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Bahrain Bay News
Bahrain Bay sails through downturn
By Nicole Walter, Features Editor, Property Monthly
Friday, 01 January 2010
Publisher: www.gulfnews.com
With the dawning of 2010, the prestigious Bahrain Bay master development is in a position - debt-free and with ample cash reserves to carry on building - that developers in Dubai can only dream of.
The healthy financials recorded by Bahrain Bay also underpins the resilience of the wider Bahraini real estate market in what has been an exceptionally difficult environment.
"Irrespective of what happens in the world economic arena, projects like these go through several economic cycles," says Bob Vincent, Bahrain Bay's CEO. "What matters is that our commitment hasn't wavered."
The investment outlay, at $5 billion, is substantial in itself. This capital has been pumped in by the master developer and the many third-party entities who have got on board. Bahrain Bay impresses with its sheer scale, totalling 1.7 million square metres of built-up area that will eventually attract anywhere up to 40,000 people.
Construction has kept a fair clip despite the troubled times — where just two years ago only the waters of the Arabian Gulf had a free run, now there is land and a new ‘neighbourhood' will come alive in phases over the next seven to ten years. Vincent admits that during the ‘dream times' in 2005, there were those who believed the development could be completed even faster — as early as 2010. But the CEO dismisses such statements made by some close to the project as unqualified.
"If you track back through history there was a lot of over-promotion and over-expectation in the market in general, not just at Bahrain Bay."
Schedule on track
Reclamation started just over 18 months ago, but since initiating infrastructure works worth $230 million, the schedule has been on track for clearing the April finishing line. Electricity sub-stations are to be handed over to the government. And the inauguration of the new headquarters for Arcapita Bank, Bahrain Bay's majority shareholder, is just around the corner. Another major Bahraini Bank, Al Baraka, will also be joining; its own head office will start construction around the time that the other one opens.
"Trying to rush it wouldn't be sustainable, we are not developing for the sake of developing but [to do so] sustainably, so the second time round we can attract investors again," Vincent explains.
An investor-based strategy
The strategy is to attract offshore investors to create a business network for future investments into and outside the region. A host of Indian and GCC developers, a Sharia fund based in Switzerland which will build a boutique hotel, and Singapore's CapitaLand are among the 16 third-party developers. The latter is developing Raffles City, which takes up 18 per cent of the overall Bahrain Bay spread. CapitaLand has completed the foundations and is expected to start construction of the superstructures by mid-year. The reason is that while the serviced apartments to be operated by Ascott has not changed, the Lifestyle mall and villa components have. The Four Seasons hotel is another candidate for redesign, now reduced in height to around 65 floors as the planned 100 floors turned out to be too expensive.
Nearly half of the third-party developers should commence construction by the middle of the year, but the others would prefer sitting out until the economic situation — and their financial circumstances — take a turn for the better. On its part, the master developer is creating a new schedule to accommodate their partners' requirements. Fortunately, BahrainBay had locked in a lot of its construction prices before the outbreak of the financial crisis. "There is no point in trying to enforce a contract schedule in a difficult environment, we've been able to lock in our risks and able to share that, because upfront we had a disciplined commercial approach," says Vincent. "If we'd had been speculative we wouldn't have had that option."
And third-party delays, estimated at about 18 months, had a silver lining for the master developer as well. It means that all 30 plots will be handed over fully-serviced, a fact Vincent is proud of. "We've been used as a case study by some of the utility service agencies around the world. It would have been extremely complex to put in infrastructure at the same time as the other buildings. We would have done it, but would have had to restrict access, complicating plot sales."
Even at the height of the crisis last summer, Bahrain Bay transferred title deeds for three parcels worth $20 to $30 million each to developers. And it isn't doing badly on land payment collection either, at 70 per cent of the total sold.
No room for speculators
Land speculation is taboo here. Once a plot is bought it has to be developed to certain guidelines, which keeps the speculator away. "Secondly, we don't allow developers in Bahrain Bay to sell off-plan," Vincent explains.
"You can only start marketing after you've paid for the land in full, and taken freehold title. Building permits, designs, and marketing plans require approval. That stops the cowboys who sometimes congregate in the development industry."
In case sub-developers can't proceed, whether owing to financial difficulties or force majeure, they're obliged to offer the land back to Bahrain Bay at a discounted price according to their contracts. This hasn't happened to date, probably thanks to the master developer vetting investors to make sure they are have the experience and capacity to perform.
"They had to understand the risk associated with their investment, these are not villas but $200 to $400 million buildings," the CEO says. "Reputations, including our own, are important to us; we want to make sure everyone gets protected and treated on equal footing."
Bahrain Bay is in charge of creating the public realms at an investment of $50 million, but it has also kept two zones (there are ten in total) or 35 per cent of the project. A Qatari developer has already expressed interest in one of them for a marina, boutique hotel and a residential villa component.
"It will still be the same product mix, but the benefit of that particular development concept is that it can be staged," Vincent says. "That attracts a different kind of developer or investor, but if we wish we may develop some of it ourselves."
The masterplan has designated 60 per cent to be committed to commercial properties and 40 per cent for residential. There will be a fair sprinkling of hotel projects seeking a prominent location on the waterfront. In the meantime, the Bahraini government is expected to start construction of the North Manama Causeway linking the airport side via Bahrain Bay to the Financial Harbour to alleviate the congestion before the first residents move in. "They are playing catch up," Vincent states. "Of course there will be on-going complaints about roads. As the city grows, infrastructure gets superseded as it does in every city."
Vincent adds that Bahrain has not got the sovereign wealth to take spending plans lightly. Where money should go is an intense debate in the Cabinet.
"It's critical that projects like Bahrain Bay get the infrastructure when they need it. We spend a lot of time with the government to make sure our vision is consistent with that of the government."
This has all the makings for a perfect marriage of public and private enterprise.