Bahrain Infrastructure Report 2011

Business Environment Ratings

Bahrain scores well in our regional Business Environment league table. The state is placed third overall, out of a total of 11 nations. Bahrain's competitive advantage is very much in its strong showing for the Risk categories. It performs relatively poorly in the Rewards categories, however. This is largely due to constraints on Industry Rewards. There would need to be a significant improvement in this latter category, if Bahrain were ever to challenge Qatar, the region's top-ranked state, although the secondplaced nation, Oman, is very much vulnerable to being overtaken.

Industry Forecast Scenario

After a contraction of 4.3% in 2009, we estimate that Bahrain's construction sector underwent growth of 1.6% in 2010. The performance over the last two years stands in stark contrast to that registered in the preceding two years, as sector growth registered 23.7% in 2007 and 8.5% in 2008. The poor performance in later years is attributable to the global economic downturn, which has crimped output in Bahrain's wider economy. However, the construction sector took a disproportionate hit from the wider downturn, due to the highly cyclical nature of this industry (and the fact that the local boom had already become somewhat over-extended).

We anticipate that Bahrain's construction sector will continue to recover in 2011, albeit slowly. We forecast that the sector will undergo growth in real terms of 3.2%, before staying in a range of 3.0%-4.0% across the remainder of our core forecast period (2012-2015). A number of factors will put a lid on sector growth going forward, despite a moderate recovery in the wider economy. One key factor is the high base provided by the boom years up to (and including 2008), which created significant new stock, particularly in the commercial construction sector. The office sub-sector is faced with a particularly marked supply overhang. Meanwhile, although there is a long waiting list for social and affordable housing, structural constraints in those sectors - not least the government's limited budget for assisting such building activity - limit the scope of future growth.

Transport and power infrastructure should provide moderate positive impetus to construction activity during our forecast period. Planned activity in the rail sub-sector should provide upside.

Real Estate

In the housing sector, demand for social and reasonably priced accommodation in Bahrain has escalated and looks set to worsen, in the lack of adequate supply. The need for social accommodation has now reached approximately 53,000 households, and is growing by 3,000-4,000 units per annum. Unfortunately, developers focused on building luxury apartments leading up to the global downturn in 2008. With a large number of projects still under development, the oversupply of this stock will worsen.

in the same way, there is an flood of virtually all kinds of commercial real estate, which will continue to worsen due to continuing projects. Given the subdued outlook for the majority of the economy, the glut is likely to persist for some time.

Yields have been moving sideways in the industrial sub-sectors, and in the office sub-sectors away from Manama. Elsewhere, they have risen. Capital values have fallen dramatically relative to rental rates, which have also been falling, but at a lower rate. Investors now view real estate as a moderately risky investment from which returns come more in the form of income rather than capital gains. We anticipate a gradual fall in yields over the next four years.

In the economy, our real GDP growth estimate for Bahrain remain mainly unchanged, with growth expected to remain lethargic in the short to medium term as the country makes a slow recovery from the recent downturn. However, Bahrain is moving towards an even heavier reliance on the energy sector than already exists, thereby exacerbating its vulnerability to changes in global oil prices. The outlook for oil prices remains highly uncertain, due to the world economy’s patchy recovery from economic turmoil.