But there are now signs of a slowdown in the luxury end of the market, according to a report by Kuwait-based Global Finance House.

The rise in house prices has been mainly on account of demand outstripping supply as most new residential properties in Bahrain focused on the high-end segment.

Manama, where the majority of the population is concentrated, has experienced Bahrain's highest property price growth, at around 400% - 600% over the past four years, the report states. Prices in other areas have also climbed by 250% - 400%

However, the prices are showing signs of more moderate growth now amidst the financial crisis. With tight liquidity, market sentiment towards property investment has declined which has led to lower transaction volumes in the residential sales market and properties are being offered at a discount in some places for the first time.

"With tightening of liquidity, project finance has become difficult and investors are showing signs of hesitancy in entering the property market. As a result transactions are coming down," the report said.

"However, the majority of new homes in Bahrain have been bought by owner-occupiers and speculator activity had been limited to the luxury segment.

"Due to this, speculator activity will be curtailed and only genuine long term investors would remain in the market.

"Developers will be forced to meet timelines and at the same time provide quality residential projects to attract property investors.

"Focus will shift to end-user buyers, particularly in the middle-income bracket that had been poorly served during the boom years.

"But in the middle income bracket prices are likely to remain firm and may even grow by 10% to 20% as indigenous demand would remain strong due to the growing young population," it said.

Yields are estimated by local realtors at around 10%, given the shortage of properties for rent and strong demand.

The rental market is almost entirely foreign-driven, and has grown substantially since the increase in US army numbers, who live largely in Juffair.

More recently, the high level of economic activity in Saudi Arabia has meant a substantial increase in new residents, who drive across the causeway rather than live in Saudi.