Supply likely to exceed demand, creating concerns over empty buildings and low rents, and threatens to test banks.
Bahrain swamped by glut of offices
A glut of office space will swamp Bahrain's property market in the year ahead and could pose further threats to the country's banking system, according to a new report from CB Richard Ellis, the property consultancy.
But any further downturn in the property sector would leave the kingdom with knockdown prices for office space and could turn Manama into a stronger competitor with other Gulf cities seeking to attract multinational companies, such as Dubai and Abu Dhabi.
"Despite a slowdown in construction rates, the supply of new quality office space in Bahrain is likely to far exceed the growth in demand in the short term," said the report.
"This is likely to completely overwhelm demand levels in the short term and it is anticipated that the market in this area will either see wholly vacant buildings or a price/incentives war amongst landlords."
Newly furnished commercial property due for completion before the end of next year will account for growth of 280,000 square metres, or 73 per cent more than current levels, the report added.
However, there was some optimism that the long-awaited Friendship Bridge, which officials aim to open in 2017, could help the kingdom to emerge as a centre between the resource-rich states of Qatar and Saudi Arabia.
Avik Rakhit, the head of the northern Gulf region at Jones Lang LaSalle, agreed the prospects for Bahraini property were grim, as oversupply would "significantly affect returns in the coming year in a negative manner".
Any slip in Bahrain's office rents might have a domino effect as companies chase the cheapest deals, causing landlords to offer lower prices across the Gulf.
"Commercial real estate will not see a lot of demand in the coming year or two," said John Sfakianakis, chief economist at Banque Saudi Fransi.
"It will all depend on the amount of growth that the region experiences. There's a lot [of supply] coming online in Riyadh in Saudi Arabia, so Bahrain doesn't have it easy in terms of competition." Mr Rakhit added Bahrain may become an attractive location for companies from emerging markets expanding into Africa.
Mr Sfakianakis said the construction sector contributes around 10 per cent of Bahrain's GDP, while the banking sector, which provides mortgages and finance for the kingdom's construction projects, accounts for around a quarter of GDP.
In August, Bahrain's sovereign credit rating suffered a downgrade by Moody's to "A3", leaving it as the lowest-rated of the Gulf countries, albeit with a "stable" outlook.
But the ratings agency warned of a negative outlook for the banking sector because of its exposure to the property market.
"We continue to have a negative outlook on Bahrain's banking system, partly because the real estate woes will take some time to play out," said Tristan Cooper, the head analyst for Middle East sovereigns at Moody's.
"There is always a lag between when the problem first begins and when it is fully reflected in banks [through non-performing loans]. Typically, real estate recessions take several years to correct as liquidity dries up and the market takes time to return to balance."