Rising cost of credit squeezes Bahrain luxury property

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• High-end apartment values fell 1.3% Q1 of 2023
• Trend set to continue, Savills says
• Central Bank of Bahrain raised interest rate to 6% on 3 May

The increased cost of credit due to higher interest rates is starting to dent demand for luxury property in Bahrain, with apartments experiencing the most impact. 

High-end apartment prices in Bahrain dropped by 1.3 percent quarter on quarter in the first three months of 2023, according to a report published this week by Savills.

Luxury villa values stayed flat over the quarter, compared to price increases of more than 5 percent across the mid-market segment. 

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“A tighter liquidity condition owing to lower LTV [loan-to-value] ratios and higher lending rates has impacted demand for premium developments,” Savills said. 

“High-end apartment values dropped quarter on quarter, despite experiencing two consecutive quarters of growth,” the report said. “We expect this trend to continue as financing options become limited against a backdrop of tighter liquidity conditions.”

High-end apartment values declined on an annual basis, too, by 1 percent, while premium villa values remained stable.

“This is likely because overall there has been a gradual yet clear shift towards villa developments over the last few years, a trend that was kickstarted post-pandemic,” explained Swapnil Pillai, Savills’ associate research director for the Middle East. 

“This shift in demand from apartments to villas has led to a gradual correction in pricing as occupiers upgrade to larger spaces.”

The Central Bank of Bahrain raised the interest rate from 5.75 percent to 6 percent at the beginning of this month, tracking the US Fed’s rate hikes.

It also raised the overnight deposit rate from 5.5 percent to 5.75 percent and the lending rates from 6.75 percent to 7 percent, according to a CBB statement issued on 3 May. The other dollar-pegged GCC states – Oman, Qatar, Saudi Arabia and the UAE – also raised their rates. 

Inflation in GCC economies has been lower than in most advanced and emerging countries, the International Monetary Fund noted earlier this year. This was due to factors such as subsidies, caps on certain products and the strengthening US dollar. 

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Savills’ report said that, overall, Bahrain’s real estate market had “largely continued the upward momentum of 2022, albeit at a slower pace given increasing global macroeconomic uncertainties”. 

Mid-end villa prices rose 5.2 percent year on year to around 603 Bahraini dinars per square metre compared to BHD573/sqm in Q1 2022. 

In the rental market, demand for low and mid-end villas remained strong as tenants curbed their expenses, the report added.

While there was no price growth across the low-end villa rental segment in Q1, the gradual increase in rents over the past few quarters means prices are now 18.5 percent higher than in the same quarter in 2022 – around BHD800 per month. 

But the apartment rental market “continues to face downward pressure” due to a persistent supply-demand imbalance, Savills said.