According to real estate consultant Cluttons, early next month the government of Bahrain is expected to introduce new obligatory tenancy registration procedures, which will aid in the maturing of the market, however the proposed rent increases at renewal threaten to obstruct the residential and commercial markets, which have both only recently begun to show increased stability.
While the exact procedure and process by which the registration of tenancy agreements will take place is yet to be revealed, the move will help to further bolster Bahrain's progressive regulatory framework, strengthening the Kingdom's business friendly appeal that investors find very attractive.
Faisal Durrani, Cluttons' international research and business development manager commented, "Any move to better regulate the market will be well received by the investment community. There are of course a number of lessons to be learned from around the region, which we hope the authorities will consider before finalizing the new regulations.
"The most critical component of the regulation should centre on what happens at the time of renewal. The current draft proposal calls for an uplift after a period of two years; 5% for the residential market and 7% for the commercial market. Landlords are expected to be restricted on imposing any rent increases on the agreed rate for two years from the start date of the tenancy, or the date of the last increase. For a market still finding its feet after being impacted by an unprecedented period of national tensions, existing landlords will have to plan further ahead and will be restricted by the rent caps being proposed. This will inevitably impact bottom lines should the market outperform the proposed uplifts. At the same time however, it is exceptionally positive to see the authorities move to put landlords' obligations and tenants' rights into clearly defined laws."
According to Cluttons, there is no perfect one-size-fits-all solution to this conundrum. In mature markets such as London, rental uplifts are often tied to inflation rates, which allows tenants to better plan for rent increases, while in markets such as Dubai, rent increases are linked directly to a rent index created by Dubai's Real Estate Regulatory Authority. For a market like Bahrain, a similar rent index would likely be the most viable solution.
Deborah Sellers, head of residential property management at Cluttons Bahrain added, "The move is certainly very positive, however there needs to be greater clarity on the process by which tenancy agreements will be registered. Furthermore, any regulations need to be air tight, with no loop holes for landlords to break lease agreements and implement rent increases in the middle of tenancies. The residential market has only recently begun to demonstrate an increased amount of stability as economic growth across Bahrain picks up gradually. And any regulation needs to be carefully implemented so as not to curtail this. With the new proposals however, tenants look like they will end up being the beneficiaries, rather than landlords."
The other key component of the legislation is expected to be centered around property development. Not only will developers be required to obtain a license prior to seeking planning approval, but a new set of regulations around off plan property sales is also anticipated, with all off plan sales expected to be formally registered. Developers will also be required to open an escrow account which will be used to hold any proceeds from purchasers and any finance obtained.
Cluttons expects that this will help to address the issue of projects stalling midway through construction and will inject confidence into the market, for buyers eyeing investment opportunities; a move that will no doubt strengthen the Kingdom's investment appeal across all property segments.