These are heady days in Manama and Bahrain’s islands, where an unprecedented number of investment projects will bring a lot of new property onto the market in a very short time. With foreigners now able to invest in a much wider range of properties than was ever available before, analysts expect an unprecedented hike in prices – as a lucrative new market emerges, promising a high return on investment.

Until Bahrain lifted restrictions on ownership in 2001, no non-Gulf Co-operation Council (GCC) national could own land on the Arabian peninsula. In 2003, Bahrain enacted legislation so that today foreign investors can own real estate – creating a market that is smaller and less brash than Dubai’s, but which offers investors a chance to buy a foothold in the Gulf’s pre-eminent financial centre.

“There are still restrictions, but there are also opportunities if you understand the market,” says one expatriate investor.

Reclaimed land

Under the current regime, investors setting up operations may purchase land in several designated sites open to foreign ownership and can buy residential property in a number of tourist developments. In common with the other smaller Gulf states, Bahrain prefers to sell foreign investors land that is reclaimed rather than property on existing terra firma. There are five specified locations on the main island, however, where 100% foreign-owned properties can be developed.

Bahrain’s opening up of its real estate market has been rooted in the authorities’ determination to increase foreign investment in a surprisingly diversified economy. A key project has been the ambitious Bahrain Financial Harbour (BFH) scheme – ‘Bahrain’s Canary Wharf’ – aimed at attracting the businesses that the ruling Al-Khalifa family needs to maintain Bahrain’s status as the regional financial hub.

Sales of freehold and leasehold premises to local, regional and international financial institutions and related businesses began in June 2004, with freehold sale and lease options structured around a ‘Strata-Titles’ ownership system, where individual titles are issued for common property that is then managed by a ‘Body Corporate’ committee of unit owners. This system is used in London, Beirut and North America.

Across the highway from BFH in central Manama is another work in progress, the Bd95m ($250m) luxury residential towers known as Abraj Al-Lulu. A quarter of the development of 862 apartments covering 18,580 square metres was sold before its official launch. The UAE-based Al-Hamad Construction and Development Company expects to have completed Abraj Al-Lulu by 2007.

Imtiaz Panjwani, chairman of Abraj Al-Lulu’s sales agents Pegasus Realty, says all four penthouses have sold for Bd3.6m ($9.5m) and about one-quarter of other apartments had gone three months before the initial sales period ends (on September 30). UAE-based investors have shown strong interest, Mr Panjwani says, spurred by prices almost 45% cheaper than similar projects in Dubai. As an added sweetener, expatriate investors in Abraj Al-Lulu will be entitled to a residence permit.

Would-be residential real estate owners were a focus of the 2001 decree, which permitted foreigners to buy properties in three residential and tourism developments – the Amwaj Islands near the international airport, Durrat Al-Bahrain at the southern tip of the main island, and Dannat Hawar on the Hawar islands, formerly claimed by Qatar.

Marketing under way

Most major infrastructure contracts for the $1bn Amwaj Islands development are in full swing or nearing completion; marketing is under way.

Some analysts canvassed by fDi suggested this real estate market was not as overheated as Dubai – but once awareness of Bahrain’s property increases, significant investment growth could be possible. Foreign investors can own high-rise commercial and residential properties, as well as property for tourism, banking, financial, health and training projects in designated areas.

One of the most ambitious projects is the $1.2bn Durrat Al Bahrain resort city, with high-rise condominiums, two hotels, an exhibition centre, 18-hole golf course and village, shopping mall, marina, a string of other recreational facilities and several beaches.

Other projects are in the pipeline, each trying to outdo its predecessors in terms of size and cost. In May, the $3bn Two Seas freehold ‘waterfront community’ was officially unveiled, an 11 million square metre freehold project to be built on a man-made island.

The residential rental property market is driven by demand from expatriates and rates of return can be very good; not all of this massive constituency – about 40% of Bahrain’s population – will want or be able to purchase property. Local landlords have enjoyed a substantial spike from members of the US military (Bahrain is home to the Sixth Fleet), whose presence has sparked enormous growth. Monthly rents are Bd500-Bd850 for a two-bedroom property and up to Bd1500 for more luxurious accommodation.

Foreigners may own whole properties in the main city’s Juffair, Hoora, Bu Gazel, Seef and Diplomatic areas. Juffair is a focus for US military accommodation but only 25% of a building in the neighbourhood can be rented to Americans.

There are also restrictions designed to keep smaller speculators away from the market on the main island. In the fast-growing Seef neighbourhood, developments must be between three and 10 storeys; in the other four designated areas, the minimum is 10 storeys.

So far, there appears to have been little interest from non-GCC first or second tier investors. Abraj Al-Lulu developer Pearl Real Estate Development Company is co-owned by Bahraini, Saudi and UAE investors. Islamic investment bank Gulf Finance House (GFH) is developing Two Seas with Bahrain-based Dala Development Properties Management Company.

Two Seas is GFH’s third landmark infrastructure development project in Bahrain, says deputy chief executive Abdul Rahman Al-Jasmi. GFH is most famously the developer of BFH and is building the $750m Al-Areen Desert Spa and Resort. It also has real estate interests in Dubai and Jordan.

New developers

Al-Marsa Real Estate is one of a crop of new local developers. It is 50%-owned by a major local Islamic institution, Shamil Bank; Al-Saraya Properties Company has a 25% stake, as does Yusuf Bin Ahmed Kanoo Group. The Kanoo family has attained a prominent position in most sectors of Bahrain’s economy.

Shamil Bank chief executive Mohammed Hussein has said the bank’s investment portfolio for local private investors will go “primarily into real estate”. With the new generation of residential and tourist projects and demand from people to own their homes, Shamil is giving “serious consideration” to developing its mortgage portfolio, says Mr Hussein.

However, this may not be easy. Mr Hussein shares the concerns of other prominent Bahraini bankers who believe the legal framework requires further strengthening, with concerns over the strength of legislation, the rights of banks over property titles in the event of non-payment of mortgages, and pricing issues such as the appropriateness of floating or a fixed-rate lending.

The market has come a very long way very quickly – but there is much more work to do.