The commercial real estate market in Bahrain continues to suffer the fallout from the global financial crisis and unrest that swept through the country in early 2011. It has been one of the slowest GCC economies to recover from the crisis and the protests mean that economic growth is likely to be slow for 2011 and 2012. In the real estate sector this has translated into falling rents and an endemic oversupply of rental space.

In spite of these challenges, elevated oil prices and higher production levels are likely to lead to an economic recovery over the coming years, though it will be slow in coming. Indeed, there is some irony in the fact that the very same unrest that is causing so much damage to the wider economy in the MENA region is also responsible for the rise in oil prices that is going to fuel economic growth. Since oil represents 80% of Bahrains export income, GDP growth is extremely sensitive to movements in the price of oil. Hence, while we are forecasting anaemic GDP growth of just 0.9% for 2011 and 1.4% in 2012, we expect rising oil production will almost singlehandedly lift growth to an average of 7.0% for the 2013- 2015 period.

While we expect growth to rebound slightly 2012, we stress that the economys medium-term outlook remains contingent upon a lasting solution being found to the current political crisis. Unfortunately, we maintain our relatively guarded outlook on the prospect of the government and opposition coming to some form of agreement in the near term. As a result, political risks will remain elevated for the foreseeable future.

Some of the key opportunities in the real estate market are:

- A general view that rents will stabilise and at least move sideways, if not improve slightly, during 2012.

- An increase in oil revenues may flow through to the wider economy and help to lift domestic demand out of the doldrums.

- Government stimulus programs and most notably the commitment to invest US$3.2bn in the construction of 30,000 new residential units by 2016.

- An earlier than expected and/or a more comprehensive than expected settlement of the political crisis would return confidence to the commercial real estate market. Four Seasons decision to press ahead with a multi-billion dollar hotel project is a positive sign of confidence in Bahrains potential.

The key risks for the real estate market include:

- As a direct result of the political crisis: Tourism arrivals contracted by more than 25% in Q111 compared to a year earlier, though there are signs that tourism levels are set to pick up again as cruise ships in particular have starting returning to the country.

Bahrains position as a financial centre has been, perhaps irreparably, damaged. It was already facing completion from Dubai, Doha and Abu Dhabi. There are reports that some businesses have already moved from Bahrain to those other cities.

The consequence has been a decrease in demand for space in both the financial services and tourism sectors, even as new developments bring additional space online.

- Very high vacancy rates and a lack of growth in the domestic economy mean that the oversupply of commercial space will only be absorbed slowly. In the meantime, it is a tenants market. It is difficult to be optimistic about the short-term prospects for Bahrains commercial real estate market. The longer-term outcome will depend on Bahrain achieving a level of economic growth outside the export-oriented oil sector.