Forget about Dubai. Serious investors are heading for the kingdom of Bahrain.
Dubai is the Las Vegas of the Gulf, a playground of the Middle East, where every scheme is bigger, better and more gold-plated than the last. But Bahrain does not want to follow. It is more interested in taking on New York and Hong Kong.
Bahrain’s government wants to turn the small island to the east of Saudi’s coastline into the banking and insurance centre of the Middle East, creating a Canary Wharf of the Gulf. Taking centre stage in these plans is Bahrain’s $1.3bn, 380,000m2 Bahrain Financial Harbour (BFH), the brainchild of Midas-fingered investor-developer Gulf Finance House.
There is no doubting the scale of its plans for BFH. In total, 30 plots of land on the Manama corniche have been earmarked, creating 557,000m2 of leaseable space.
The first phase, called the Financial Centre, is due for completion by the end of next year. It will consist of the Dual Towers, the Financial Mall and Harbour House.
The Financial Mall will provide 12,000m2 of offices for Bahrain’s stock exchange, as well as brokerage and trading firms. It will give companies not just offices but also the opportunity to open shops.
The 12-storey Harbour House will complement this, providing 3,000m2 in a 28m diameter circular tower for media and marketing agencies specialising in business, finance and investment. Dual Towers will provide 90,000m2 of offices, split evenly between the east and west towers.
Although the scheme is only a few storeys high at present, it is already attracting interest from both Islamic and international banks. HSBC, the world’s third-largest bank, has already expressed an interest in the centre.
The development comes at a golden time for Bahrain. The government is putting in the legislative foundations to bolster its significant position as the banking capital of the Middle East (see box).
And Bahrain is literally lifting itself out of the sand. Licences for $3bn of projects are in the process of being granted, and a two-year study to produce a masterplan for the kingdom is being developed by a team of consultants, including architect Skidmore Owings & Merill and DTZ.
But success has brought its problems. Bahrain’s occupier market is largely untested, especially when it comes to acceptance of western standard leases.
With construction costs rocketing following labour reforms that stipulate the use of Bahraini nationals in the workforce, and land values rising by up to 35% pa, it could be an uphill battle to secure the international investors that Bahrain’s developers wants to attract (see box, p89).
Financial services bring in more than oil
Developers will have a solid base to build on. Bahrain is already host to 350 banks, insurance companies and other financial institutions that, together, boast assets of $109bn. It has its own version of the Financial Services Authority in the shape of the Bahrain Monetary Agency. And, last year, 19% of the island’s total GDP was derived from the financial sector – a third more than between 2002 and 2003 – bringing its contribution to almost the same level as that from oil.
Islamic investment bank Gulf Finance House is backing several major projects, such as the $750m Al Areen Development in Bahrain’s desert and the massive $3.1bn theme park Legends in Dubailand. It also owns its own fledgling airline, Mena. It is nowmanaging BFH and has appointed Knight Frank to oversee the first phase of the development – no doubt, with an eye on the London-based firm’s experience on Canary Wharf. Myles Barraclough, of Knight Frank’s City office, arrived recently to set up the office inBahrain, its first post in the Middle East (see box above).
But there is one vital difference between Docklands and Bahrain Financial Harbour: lease lengths. As a relatively immature market, Bahrain has yet to embrace flexible lease terms, something Claire Hughes, associate director in DTZ’s Bahrain office and agent on the 50-storey World Trade Centre development, is very aware of.
“Leases don’t operate in the way we’ve come to expect in the UK,” she says. “It is alien here, and we’ve had to push it with the WTC. We’ve been going to corporates and explaining flexibility and leasing terms and what occupiers can expect in return.”
At present, lease lengths hover around the two- to three-year mark. But, at the end of this term, the occupier has the right to remain at the same rent and terms of occupancy. This is a problem for any investor looking for a juicy return on income.
Hughes says legislation is being considered to bring Bahrain more into line with Europe, but she believes the market needs to move first.
Top rents rest at 8 dinars per m2 per month, equivalent to around £110 per m2. Hughes believes this will provide a starting point for lettings at the WTC, but she is pushing for rent reviews or a system that will ratchet rents up automatically. In addition, the developer will look at stretching leases to five years, bringing Bahrain into line with much of Europe.
Lease lengths
“Obviously it will take time to educate the market, but there have not been products such as the BFH or the WTC before,” says Hughes.
BFH has a different approach. Knight Frank’s Myles Barraclough believes it may not be necessary to change lease lengths. “Historically, one- to two-year lengths have attracted occupiers, and we have to bear in mind the market if we are competing against other schemes. With the quality of our scheme, I’d like to see occupiers committing to longer leases, but I don’t want to compromise the scheme by insisting on them.”
On rentals, however, BFH intends to set records, believing the quality of accommodation, the scheme’s location and its marina will enable it to command rents in excess of the standard 8 dinar per m2 per month.
There will be a large degree of flexibility in terms of sale or lease. BFH intends to look at a two-tier marketing strategy that will include freehold ownership as well as leasehold, either structured around a more typical lease or a strata title, whereby an occupier buys the freehold of one or several floors in a scheme.
In BFH, strata sales are open to any foreign investor, although Barraclough expects interest will come from closer to home. “Given the relatively untested market in schemes such as this, I expect the focus will come from local investors,” he says. Indeed, sales have already been confirmed for Harbour House, bought by Saudi businessman Khalid Abdul Rahman Al Rajhi for $30m in May. His compatriot, Sheikh Al Ali Al Rashed, also invested $50m, netting him the Bahrain International Insurance Centre on the Financial Harbour.
“Strata type titles are not a new concept in Europe,” adds Barraclough, “but unless we are talking about residential in the UK, in bigger schemes such as Canary Wharf, we do not have investors buying floors.”
Buyers from the Far East are more comfortable with strata-type titles and remain a firmpossibility, says Barraclough. “But that is not to say we can’t convince other foreign investors,” he adds.
Those notorious Middle Eastern returns could help. Although the rates change almost daily, Barraclough says investors can expect yields in the region of 7.25%. This is lacklustre when compared with returns of 43% – representing an internal rate of return (IRR) of 18.1% – being quoted by Rikaz’s Amwaj resort in Saudi Arabia, but it is still higher than has been achieved historically.
There is the prospect of some reversion, with the market going from strength to strength.
Unlike Dubai, where the level of construction means a building is outdated almost as soon as it is built, Bahrain’s rise has been steady. “I don’t think there is the oversupply seen in Dubai, and the market isn’t as saturated so, although the market is untested, I see no reason why investors shouldn’t see some reversion,” says Barraclough.
But the prospect of strata sales adds yetanother layer of uncertainty to risk-averseinstitutions. Robin Williamson, head of DTZ’s Bahrain office, believes it is a step too far for the pension funds. “The lease structure isn’t in the favour of any Gulf state,” he says. “There’s international interest from the Far East and sniffs from South Africa, but it is not institutional.”
Under construction
With billions of dinar continuing to pour into Bahrain from neighbouring Saudi Arabia and Kuwait, the lack of interest from the funds may not be a problem. Williamson places IRR in the late 30s. However, he says that the class of development now under construction in the country has yet to be tested.
“There is an issue about the exit for funds,” he says. “You do not put buildings on the market and get bids, so there could be a problem if the Gulf Finance House is looking at exiting funds by selling to third parties.”
As the market matures, answers to these questions will undoubtedly surface. But at least the right questions are being asked in Bahrain – unlike other parts of the Middle East, where bigger-is-better and the “build-it-and-they-will-come” approach still seems to reign.
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Site 380,000m2 Complete by 2009 |
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Phase I scheduled for completion by the end of 2006 – offices: The Dual Towers: 90,000m2 The Financial Mall: 12,000m2 Harbour House: 3,000m2 |
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30 individual development land parcels |
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18ha of landscaping, roads, leisure and a performance hall |
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Spans 380,000m2 |
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570,000m2 of leasable space |
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Will house 7,000 people and provide employment for 8,000 |
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Legislation, transparency and regulation in the Arab world have always been a worry for foreign investors. But Bahrain is determined these issues will not become a barrier. In 2002, the government announced the creation of a single regulator for financial services – the Bahrain Monetary Agency – and set the island firmly on financial institutions’ radars. Since then, a raft of measures have been put in place to assure investors. A framework for new disclosure standards for companies listed on the Bahrain stock exchange has been drawn up, as have anti-money-laundering regulations for the issuing, offering and listing of debt securities. The government is finalising draft securities and exchange regulations as well as guidelines against insider trading. New corporate governance requirements for boards and senior management of listed companies are also in the pipeline. |
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Knight Frank is a relatively slow starter in the Middle East. With operations throughout Europe, Africa, the US and the Far East, it was missing the Arabian Gulf piece in its global jigsaw. But it was not sheep mentality that made it move. Clive Betts, senior partner, says the firm was looking for a linchpin project in the region. “We’ve long considered opening in the Middle East, but we wanted a quality project, like another Canary Wharf,” he says. Bahrain Financial Harbour gave it that opportunity. The company now intends to use Bahrain as a springboard into the region. Betts remains tight-lipped on destinations, but hints: “You could well see us in a couple more countries within 12 months.” With Knight Frank’s business split 50:50 between commercial and residential, Dubai would seem an obvious choice. But, says Myles Barraclough, head of Knight Frank’s recently opened Bahrain office: “Dubai is a safe bet, and there are other western property consultants there. But we are looking at opportunities that are in less favoured places, such as Oman, Quatar and Saudi Arabia.” |
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Racing Bahrain Financial Harbour for the sky is the 50-storey World Trade Centre. Standing 240m tall, the two trapezoidal towers will boast a net internal space of 35,000m2, including 34 floors of office space and 30,000m2 of retail space. WTC started on site in October and completion is scheduled for June 2006. But while there is friendly competition while construction is under way, the two developers do not intend to compete once they are completed. Claire Hughes, associate director at DTZ and agent for the WTC, says: “The BFH is looking at big international occupiers to sell buildings off to investors while our client wants to retain control.” Floorplates at the WTC will range from 100m2 to 23,000m2, which Hughes says are half the size of those provided by BFH. And while the WTC, as a member of the World Trade Centre Association, will look toward attracting the financial sector, it will not target it, she says. “We are looking at being the first point of contact if you want to do business in Bahrain, so we want a tenant roll reflective of the companies in Bahrain,” she says. The retail offering will feature high-end designer shops. Retailers such as Cartier, Tiffany, Hugo Boss and Escada are thought to be considering making debuts in the country via space in the development. |
