Much like other members of the Gulf Cooperation Council (GCC), Bahrain is in the midst of a construction boom. However, Bahrain has become a particularly attractive alternative to other markets in the region that are already saturated. Furthermore, the kingdom has made legal changes to allow foreign ownership in some projects.

Surge of activity

Recent weeks, in particular, have seen a surge of activity in the sector. Abu Dhabi Investment House (ADIH) unveiled its $100 million Sunset Hills project in Bahrain. The mixed-use development will have villas, townhouses, apartments, and a retail component. It will be located adjacent to ADIH’s $1 billion Al-Areen project, and cover 47,000 m2 with a built up area of 56,000 m2. In addition, Marina West, Bahrain’s first residential beachfront community, launched its sales initiative for the development’s luxury freehold residences in the 75,000 m2 gated community.

In addition, there has been tangible progress in Bahrain’s ongoing real estate projects. The first phase of the Bahrain Financial Harbor, the Financial Center, is progressing ahead of schedule and by the end of last month nearly 92% of work had been completed. Moreover, Abu Dhabi Investment House recently announced that piling work on its $90 million development, Lagoon Bahrain, will be finished in March. The Lagoon, part of Amwaj Islands off the coast of Muharraq, will be made up of eight low-rise buildings for high-end consumer retail, leisure and food and beverage outlets. Covering a total land area of 55,000 m2, the development is due for completion in September.

On February 7, the kingdom played host to a three-day forum to review the sector’s current boom and future prospects. It aimed to study factors behind the real estate boom in GCC countries, analyze future prospects, explore means of averting problems hindering the sector’s development and provide a favorable atmosphere to maintain such development.

Bahrain’s growing importance

Bahrain’s importance to the regional real estate sector has grown over the last few years. With Kuwait and Dubai attracting large numbers of investors to the extent that property prices are soaring, Bahrain has emerged as a new favorite for investors. The international press reported in January 2006 that residential property prices in Bahrain had risen on average some 200% over the previous three years. Despite this phenomenon, Bahrain’s prices remain about 45% cheaper than those in Dubai and Doha.

Bahrain’s real estate appeal has brought new developers to the market, such as Al-Marsa Real Estate, part of the local Kanoo Group. Other beneficiaries are banks, which have witnessed increased demand for house-buying vehicles. shariah-compliant financial tools are also on the market.

In spite of the momentum that is propelling real estate forward in Bahrain, there remain significant questions to be answered. The kingdom is increasingly aware of the negative socio-economic repercussions that the sector’s boom may facilitate, namely disenfranchising lower income bracket and first-time buyers. Additionally, infrastructure remains a worry, especially as Manama Municipal Council recently announced that permission to start construction work on the $2.5 billion Bahrain Bay waterfront residential, commercial and retail district could be delayed by councillors worried over traffic congestion. More specifically, the municipal authority wants to change the current proposed entrance and exit routes, saying they could create massive jams in an already congested area.

Issues of infrastructure have not deterred developers from taking matters into their own hands. For example, Riffa Views Signature Estates recently marked a major milestone with the signing of a $69 million infrastructure contract with Cybarco Bahrain Ltd. Under the contract, Cybarco—in a joint venture with Tebet Enterprises—will undertake one of Bahrain’s largest-ever infrastructure projects to build roads, telecommunications cabling, electricity and water supplies for the luxury residential development.

One of the Saudi Arabia’s most pressing issues came to the fore recently when the Ministry of Labor unveiled new “Saudiization” legislation, aimed at replacing immigrant laborers with Saudi Arabians. Contractors managed to win some concessions from the ministry, but emphasized the importance of immigrant labor for the completion of the kingdom’s numerous mega-projects.

For years, the kingdom has relied on expatriate blue-collar workers, particularly from India, Pakistan, Sri Lanka, Bangladesh and the Philippines for heavy manual labor such as construction site work. High numbers of expatriate workers are also found in a broad range of sectors, particularly those requiring a high level of skill, such as engineering. In addition, the majority of house-staff are imported. Unofficial estimates place the number of expatriate workers at just under 7 million.

Saudiization, however, is the process of replacing expatriate labor with Saudi nationals. Saudi Arabia has a growing population, with a majority under the age of 25. Creating employment for what analysts term the youth bulge is a priority for the government. The problem is compounded by the lack of adequately qualified Saudis for the skilled job market, as many are reluctant to do the types of job expatriates have traditionally held.

The other factor is cost. While the responsibilities for employers of hiring foreigners in areas such as health insurance have increased, they are still cheaper than Saudis and more willing to work long hours, often in uncomfortable environments.

Little success in local recruitment

“We have had little success, to be honest, in employing nationals at the operational end, where the bulk of our requirement is, while our middle-management and above is over 75% Saudi,” said the CEO of a Riyadh-based service company. “This situation is repeated all over the kingdom.”

Last month, Ghazi al-Gosaibi, the labor minister, signalled the government’s intent to push on with Saudiization by raising the minimum number of Saudis employed by any company to 5%. The quota will still vary between sectors. Companies failing to meet the required percentage will be publicly named and barred from foreign recruitment.

For some sectors, the new quota comes as good news—it is a readjustment from higher quotas—particularly for construction.

The Ministry of Labor has recently recognized the concern of contractors and reduced the sector’s Saudiization quota to the minimum 5% from 10%. The ministry also permitted labor visas for the sector to be extended to two years as opposed to one.

Most Saudi businessmen agree with the Saudiization concept, yet they face challenges implementing it. Abdullah Ibn Hamad al-Ammar, chairman of the National Committee for Contractors (NCC), voiced the concerns of members of the group. He stated that while a national contracting base was the ultimate aim, the raft of new large-scale infrastructure projects and industrial expansion plans, including those of Saudi Aramco and Saudi Basic Industries Corp (SABIC), required at least 1.2 million additional visas to recruit engineers, skilled labor and ordinary workers. He estimated the worth of these projects to be in the region of $75 billion.

In a parallel move, the ministry is making it more complicated for employers to take on expatriate employees. Al-Gosaibi announced that companies wishing to take on such workers will now need to prove that they have the means to pay them—there have been a number of instances where complaints have been made by foreign workers who claim not to have received their salaries. He said that the new initiative links the import by any company of foreign laborers to its capital and its ability to pay salaries.

Still, with restrictions on expatriate labor, observers have voiced concern over how the massive economic city projects planned for Rabigh, Hail, Madinah and Jizan will be built. The $80 billion developments require huge infrastructure development and will undoubtedly require more imported labor for their completion.

Observers are voicing their concerns over housing supply and financing opportunities, as Saudi Arabia’s population continues to expand at a rapid pace. And so, on January 16, the public and private sector joined together to discuss ways of tackling the pressing issue of housing finance in the kingdom.

Saudi Arabia has a rapidly expanding population with annual growth rates in the region of 2.2% to 2.5%. Riyadh alone is estimated to need 270,000 housing units. Officials estimate that the kingdom needs to build more than 1.5 million units by 2015 if it is to keep up with demographic change.

The kingdom’s residential property development has not attracted investment levels seen in other Gulf countries. It is widely accepted that the root of this lies in issues relating to financing. John Sfakianakis, SABB’s chief economist, told a two-day Saudi Arabia housing finance conference that housing represented just 7% of the kingdom’s real estate market.

With a population that the UN warns could double by 2050, the economic and social implications of failing to address this situation are alarming.

For his part, Minister of Finance Ibrahim Abdulaziz al-Assaf explained at the Euromoney event that the government’s intervention in housing provision dates to the mid-1970s with the formation of the Real Estate Development Fund (REDF), which he said by 2006 had provided financing for some 613,000 housing units. In 2004, the fund was running low on capital and received a further $2.4 billion from the Saudi Arabia Monetary Agency. Another injection of the same amount was made in 2006, as the situation became more pressing. The REDF’s current capital base stands at $25 billion. Al-Assaf said 53,000 loans had resulted from the cash boost to the fund.

Delinquent loans weakening fund

However, the fund is designed to be self-sustaining and relies on the regular repayment of loan installments. By 2004, about 30% of outstanding loans were delinquent. This resulted in the number of loans on offer being considerably reduced—and the government’s subsequent intervention to bolster the capital. Prior to this, no more than 10,000 loans were made in any single year, with the annual average about 6,500. Meanwhile, applications have been averaging 30,000 per annum.

The minister explained that this situation prompted the government to rethink its housing provision strategy and the ideal of a property for every Saudi family. While measures have been taken to increase collection rates—awareness campaigns and the participation in an electronic transfer system known as Saree whereby repayments are deducted straight from an individual’s account—he indicated the situation is ultimately unsustainable given the demand.

His message and that reiterated by subsequent speakers was for an increase in private sector involvement, via investment funds and the formation new residential real estate development companies. Traditionally deemed unattractive because of an ambiguous legal framework, relatively low rental rates, the high level of default on payments and lack of stock market-linked financing vehicles, it is now being focussed on as a solution.

Many analysts feel that Saudi Arabia could eventually develop a strong sukuk market (sharia-compliant bonds) to underpin the sector as in Western markets. Some of the speakers argued that for real estate investment funds to flourish, they needed to be linked to the stock market and particularly a bond market, which in the kingdom remains immature. However, the stock market has fallen out of popularity with investors, given its continuing weak performance. Indeed, some observers have mentioned that this could be a reason why some investors have turned their attention toward real estate.

Another important tool for the development of the sector is the availability of mortgages. Again, this is an area with much potential but dogged by restrictive laws, particularly relating to title deeds. The law has been under review for some time and the banks have been awaiting new legislation.

Yousef al-Shelash, the chairman of Dar Al-Arkan, the kingdom’s largest private real estate company with a capital of $1.5 billion, outlined his company’s fund specifically intended for this type of investment. However, he explained that the decision to increase his company’s involvement with the residential sector was not easy given the obvious attractions of more mature real estate markets elsewhere in the Gulf. He said the Saudi sector has the demand but considerable obstacles, the root of which was the lack of a sound legal infrastructure which leads to low levels of competitive financing.

Dubai based KM Properties, the real estate arm of KM Holdings, announced its entry into the Saudi market establishing three offices in Riyadh, Jeddah and Dammam. The company recently launched a $2.3 billion Islamic real estate investment fund covering the GCC.

Days after Bahrain’s contract with Formula One was renewed, it was confirmed that Abu Dhabi signed a seven-year contract to host its own race beginning in 2009.

At a signing ceremony in the Emirates Palace, the Crown Prince of Abu Dhabi, Sheikh Mohammed bin Zayed Al Nahyan, spoke of the significance of the deal for the emirate: “A Formula One Grand Prix is one of the world’s most prestigious sporting events and is unrivaled in terms of continuous global resonance. That is why this new partnership is such an exciting one for Abu Dhabi and the entire UAE.”

The deal has the potential to bring substantial economic benefits to the city. The usual annual fee for hosting a Grand Prix event is between $15 million and $22 million. Abu Dhabi, however, believes that the initial capital outlay will be repaid by the potential economic impact of the event. Sheikh Mohammed said of the Grand Prix, for Abu Dhabi, and indeed the whole of the UAE, the opportunities that are presented by increased international attention and connectivity will deliver very real macroeconomic benefits. Indeed, Formula One is big business. The Bahrain Grand Prix generated $324 million in direct income for the businesses of the kingdom in 2006, which constituted almost 3% of GDP and created 400 full-time jobs.

New track being built for event

The event in Abu Dhabi will be held at a new track being built by the local real estate developers Aldar Properties. Already under construction, the circuit is part of the wider development of Yas Island, east of the city center. This natural island will also be home to the first Ferrari World theme park as well as a number of high-end resorts and golf courses. The development of Yas Island will cost $40 billion with the first phase of development expected to be complete by 2008 and a final completion date of 2014.

A significant component of this strategy for developing the profile and exposure of Abu Dhabi is producing eye-catching sporting events. The Abu Dhabi Tourism Authority (ADTA) sees this as crucial in attracting more visitors to the emirate. According to the director general of the ADTA, Mubarak al-Muhairi, recent success in hosting regional and international events has emboldened the emirate to further develop this strategy.

“The huge response by tourists and visitors to these sports events has prompted the ADTA to focus on sports events as a means to promoting tourism growth in the emirate,” Al Muhairi said. “We have realized that Abu Dhabi enjoys massive potential on sports tourism.”

Host of sporting events

Indeed, in the last month alone, Abu Dhabi has hosted the Gulf Cup football tournament, the Abu Dhabi Golf Championships and the Formula One festival. The Golf Championships, with a total prize money of $2 million, brought 23,000 spectators to the emirate, exceeding the target of 20,000 that the organizers had set. This also represented a 30% increase on the figures for the inaugural event in 2006. It is expected that such visitors will have a relatively high spend per head bringing in significant revenue. Moreover, as with Meetings, Incentives, Conventions and Exhibitions tourists drawn to the emirate by the new exhibition center, the challenge for Abu Dhabi is to extend the length of stay of these sports tourists beyond the duration of the event. Abu Dhabi will also undoubtedly place a significant emphasis on stimulating return visits using sporting events as an opportunity to showcase the emirate.

Indeed, it appears that the significance of the Formula One Grand Prix goes well beyond the direct revenue of the event itself. Such an attraction gives the emirate global visibility and will be a key component of its marketing strategy. The Grand Prix, along with the other sporting events already hosted by Abu Dhabi, may well go some way to meeting the ADTA’s target of attracting over 3 million  tourists a year by 2015.

Abu Dhabi is set to develop a natural gas network for residential buildings and industrial projects. The aim is to replace liquefied petroleum gas (LPG) with natural gas in all residential units and industrial developments as well as increasing the number of natural gas refilling stations for motor vehicles. According to an Abu Dhabi National Oil Company (ADNOC) official, work will begin on the pipeline by mid-2008. The company is also looking to extend its gas coverage to the industrial zones throughout the emirate.

The work will start this year to construct a gas network to cover phase two of the Industrial City of Abu Dhabi (ICAD II), including all the big industries such as ceramics, glassware, chemicals, and so forth.

These plans for Abu Dhabi follow a similar project in the emirate of Sharjah, which holds 5% of the UAE’s gas reserves. Sharjah Electricity and Water Authority (SEWA) has almost completed a project to connect residents of the emirate to a natural gas pipeline. Emirates General Petroleum Corporation (Emarat) and Dana Gas are also working on a 30 kilometer pipeline to take natural gas from Sharjah to the Hamriyah Free Zone, an industrial area within the emirate. Rashid al-Shamsi, the general manager of Emarat, explained that the  project would be an integral catalyst in fostering industrial growth and economic development.

The move towards residential and industrial use of natural gas within the UAE seems designed to make more cost-effective use of gas supplies, as natural gas is a cheaper option which allows for the increased export of LPG. However, both Sharjah and Abu Dhabi are somewhat dependent on cross-border gas agreements. Crescent Petroleum, a shareholder in Dana Gas, is still in discussion with Iran over a deal to supply gas from the Salman field in the Gulf to Crescent for utilities and industrial users in the UAE. Agreement on pricing seems to be the sticking point as natural gas prices have risen significantly since the initial contract was discussed.

New project to alleviate pressure

Abu Dhabi is also waiting for the Dolphin project to come on stream to alleviate the pressure on gas supplies in the emirate. The cross-border energy deal with Qatar will see the import of 90.6 million cubic meters of natural gas a day. The project will also serve the northern emirates of the UAE, as well as Oman, in the largest single energy initiative in the Middle East.

The UAE is the third-largest marketed producer of natural gas in the MENA region, according to OPEC’s most recently published figures. However, despite this and despite sitting on the fifth-largest gas reserves in the world, gas supply is presently a major concern for the UAE and Abu Dhabi. Largely as a result of significant real estate and industrial developments, the UAE has had to work extremely hard to meet the demands placed on its gas supply by domestic consumption, the utilities sector and oil recovery. As one industry insider said, summer 2006 was the first in which Abu Dhabi had to burn fuel oil for power generation. This is obviously less cost efficient than using gas and isn’t a formula that the emirate wants to sustain.

Although the Dolphin project, which is expected to come on stream in 2007, will meet some of this demand, ADNOC is looking to increase its own production. Many of the international oil companies operating in the emirate are working with ADNOC to increase gas production and develop sour gas reserves. Deputy general manager at Total Abu Al Bukhoosh, Sultan al-Hajji, said that the Abu Al Bukhoosh field is now producing more gas than oil. Other companies such as Shell are working with ADNOC to source more opportunities for gas production.

Supreme Petroleum Council Secretary-General and CEO of ADNOC Yousef Omair bin Yousef recently told the local press that Abu Dhabi will witness a great leap in gas production and processing over the coming few years, which will make it one of the biggest gas producers and exporters in the world. He also announced that the company will increase its gas production capacity from 127.4 million to more than 170 million cubic meters per day over the next two years. As part of this strategy, Abu Dhabi will look to double its exports of LPG in the next two years from 6 billion tons to 12 billion. Yousef also said there were plans to tap and export sour gas.

It is in this context that Abu Dhabi is looking to phase out LPG locally and replace it with a natural gas network. This will provide a cheaper and safer supply for industries as well as a clean fuel alternative for vehicles. Therefore, despite concerns over gas production capacities meeting demand, the emirate is looking to take advantage of its abundant reserves to improve efficiencies at home and become a leading supplier abroad.

Dubai Studio City (DSC) is the cornerstone of an ambitious plan to place the emirate at center stage of the Middle East’s film industry and beyond. The immense project includes sound stages, back lots, pre and post-production facilities, massive water tanks to allow for the shooting of scenes afloat, and special effects workshops. There will also be office space, accommodation, equipment rental, transport, casting agencies and all the side industries associated with filmmaking.

DSC is part of the wider Dubai Media City, which incorporates facilities for the television, music, film and broadcast industries. It has fast become the center of the region’s media industry, with more than 900 companies from 45 countries setting up shop.

The DSC project is being carried out by TECOM Investments, a part of the Dubai Holding group, responsible for a number of emirate’s largest developments including the Dubai Internet City, designed to be the hub of the region’s hi-tech industry.

In mid-December 2006, DSC management announced that work was about to start on two adjoining state-of-the-art sound stages, both of 2,300 m2 which can be opened up to form a single stage. The two studios will be ready for productions by the first quarter of next year, with a 1,380 m2 sound stage up and running before the end of this year.

Just the first act

The stages are part of the first phase of DSC’s development, with a back lot, warehouses, workshops, and commercial and support offices also being constructed at the same time.

Ultimately, DSC will have 14 sound stages, allowing for numerous simultaneous productions, with the whole facility covering some 2 million m2.

According to Amina al-Rustamani, TECOM Investments’ executive director of media, they will form the backbone of DSC.

DSC’s sound stage complex forms part of an infrastructure that is one of the critical building blocks for a vibrant film and television industry in Dubai, he told the press in December 2006. By combining it with support services, commercial, residential and educational facilities, Dubai Studio City will provide a unique one-stop-shop offering for film and broadcast companies.

New jobs for Dubai filmmakers

Another facet of the project, one inline with government objectives, is that DSC will create job opportunities for Dubai nationals. Not surprisingly, there are also training centers for various professions in the film industry penciled in to be part of the city, allowing Dubai to grow its own movie makers as well as hosting those from overseas.

First launched in early 2005 as little more than a concept, DSC is rapidly becoming a reality and is already attracting some of the leading lights in the region’s film production industry.

One of the latest to jump on board the DSC bandwagon was the Egyptian company Final Cut Film Production FZ, which announced in late January that it would build a $270,000 production facility, including a sound studio, that will have cameras rolling in 2008.

Another to buy into the project was Al Aqariya Group, which focuses on real estate-based media. Al Aqariya last year said it would locate its headquarters at DSC and construct a multi-functional facility that would include television studios, a media center and commercial space, with a total budget of $135 million.

Overall, during 2006, more than 25 companies from Egypt, Lebanon, India and the US took out licenses to join DSC, with others apparently keen to follow.

On February 3, Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum, unveiled the Dubai Strategic Plan (DSP)-2015, a broad-based plan that outlines the emirate’s social and economic objectives for the next eight years.

Among the key points of the DSP is achieving a gross domestic product (GDP) of $108 billion and lifting real per capita income to $44,000 by the end of the plan’s life span.

Good shot at hitting target

If the past is anything to go on, Dubai has a good chance of meeting these goals. In 2000, Sheikh Mohammed laid out an economic agenda for the emirate for the coming decade, Vision for Dubai, which included raising the GDP to $30 billion, increasing per capita income to $23,000 and reducing oil’s contribution to the GDP.

By the midpoint of the ten-year plan, the GDP had increased to $37 billion, per capita income was $31,000 and, with the boom in the services and financial sectors, the non-oil sector represented 95% of GDP.

One of the factors for the DSP’s success is the GDP’s sustained growth of 11%. While this may seem ambitious, it is actually 2% lower than the economic expansion the emirate has enjoyed for the past six years.

The plan will not be affected by oil price fluctuations, said Sheikh Mohammed. Dubai has succeeded in diversifying its sources of income, and reducing its dependence on oil.

Sheikh Mohammed said Dubai would focus on economic sectors in which it has a strong competitive advantage and that are expected to experience global growth. These were identified as tourism, transport, trade, construction, and financial services. Dubai would also look to create new sectors within the economy capable of developing a sustainable competitive edge, he said.

However, Sheikh Mohammed said that success in strategic development cannot be defined solely by major achievements in these economic sectors; progress in social and legal areas is also key.

Fundamental to the success of the DSP will be measures to increase the level of participation in the economy by Dubai nationals and to further improve the education system to better meet the needs of society and the economy.

To support economic and social development, the plan specifies a massive but managed expansion of the emirate’s infrastructure involving careful urban planning and meeting energy, electricity and water requirements while preserving the environment.

One of the key elements of the plan calls for improved transparency and accountability in all state activities, through a modernization of institutional structures and a devolution of some policy making functions. This drive for accountability is to include performance-based budgeting and resource allocation and linking state and organizational budgets to the strategic plan.

Private sector not neglected

While the DSP gives a major role to the state in managing the overall process, the role of the private sector was also stressed. From forming partnerships with the state to provide select services to taking on a larger role in the economy, the private sector is expected to be one of the main beneficiaries of the DSP as well as one of the key elements in making it work.

Sheikh Mohammed said he wanted the DSP to serve as a compass, pointing the way for the private sector, which should make full use of the programs and projects that will stem from the plan in order to fully benefit from them in the years to come.

Though the DSP has its own specific goals, Sheikh Mohammed, who is also the prime minister and vice president of the UAE, stressed the plan is aligned with the overall strategic plan being prepared by the UAE cabinet. The DSP could also serve as a blueprint for neighboring and friendly oil-producing countries in their efforts to restructure and diversify their economies, he said.

According to Suresh Kumar, CEO of Emirates Financial Services, the objectives set out in the DSP were realistic and achievable.

“It is a continuation of the momentum we have been seeing for the last 10 years,” he said in an interview with the local press. “Of course, it includes stretched targets, but that is how it should be.”

The targets may be stretched, but Dubai’s proven track record of meeting and exceeding its goals means that the glittering prize held out by Sheikh Mohammed could well be within reach.