With the industrial sector looking to post positive growth in 2013 on the back of increased regional demand, steps are being taken to boost the supply of space for manufacturing activities.

According to data from the Ministry of Industry and Commerce, industrial production accounts for 17% of GDP. This puts it on a par with the kingdom’s financial sector, long seen as the driving force of the economy, although in a trough in recent years due to the global downturn and local unrest.

Industry could soon eclipse the finance sector, with ministry forecasts predicting its contribution to the economy will rise to 25% in coming years. The government intends to stimulate this through a range of incentives and investments in infrastructure, especially in transport and logistics, including the addition of a rail link to Saudi Arabia and a road-rail connection to Qatar.

In a report issued at the end of April, real estate firm Cluttons said demand for industrial space in Bahrain looked set to mark a modest increase this year, rebounding from the uncertainty that the report said had taken a toll on the marketplace. Forecasting a period of relative calm and citing central bank projections of 4% economic growth in 2013, Cluttons said there would be a rise in industrial freehold and leasehold values, though this was in part due to a shortage of supply.

“The industrial market has seen a slight upturn in performance, although this is underpinned by a lack of stock, rather than an increase in requirements,” the report said. “The low supply levels are translating into increased landlord negotiations, as they are aware of market conditions and are trying to maximise potential returns.”

Evidence from two of the largest industrial parks in the country – the Bahrain International Investment Park (BIIP) and the Bahrain Investment Wharf (BIW) – also suggests that demand may be catching up with supply, with occupancy rates reaching 70% and 96%, respectively, as of the end of 2012. The BIIP saw 22 new businesses established at the site last year, and a further three projects with a combined value of $500m are due to launch before the end of 2013.

Salah Janahi, the director of industrial areas directorate at the Ministry of Industry and Commerce, acknowledges that a lack of elbow room at developments such as the BIIP is limiting the pace of industrial expansion.

“Our main challenge is land scarcity; we are receiving too many applications – both foreign and local – because of the incentives that we offer,” he said in an interview with online publisher Macropolis in early May. “However we do not have enough land at the moment. We are studying the requirements and the report has been raised to the government who are trying their best to allocate more land for the industrial sector.”

Land is scarce on the island nation, and industry has to compete with other uses, both business and residential. Indeed, the government has pushed in recent years to resolve a long-standing housing shortage, which will likely mean more area set aside for homes. Land reclamation is one solution, with dredging and other work used to expand the area of sites such as Khalifa Port, but this option can be limited by environmental concerns.

Bahrain will also have to contend with a rising tide of industrial complexes being developed elsewhere in the region, in particular in land-rich Saudi Arabia and Oman, along with Qatar, which is channelling some of its gas and oil revenue into manufacturing.

Though competition is expected to increase, so too are opportunities. On May 7 Aluminium Bahrain (Alba) released its first quarter results, showing a 2.2% increase in sales and a 3% rise in production. The improvement was in part driven by higher infrastructure spending in Saudi Arabia and Qatar, the company said in a statement.

In the future, Bahrain will likely experience difficulty accommodating industrial expansion, limiting the sector’s potential contribution to the economy, though by targeting specific markets, and by playing on advantages such as location astride regional trade routes, Bahrain’s industries may be able to overcome the problems of land scarcity and continue to register growth.

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