Addressing Bahrain’s Housing Needs
Bahrain’s Ministry of Works has been active in trying to address the ongoing undersupply of affordable housing in Bahrain. The Kingdom is now regarded as one of the pioneers in addressing the region’s need for low-cost housing through its use of Public Private Partnerships (PPP), the first of which was put out to tender in April 2010.
According to estimates by Bahrain’s Ministry of Works there are currently 53,000 Bahraini citizens on the Kingdom’s social housing waiting lists. Under-investment within the sector has led to a shortage of affordable housing. However, recent Government initiatives to redress this imbalance have received much industry support and are expected to make some inroads in the medium term.
To put the scale of the housing problem into perspective, over 85% of the Bahraini population are estimated to earn less than BD 1,000 per month. Affordability therefore remains a key issue and is directly proportional to the income profile of the market. In the chart below we illustrate the income distribution across Bahrain for Bahraini nationals and non- Bahraini citizens.
The estimated average basic wage for Bahrainis in both the public and private sector stood at BD 683 in Q2 2010 according to Government sources. In the chart below we illustrate the historic wage evolution over the 2002 to Q2 2010 period for both the public and private sector. At a national level, the upward pressure on wages will be relatively muted by the large expatriate population.
In the private sector, average monthly wages for Bahraini nationals stood at BD565 per month in Q2 2010, some 270% above the non-Bahraini average of BD210 per month. In the public sector, the variation between incomes of the two groups is significantly smaller with current average wages at BD910 per month for nationals and BD1, 053 per month for non-Bahraini. However, it should be noted that the public sector is almost wholly comprised of Bahraini nationals who represent 86% of the 55,500 people employed in the sector. Conversely, the opposite is true in the private sector where Bahrainis are in the minority and hold only 20% of the private-sector roles.
In recent years there is a growing disconnect between the incomes/wages for the majority of the population and property rental and sales rates. Addressing this mounting affordable housing shortfall has quickly climbed to one of the most pressing domestic priorities. According to estimates by the Economic Development Board, Bahrain will need to build over 20,000 additional housing units over the next 10 years through the use of its public private partnership model to meet growth expectations set out in the Government’s Vision 2030 plan.
Economic reforms announced by the Crown Prince Sheikh Salman bin Hamad Al-Khalifa and the Economic Development Board (EDB) have given the market the much needed support required to elevate the national living standards through the increase in supply of affordable housing within the Kingdom.
Public Private Partnerships (PPP)
Working with the EDB the Ministry of Works issued the country’s first pilot PPP social housing project earlier this year which will see the development of 5,000 affordable housing units. Three local firms prequalified for the project, with two submitting bids in August and one declining to bid. Both bids were from local developers namely the Al- Moayyed International Group and Naseej. A contract award is scheduled to be made by the end of 2010 and construction on the sites should commence in early 2011, with the first units being delivered in 2013.
The scope of the project is for a minimum of 3,500 social houses and 1,500 units built for a slightly higher income bracket that is still categorised as ‘affordable’. Land will be granted to the developer at no cost by the Government, on one of three possible sites: Al-Buhari east of Riffa; North Bahrain Newtown or Al-Lawzi.
The Ministry of Works will be structuring the contract using the concept of ‘availability payments’ over a 25 year period. A key attraction with this structure for the private sector is that the risk of securing a buyer has been taken on by the Government, who will earmark the distribution of housing units according to their criteria. Therefore the revenue risk is transferred from the developer to the Government.
One of the key benefits for involving the private sector in this way is that it allows the Government to minimise its capital expenditure in the early stages of a project. Through the use of the PPP model, initial capital costs are borne by the developer, who is incentivised to develop housing projects as quickly and cost effectively as possible in order to be paid. The EDB is hoping that the successful alliance between the Government and property developers will lead to a dramatic decrease in the waiting period for affordable housing to five years by 2014 and also lead to increased work productivity and the eventual realisation of the ambitious housing projects envisaged as part of the Vision 2030 plan.
While the new PPP contracts have garnered developer interest within Bahrain and the wider region, the contracts were not the Ministry of Works’ first foray to address the housing crisis within the country. In 2009, the Ministry considered rolling out its “Smart Construction” projects. These designs involved the use of Chinese contractor Intechbuilding’s low-cost steel framed housing models. To develop these houses, National China Academy signed an agreement with Eskan Bank to establish a centre for promoting such methods. Intechbuilding claimed that houses built using its methods could be built in two months in contrast to the construction time using traditional construction methods of 12 to 18 months. Two test houses were constructed in Hamad Town that were unveiled to the general public for feedback in February 2010. The feedback from local contractors was that if this method of construction would be used for all of Bahrain’s low-cost housing, it would result in the extensive use of Chinese contractors and raw materials with an estimated BD 350 million being exported out of the country.
Market outlook and challenges
Thus far the Bahrain Government has not followed suit with the UAE Government that has introduced a requirement on private developers to allocate 20% of their master plan community to affordable rental accommodation. While the requirement has been welcomed by some in the industry as a step forward, it is however expected to result in the decoupling of markets into regulated rental or sales.
The success of the Government’s PPP initiative is relying heavily on the premise that the PPPs will bring to the table innovative building and cost saving techniques allowing the private sector to generate the profits necessary to participate in the partnership. The Government is expected to provide plots of land according to the master plan set out in the Vision 2030.
Despite the Government providing the land in the partnership and other incentives, it will be more challenging for developers to unlock viable schemes due to thinner margins associated with affordable housing. Developers can ensure financial viability of affordable schemes by conducting due diligence in the form of market research, an informed affordability analysis and a robust project financial feasibility, allowing developers to create a concept which is specified to meet the requirements of the target occupiers, but remains financially attractive.
We expect that the sector will continue to require close support from the Government in ensuring that developers see the affordable housing market as a profitable one, through the use of preferential lending rates, stable revenue streams and other market incentives such as tax breaks on imports and other subsidies.
As the first social housing project planned by the Ministry of Works, the Government is going to great lengths to ensure its success. There will be a Government guarantee on the scheme in order to secure finance for the chosen developer and associated contractors. The finance minister Sheikh Ahmed Bin Mohammed Al-Khalifa has confirmed that the state will provide support for the project, but has not given details of the level of support needed to attract private finance beyond the pilot project.
Notwithstanding the above market challenges, the PPP housing construction method is a proven one and has successfully been done in Mexico and Brazil. Many Governments within the region are watching closely as Bahrain tries to solve its housing crisis through its PPP housing initiative.
