Month: April 2020

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Estater continues its analysis on the retail sector in this blog, this time we cover Bahrain retail sector.

Estater estimates that Bahrain by the end of 2019 has around 2.05 million m2 of retail space spread across hundreds of properties. Of this, around 45% is in main retail malls such as City Center, Seef Mall, The Avenues Bahrain, The Atrium Mall, Juffair Mall, Oasis Malls, etc. The remaining 55% includes all the plazas, high street retail and stores across the country. The occupancy ratio for this entire space is around 85% with average lease rate estimated around BD 7.1 per m2 per month.

As the theory of retailing shows, a retailer pays anywhere between 7% to 20% of its gross sales as rental to sustain its business. The percentage varies mostly within this range across different cities in the world, different properties and for different shops within each property.

Bahrain Government carries out household expenditure survey from time to time. The last such survey was done in 2014 / 15. The monthly expenditure and its breakup for Bahraini and non-Bahraini households is shown in the table below.

Table 1: Monthly expenditure breakup for Bahraini and non-Bahraini households

Using suitable growth rates in line with economic growth between 2014 and 2019, the chart below shows our estimates of monthly household expenditure in 2019. Average monthly expenditure by a Bahraini household was BD 1,975 in 2019 and BD 1,198 by a non-Bahraini household.

Monthly Expenditure

Not all this expenditure is done in retail properties; spending on health, education maintenance of houses, etc. is all outside retail properties. Using suitable matrix, we have estimated the monthly spending of Bahraini and non-Bahraini households in retail properties. This is shown in the chart below.

Monthly Household Spending in retail Properties

Based on our estimates for different spending items, we have projected decline in household retail spending for the year 2020 and 2021. We have accounted for 15% decline in 2020 and another 5% in 2021. Note that most of the retail properties (barring the essential items) were closed for several weeks due to lockdown; this alone can lead to around 8-10% decline in the year 2020. Therefore, 15% decline over the full year due to economic difficulties is very much possible.

In 2019, we estimate that there were 125,000 Bahraini households and 245,000 non-Bahraini households (as per population data and average family sizes). Multiplying their respective monthly retail spending, we get BD 2.59 billion as annual spending in Bahrain in all retail properties.

With total 2.05 million m2 retail area with average lease rate of BD 7.1 per m2 per month, the retail properties receive BD 175 million as rental payments every year. This represents 6.8% of the retail spending.

Table 2: Estimates of Household Spending in Retail Properties Bahrain (2019)

The ratio of rentals as percentage of retail spending is the lowest in Bahrain for GCC countries. In other words, the retail lease rates are the lowest in Bahrain for all GCC countries.

The retail space will undergo some expansion over the next two years as several properties are already under construction (such as Kingdom Mall, Mall of Dilmunia, Marassi Mall, etc.). Over this time period, number of households will also increase due to their natural growth.

We believe that the ratio of rentals to retail spend will decline over the next two years as the retailers will not be willing to pay the same rental levels as before. We project (refer to the chart below), the ratio will decline from 6.8% in 2019 to 6.5% in 2020 and further to 6.3% in 2021.

Projected Trend for Retail Space and Rentals as % of Retail Spending

Keeping in mind all factors such as decline in the rental to retail spend ratio, increase in households, decline in retail spending, we have projected that the rental income of all properties in Bahrain is expected to decline to BD 138 million in 2020 (from BD 175 million in 2019) and further to BD 129 million in 2021. This decline could be the combined effect of higher vacancy and lower lease rates.

We also project that the average lease rate will fall to BD 6.7 per m2 in 2020 and to BD 6.5 per m2 in 2021. This is 5.5% decline in the average lease rate in 2020 and another 3.0% decline in 2021.

Projected Trend for Rentals and Average Lease Rate (per m2)

The rate of decline will vary considerably across locations and across property types. However, suffice to say that the retail space sector is looking at around 8 – 9% decline in average lease rates over the next 12 – 18 months. The decline in lease rates elsewhere in GCC are far higher (around 25 – 30%) but Bahrain is expected to have moderate decline as the lease rates here are already low.

The drop in the lease rentals will lead to substantial decline in retail property valuations. In the first year itself, the combined effect of drop in income and increasing risk premium in the market can lead of substantial devaluation in retail properties. This will present a challenge to the banking sector as many of the retail properties are mortgaged.

Estater (part of REMI) is the largest real estate intelligence platform in Kuwait and Bahrain. With wide raging database on properties across all sectors, Estater use sophisticated Geographical Information Systems (GIS) and data science to map and predict real estate market behavior.

One of the key worry for the real estate sector in the current Covid19 pandemic is its impact on the retail sector. While the retailers are worried about the impact on their sales, owners of retail malls and plazas are concerned about the impact on occupancy and lease rates. These two are closely interlinked and this blog creates a small analysis to address this.

Estater estimates that Kuwait by the end of 2019 has around 5.14 million m2 of retail space spread across hundreds of properties. Of this, around 16% is in Grade A retail malls such as The Avenues, 360 Degree, Salhia Complex, Marina Mall, Gate Mall, etc. The remaining 84% includes all the souqs, coops, retail properties in Shuwaikh, Al Rai, Dajeej and hundreds of retail plazas across the country. The occupancy ratio for this entire space is around 90% with average lease rate estimated around KD 14.9 per m2 per month.  

As the theory of retailing shows, a retailer pays anywhere between 7% to 20% of its gross sales as rental to sustain its business. The percentage varies mostly within this range across different cities in the world, different properties and for different shops within each property. Central Statistical Bureau of Kuwait carries out household expenditure survey every five years. The last such survey was done in 2013; before that in 2008. The total expenditure and its breakup for Kuwaiti and non-Kuwaiti households is shown in the table below.

Table 1: Monthly Expenditure pattern 2008-2013 in Kuwait

Using suitable growth rates in line with economic growth between 2013 and 2019, the chart below shows our estimates of monthly household expenditure in 2019. Average monthly expenditure by a Kuwaiti household was KD 3,7091 in 2019 and KD 750.8 by a non-Kuwaiti household.

Chart 1: Monthly Household Expenditure on All Items

Not all this expenditure is done in retail properties; spending on health, education maintenance of houses, etc. is all outside retail properties. Note that spending on “housing, water, electricity, gas and other fuels” alone account for 46% of Kuwaiti household expenditure and 38% non-Kuwaiti household. Using suitable matrix, we have estimated the monthly spending of Kuwaiti and non-Kuwaiti households in retail malls. This is shown in the chart below.

Chart 2: Monthly Household Spending in Retail Properties

Based on our estimates for different spending items, we have projected decline in household retail spending for the year 2020 and 2021. We have accounted for 14% decline in 2020 and another 2% in 2021. Note that most of the retail properties (barring the essential items) are closed for one and half months due to lockdown; this alone can lead to around 8-10% decline in the year 2020. Therefore, 14% decline over the full year due to economic difficulties is very much possible. 

In 2019, there were 310,442 Kuwaiti households and 502,508 non-Kuwaiti households (as per data of Public Authority for Civil Information). Multiplying their respective monthly retail spending, we get KD 6.52 billion as annual spending in Kuwait in all retail properties.

With total 5.14 million m2 retail area with average lease rate of KD 14.9 per m2 per month. This means that the retail properties receive KD 922.3 million as rental payments every year. This represents 14.2% of the rental spending.

Table 2: Estimates of Household Spending in Retail Properties Kuwait (2019)

The retail space will undergo some expansion as a number of properties are already under construction (such as Assima Mall, 360 Degree Outlet Mall, etc.). Over this time period, number of households will also increase due to their natural growth.

We believe that the ratio of rentals to retail spend will decline substantially over the next two years as the retailers will not be able to afford the same rental levels as before. We project (refer to the chart below), the ratio will decline from 14.2% in 2019 to 13.0% in 2020 and further to 12.5% in 2021.

Chart 3: Projected Trend for Retail Space and Rentals as % of Retail Spending

Keeping in mind all factors such as decline in the rental to retail spend ratio, increase in households, decline in retail spending, we have projected that the rental income of all properties in Kuwait is expected to decline to KD 722.8 million in 2020 (from KD 922.3 million in 2019) and further to KD 690.2 million in 2021. This decline could be the combined effect of higher vacancy and lower lease rates.

We also project that the average lease rate will fall to KD 11.1 per m2 in 2020 and to KD 10.4 per m2 in 2021. This is 25.7% decline in the average lease rate in 2020 and another 6.4% decline in 2021.

Chart 4: Projected Trend for Rentals and Average Lease Rate (per m2)

The rate of decline will vary considerably across locations and across property types. However, suffice to say that the retail space sector is looking at more than 30% decline in average lease rates over the next 18 – 21 months.

The drop in the lease rentals will also lead to substantial decline in retail property valuations. In the first year itself, the combined effect of drop in income and increasing risk premium in the market can lead of substantial devaluation in retail properties. This will present a challenge to the banking sector as many of the retail properties are mortgaged.

Estater (part of REMI) is the largest real estate intelligence platform in Kuwait and Bahrain. With wide raging database on properties across all sectors, Estater use sophisticated Geographical Information Systems and data science to map and predict real estate market behavior.

With the outbreak of Covid19, the Governments in the GCC region, rightly so, introduced several lockdown measures. These tough measures adopted by the Governments will have considerable impact on real estate values. In such times when markets will be full of rumors, we bring some historical perspective.

During 2008 – 2009 period, the region saw severe impact of global financial crisis. While the origin of the financial crisis was totally different from the current Civid19 crisis, the market conditions are similar and therefore comparable.

Based on the comparison of thousands of transactions of houses between 2007 and 2013, we show in Chart 1 that the average prices of private houses decline by 1.6% in 2008 (over 2007) and further by 16.5% in 2009 (0ver 2008). In total the house prices declined by 17.9% before these started gradually improving. By 2011, the average house price was higher than the house prices in 2007.

Without doubt the price behavior varied a lot from location to location. Some locations posted decline of more than 30% also; however, the overall trend was as shown in Chart 1.

Chart 1: Average Transaction Prices for All Kuwait

Chart 2 shows the comparison of transactions of residential investment properties across Kuwait. The average price increased somewhat in 2008 but declined sharply by 27.7% in 2009 (0ver 2008).  Once again by 2011, the average investment property prices were higher than the prices in 2007 and 2008.

Chart 2: Average Transaction Prices for All Kuwait

The real estate market is likely to react negatively to the economic shock of Covid19 and the property values will most likely decline. Many real estate market conditions are different in 2020 than these were in 2008. However, the two charts above put things in perspective as to how much decline can be expected and for how long the prices will remain low.

Estater (part of REMI) is the largest real estate intelligence platform in Kuwait and Bahrain. With wide raging database on properties across all sectors, Estater use sophisticated Geographical Information Systems and data science to map and predict real estate market behavior.

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