Tag Archive : Lease Rates

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.

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.

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.

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.

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.

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.

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.