Demand driven business

General manager Amin Al Arrayed.

First Bahrain general manager Amin Al Arrayed discusses the changing face of the property industry, the potential growth areas and the shift towards demand driven business models.

Can you briefly tell us about your latest project?
It is a US $45 million (BHD17 million) warehousing project which will address the shortage of storage facilities for small to medium businesses in Bahrain. It will cover about 66,500m² and be one of the largest warehousing complexes in Bahrain.

The project will be done in three stages and towards the end of the year we should have the ability to start letting out some space.

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It is an unlikely time to be starting a new project, are there any doubts about the current market?
We do have to be very cautious because the market has changed quite significantly, especially for upmarket freehold
property, which is really weak due to a lack of liquidity.

It is something that is forcing everybody in the market to reassess what type of projects they’re going to do because some of the business models that were doing very well in the boom times just don’t work when there’s no liquidity.

I think a lot of the luxury apartment and seafront development projects will be under a lot of stress going forward because they were really funded by investors and speculators who were largely backed by bank finance. Some people made a lot of money out of it, but when the market shifts, these models get stress tested and if you’re caught without funds for your project then you face a very difficult time.

Does your project avoid this?
Our project is very sensible and fundamentals-based. It’s industrial to start with, so it’s not high-end or residential, but primarily it’s a project that we will own as a company and rent out.

Projects that look for a quick exit through sale will be the one’s hard pressed to find buyers in this market. Our strategy has been to focus on yield income generating projects and not necessary capital appreciation projects where you look for a buyer, in some cases even before you even build.

Will we see more of these types of projects in the future?
Absolutely. I think there is a huge shortage of projects and developers are becoming more realistic now on their return on investment. Before it was very easy to make quick money in real estate because you could buy land and it was appreciating 20% in just six months.

That created a false sense of what is a good return and now people are looking at more sensible projects, like our warehousing project. The returns aren’t in the 30% range but at least they’re sustainable, and sustainability now is something that will be driving this market forward. Developers that take up sustainable projects (projects that address real demand and have good fundamentals), will stick around. The market will get rid of those that don’t.

Was First Bahrain ever looking at developing high-end residential property?
We were looking at it because obviously we’re a company that wants to generate profits, but we had the foresight to see that the bubble wasn’t going to continue indefinitely.

We decided to go for an industrial project around early last year even before the crisis became acute and time has proven us right. Our focus this year is on this project and we will be looking at making a few acquisitions. Prices have softened a little bit so you can actually make some good acquisitions if you have cash. We are also looking at potentially setting up something in Saudi.

Does Saudi Arabia present a ripe opportunity for development?
Definitely, Saudi is a very closed market and real estate wasn’t subject to the volatility that you had in Dubai and Bahrain. Now it’s just starting to open up and the vast majority of Saudis don’t own their own home so that presents a huge opportunity to provide middle income housing.

Those are the types of projects that we will look to get into. Saudi is also very local-demand-driven and doesn’t depend on foreigners to buy. Domestic investment is something you can always count on and it makes you less susceptible to the kind of shocks we’ve seen recently.
 

Saudi is a huge country too, that’s one of the factors. The scope and scale of Saudi is so huge that in the next 10 or 20 years they’re going to be catching up with the supply gaps that exist.

So I think there will be a very strong deal-flow coming from Saudi over the next 10 years and that’s why we want to position ourselves to take advantage. Dubai had its run and things are cooling off now, it’s very hard to come in and do something
meaningful when prices are coming down.

What about in Bahrain?
Bahrain is more sector-specific and I think a lot of focus now will be on industrial and infrastructure development as opposed to building luxury towers. There is a lot of demand for middle income housing in Bahrain.

We’ve seen some developers trying to address this and we’ll be looking at that sector too. Low-rise type developments as well.

Have there been any benefits from the financial crisis?
Clearly we’re taking advantage of a reduction in the prices of materials and thankfully, we were able to negotiate a very good contract. We actually renegotiated our bill of quantities by up to 20% because the prices came down. For developers who have cash it’s actually an advantage that the market has cooled.