Local projects: a new approach to development?

Identifying supply gaps and addressing those needs may sound like an obvious development strategy, but it’s not one that’s been much in evidence over recent years.

In the rush to chase the speculative dollars of foreign investors eager to make a profit from property, a lucrative – and just as importantly, more sustainable – sector of the real estate market has been largely ignored in recent years. That's the view of First Bahrain, an innovative development company operating out of Bahrain and Kuwait that is dedicated to achieving sustainable returns for all its stakeholders through a demand-driven investment approach. "We're a regional real estate development company," explains Amin Al Arrayed, the firm's General Manager. "Our focus is on demand-driven investments, and as such we focus on investments that are really driven by the needs of the local economy. We don't focus so much on foreign investment."

It's an approach that has helped First Bahrain successfully weather the recent economic crisis – a storm that has seen many of its fellow real estate competitors struggle. "You have to be selective in terms of the type of projects you enter into, primarily due to the market conditions," says Al Arrayed, explaining that there are three main elements to the firm's strategy. "The first is we don't undertake projects that require a lot of external financing; we make sure that our funding is sufficient to complete the project. This sets the parameters for the second part of the strategy, which is that the projects that we go for are typically smaller or phased, so we don't undertake a massive project in one go. Instead we break it into smaller, more manageable pieces that we can complete on-time and on-budget before moving on to the next one. The third part is that we don't have a sell-bias on our projects. We don't necessarily look for exits before completion, and we're quite happy with yield income over exit returns. So for example, if we were to build warehouses or residential units we could rent those out and still make the kind of returns that would satisfy us, as opposed to needing a quick sale. Together I think these strategies have worked well for us."

First Bahrain's flagship project is its $45-million logistics and warehousing development, Majaal, located within the Bahrain Investment Wharf. Since its launch in October 2009, the development has received a wave of interest from businesses, both local and international, looking for integrated and modern storage solutions with value added services. Majaal offers a prime location, situated within the Salman Industrial City, and is in close proximity to the major transport links of Khalifa Bin Salman Port and Bahrain International Airport. Construction work on phase one of the project – which will deliver 130,000 square feet of secure and cost effective storage space to its tenants – was completed earlier this year, and Al Arrayed believes its achievement of on-time and on-budget construction puts the company in a good position to execute on projects over the year ahead.

"I think Bahrain may have been a little bit less impacted than some of its near-neighbours like Dubai, which really were at the forefront of the freehold, off-plan model of development," he says. "In Dubai, the majority of the projects were traded many times before they were completed and there was a lot of inflation built into the system. We saw that happen here to a much lesser extent, and while there are some projects clearly that are having difficulty being completed due to lack of funding (either because of defaults on the part of investors in the project or because of the lack of bank finance), there are also a lot of very sustainable projects. We're happy that we chose to make the warehousing segment our first foray into development. For us, it's worked out very well.

For Al Arrayed, the key to First Bahrain's success has been its focus on meeting unmet needs. "It's less about the difference between local demand and external demand, and more about the difference between real demand and speculative demand," he explains. "What you have now is a situation whereby a lot of the speculation has disappeared and a lot of the speculators are no longer in the market, and the only thing left is local demand-driven projects. That suits us just fine, because that was the only sustainable form of demand anyway. Our strategy has been to identify supply gaps in the market and address those.

"For example, when we found that there was a shortage of SME warehousing in Bahrain, we came up with a proposition that would fill that gap, and that's the way we structure our projects. It's looking at the market, identifying supply gaps and then coming up with projects to meet those needs, as opposed to continuing to build projects that cater to a segment that really no longer exists."

Al Arrayed feels that liquidity is going to be the key challenge for those real estate development companies looking to complete projects over the next few years. "A lot of them were overly dependent on bank finance and their ability to sell units before they complete," he explains. "They will struggle, and I know that a lot of delays have happened because many of them aren't able to secure the cash flows necessary to continue with their projects."

He believes a tighter regulatory framework across the region would go some way to addressing the problem of project financing. "There needs to be some kind of regulation to make sure that the money that is collected from investors is utilised for its intended purpose," he says. "It's currently very difficult to make sure that the money you paid towards your flat goes toward the actual completion of your flat. So if a developer is going to announce Project A, we need to make sure that the money that's been collected for that purpose is used for the completion of Project A, rather than for Projects B and C. Lack of regulation in this area has led to developers taking too many risks and not being held accountable for their ability to live up to their promises."

As for the next 12-18 months, Al Arrayed is bullish on prospects for both his firm and for Bahrain as a whole. "Within the real estate sector we're very positive on the potential in the warehousing and logistics sector," he says. "For us, we see that as a growth area. Infrastructure is another area where we think that there is room for growth, particularly in terms of the expansion of private and public sector partnerships. Governments are going to be playing a much bigger role going forward in terms of development, so the more that they can combine their efforts and align their interests with the expertise of the private sector, the better. We see a lot of opportunity there.

"Our view is that the region still has a lot of potential," he concludes. "We're looking at Saudi Arabia, we're looking at Oman, we're looking at Abu Dhabi. We are looking for areas where we feel the fundamentals are strong, and we're looking for like-minded partners to help us. It's a very disciplined approach to growth, based on the liquidity that we have. If you don't have the money to build it, don't build it. It's as simple as that."

Bahrain Investment Wharf

Majaal is a warehousing and logistics facility located on a 716,000 square foot plot in the Bahrain Investment Wharf, providing more than 429,000 square feet of warehousing space. Designed by the international engineering firm Tebodin Consultants & Engineers. The project will be developed in three phases with the first phase completed earlier this year. The general contractor is Abdullah H. Al Darazi Company and Baker Wilkins & Smith has been appointed as cost consultants.

To meet an increasing demand from small and medium enterprises for comprehensive modern warehousing facilities, the warehousing space will be divided into individual units of approximately 2500 square feet each with an option to combine units to accommodate larger tenants' needs. The development aims to bridge an existing gap between quality of the space and level of services provided in Bahrain's warehousing property market.

In addition to the physical warehousing space, the development will boast a range of services that caters to the needs of its tenants, including 24/7 security service, state-of-the-art ICT provisions, assistance on efficient design and use of space, and a range of value added services.