environment for global occupiers and the implementation of various urban regeneration initiatives.

transactions throughout 2018, as key occupiers both from the public and private sector look to expand or move to upgraded premises, the market continues to be dominated by a lack of Grade A stock and a large supply pipeline.

In terms of performance, market wide rents and occupancy levels have been under pressure since 2016, with the trend continuing into 2018 amid increasing levels of supply and subdued occupier demand. Key prime schemes continued to perform better than the market average as a result of a lack of high quality stock. However as new schemes are released into the market this trend is unlikely to persist over the long term.

Against the backdrop of a highly elastic supply dynamic, we see rents for Grade B assets softening further in the short

accessibility and parking arrangements will struggle for occupancy.

Although we have seen an improvement in business sentiment in 2018, we believe that any increase in demand will remain subdued in the short term, with rents and occupancy likely to remain under pressure as increased demand will be met with new supply. Vacancy rates can therefore

be expected to rise placing downward pressure on rents. In this context, we

incentives in order to maintain occupancy levels amid an increasingly competitive market.

space picking up from current levels as economic reforms under the National Transformation Plan (NTP) and Vision 2030 start feeding through the wider economy, translating into an acceleration of growth in the non-oil private sector.

Moreover, the implementation of various urban regeneration initiatives including mixed use communities and large scale infrastructure projects, is expected to act as a catalyst for the real estate market.

Furthermore, it is expected that the planned wave of privatisation will boost investment and foster growth in the business environment creating favourable

Source: Macrobond

140

120

100

80

60

40

20

0

Source: Knight Frank Research

Double the real estate contribution to GDP from 5% to reach 10% by 2020

Increase the real estate sector growth to 7% per year up from 4%

Increase the private sector contribution from 40% to 65% of GDP with particular focus on the real estate sector

x2

FIGURE 1 Selected NTP targets in relation with the real estate sector

FIGURE 2 Brent Crude Oil, Spot (in USD)

Q3 20

12

Q4 20

12

Q1 20

13

Q2 20

13

Q3 20

13

Q4 20

13

Q1 20

14

Q2 20

14

Q3 20

14

Q4 20

14

Q1 20

15

Q2 20

15

Q3 20

15

Q4 20

15

Q1 20

16

Q2 20

16

Q3 20

16

Q4 20

16

Q1 20

17

Q2 20

17

Q3 20

17

Q4 20

17

Q1 20

18

Q2 20

18

Q3 20

18

Please refer to the important notice at the end of this report.

“The implementation of various urban regeneration programs, mixed use communities, and large scale infrastructure projects is expected to act as a catalyst for the real estate market in the Kingdom.”

SAUD SULAYMANI Partner, Saudi Arabia

Regional offices in:

Botswana • Kenya • Malawi • Nigeria • Rwanda • Saudi Arabia • South AfricaTanzania • UAE • Uganda • Zambia • Zimbabwe

RESEARCHTaimur KhanResearch Manager+971 56 4202 312taimur.khan@knightfrank.com

KINGDOM OF BAHRAIN Stefan Burch, MRICSPartner+966 53 0893 297stefan.burch@me.knightfrank.com

OCCUPIER SERVICES &COMMERCIAL AGENCYMatthew Dadd, MRICSPartner+971 56 6146 087matthew.dadd@me.knightfrank.com

HOSPITALITY & LEISUREAli ManzoorPartner+971 56 4202 314ali.manzoor@me.knightfrank.com

VALUATION & ADVISORY SERVICESStephen Flanagan, MRICSPartner+971 50 8133 402stephen.flanagan@me.knightfrank.com

CAPITAL MARKETS / INVESTMENTJoseph Morris, MRICSPartner+971 50 5036 351joseph.morris@me.knightfrank.com

MEDIA & MARKETINGNicola MiltonHead of Middle East Marketing+971 56 6116 368nicola.milton@me.knightfrank.com

Important Notice© Knight Frank 2018 - This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank to the form and content within which it appears.

Knight Frank UAE Limited (Dubai Branch) Prime Star International Real Estate Brokers (PSIREB RERA ORN: 11964 trading as Knight Frank with registration number 653414. Our registered office is: 5th Floor, Building 2, Emaar Business Park, PO Box 487207, Dubai, UAE.

Knight Frank UAE Limited (Abu Dhabi Branch) is a foreign branch, with registration number 1189910. Our registered office is Unit 103, West Tower, Abu Dhabi Trade Center, Abu Dhabi, PO Box 105374, Abu Dhabi, UAE.

(Y)our Space

FIGURE 10Bahrain’s key demand generators

ManamaAl Dar Islands

Bahrain

A’Ali Royal Burial Mounds

Dive Park

Prince KhalifaBin Salman Park

Al Fateh GrandMosque

The Avenues Mall

Arad Fort

Tree of Life

Hawar Islands

Lost Paradise ofDilmun Water Park

Bahrain InternationalCircuit

Qalat AlBahrain

Seef MallBahrain

Bahrain FinancialDistrict

Moda MallBahrain WorldTrade Center

Bahrain NationalMuseum

Source: Knight Frank Research