New Rules Hang Over Bahrain’s Real Estate Market

The Bahraini government is expected to introduce new mandatory tenancy registration procedures early next month, which will help the market mature. However, the proposed rent increases at renewal threaten to impede the residential and commercial markets, which have only recently started to show increased stability.

Even though the precise steps and procedures for registering tenancy agreements have not yet been made public, the move will support Bahrain’s progressive regulatory environment and increase the Kingdom’s attractiveness to investors as a business-friendly destination.

Any effort to strengthen market regulation will be welcomed by the investment community, according to Faisal Durrani, manager of international research and business development at Cluttons. Of course, there are a number of lessons to be learned from the surrounding area, which we hope the authorities will take into account before putting the finishing touches on the new regulations.

“What happens at the time of renewal should be the most important part of the regulation. The current draught proposal calls for an increase of 5% for the residential market and 7% for the commercial market after a two-year period. For two years after the tenancy’s start date or the date of the most recent increase, landlords are expected to be prohibited from raising rent above the agreed-upon amount. Existing landlords will need to make longer-term plans and will be constrained by the proposed rent caps in a market that is still getting back on its feet after being affected by an unprecedented period of national tensions. Should the market perform better than the suggested uplifts, this will unavoidably have an impact on profit margins. However, it is also incredibly encouraging to see the government take steps to codify tenants’ rights and landlords’ responsibilities in-laws.

Cluttons contends that there is no ideal, one-size-fits-all answer to this problem. Rent increases are frequently correlated with inflation rates in developed markets like London, allowing tenants to better plan for rent increases, while in developing markets like Dubai, rent increases are directly correlated with a rent index developed by Dubai’s Real Estate Regulatory Authority. A similar rent index would probably be the most practical solution for a market like Bahrain.

Cluttons Bahrain’s Deborah Sellers, head of residential property management, continued, “Although the move is unquestionably excellent, there needs to be more clarity regarding how tenancy agreements will be registered. Any rules must also be completely enforceable, with no exceptions that would allow landlords to violate leases and impose rent increases in the midst of tenancies. The residential market has only recently started to exhibit more stability as Bahrain’s economic growth gradually accelerates. And any regulation must be carefully put into effect to avoid restricting this. However, it appears that with the new proposals, tenants will ultimately benefit rather than landlords.”

Property development is anticipated to be the focus of the legislation’s other important element. In addition to the requirement that developers obtain licenses before requesting planning approval, new rules regarding the sale of off-plan properties are also anticipated, with all off-plan sales anticipated to be formally registered. Additionally, developers will be required to open an escrow account, which will be used to hold any money received in the form of payments from buyers and any financing.

Cluttons anticipates that this will help address the problem of projects stalling in the middle of the construction and will boost market confidence for buyers looking for investment opportunities. This action will undoubtedly increase the Kingdom’s appeal as an investment destination across all property segments.