Sunday, 14 September 2008

Morocco and the building boom

A view of King Hassan II Mosque.Image via Wikipedia Investments in infrastructure, housing and tourism are building blocks essential to Morocco 's future: they promote long-term economic growth, create a positive image of the kingdom, and seduce foreign investors. But recent spikes in the costs of construction materials have many worried that the breakneck speed of development could soon prove unsustainable, as demand outpaces supply.

Bull Market in Construction Sector
Construction in Morocco is entering into its most bullish phase ever, with the country launching touristic accommodations, luxury real estate, infrastructural projects, and social housing developments in numerous regions. In the past three years, The North African kingdom has emerged as a real estate investment destination. The government, investing heavily in this image, is financing large-scale building projects in various sectors to raise infrastructure up to the level of international standards, increase tourism and foreign investment, and resolve the perpetual shortage of low-
income housing.

The government's Plan Azur is part of the strategic national development plan, Vision 2010, and aims to increase tourism to 10 million annual visitors by the end of the decade. Plan Azur outlines the development of large-scale luxury resorts in six coastal regions, in partnership with major developers in the UAE and abroad. The six resorts, all currently in construction, will add 111,000 beds to the kingdom's tourism capacity and create 200,000 direct jobs, according to government figures. European and Gulf investors are playing an important role in these and other real estate developments, particularly the Spanish company Fadesa, and Gulf investors like Dubai HoldingDubai Holding and EmaarEmaar, who have signed investment conventions with the government for a total of $9 billion over the next decade.

As it breaks ground on high-end accommodations for Moroccan elites and tourists, the government is also investing in less lucrative but sorely needed housing for the country's poor, who make up 17-20% of the population. Social housing construction increased from 113,000 units in 2005 to 115,000 units in 2006. The Minister of Housing and Urbanization aims to increase yearly construction of housing units to 150,000 by 2009, and to eliminate all slums by 2012. Rapid urbanization has made providing low-
income housing a major priority: 55% of Morocco 's population currently resides in urban areas, and this number is increasing each year. The housing shortage has created an urban blight of sprawling shantytowns in each major city, which have proven a hothouse for Islamist extremism in recent years.

The third national development strategy affecting the construction sector is infrastructure. New roads, ports, technological facilities, and airports are preconditions for achieving ambitious tourism goals and a more favorable business climate. Alongside high-end real estate and social housing developments, infrastructural improvements are helping business boom at construction companies. The highly-anticipated TangierMed Port , strategically situated on the Straits of Gibraltar, is currently adding a third and fourth container platform to the two already in operation. Airports are being built to optimize the Open Skies Agreement, which will link Morocco to Europe 's network of budget airlines and routes. Preparations for the arrival of the TGV and train station renovations add another dimension in the large-scale construction of public works.

High Prices: A Necessary Evil?
Solid economic growth and modernizing projects are having both positive and negative effects on Morocco 's construction sector. On the one hand, strong demand and burgeoning real estate values are providing a solid platform for the sector's continued growth. However, with demand at an all-time high, construction materials are selling for higher and higher prices, pushing up the costs of development projects and leading to lengthy delays. Spikes in the prices of essential materials like cement, steel, wood and aluminum could cast a dark shadow over this kingdom's sunny prospects.

Morocco 's leading construction company in terms of volume, turnover and number of employees is SGTM Construction. The company is delivering technically advanced work on some of Morocco 's most sophisticated projects, like the TangierMed Port , airports, and Plan Azur resorts. The government supplies 90% of SGTM's contracts. " Morocco is going in a very good direction, for bringing the whole country up to speed," said Hamza Kabbaj, president of SGTM. "A lot of people think we're moving too fast. I think it's the only way to take the challenge. You have to deliver, you have to give people roads, airports, bridges and ports in order to be able to do business and have investors come in and establish companies. Yes, it will cost money, it will be challenging, it will cost a lot of trouble sometimes, but we have to go through that in order to establish a good base and a good infrastructure for Morocco to be able to meet the challenge."

In part, local builders blame an international economic downturn for the elevated prices of building materials. Record oil prices, rising freight overhead costs, and elevated demand are driving up costs everywhere. Booming cities like Dubai and Singapore have recently reported record highs on building materials, in particular since June 2008. Malaysia , Indonesia , and Burma all recently imposed restrictions on log-cutting, driving up the cost of wood. Developing economies in Asia , the Middle East , and South America are experiencing construction booms and global demand is at an all-time high.

High Demand, Local Profiteering
Some builders are expressing concern that local conditions in the Moroccan construction sector are pushing prices up even higher. For instance, one construction executive attributed high prices to market manipulation among local cement and steel providers. Public-owned SonasidSonasid, an affiliate of Arcelor/Mittal, the largest steel producer in the world, furnishes Morocco 's construction-
ready steel. Builders report an increase of 25% in the price of steel, the main component used in building, since the beginning of 2008.

Importing construction-ready steel involves 16% customs tax, 3% handling rate, and transport costs. SonasidSonasid imports raw steel and transforms it into construction-ready steel, maintaining its stronghold on the market by adjusting prices to remain just slightly below fluctuating international rates, ensuring its dominance of local steel supply. "They're smart enough to position their price always just a little lower than international price plus the customs taxes so you know you definitely end up buying from them," the executive said.

As for cement, Morocco has one of the highest prices in the world. Whereas in Egypt a ton of cement costs $65, in Morocco it sells for as much as $100. This is partially related to the high local cost of the energy required to transform limestone into cement. But as demand reaches unprecedented levels, some builders are accusing the cement industry of price fixing. Demand for cement in Morocco is rising by an astonishing 10-12% per year, by one builder's estimation, and the Minister of Housing reports that cement consumption augmented by 50% between 2002 and 2007.

The CEO of one leading Casablanca construction company, speaking on condition of anonymity, said, "The big cement producers all have the same prices. There's a very strong association of cement producers who sit together and say ok, the price now is this much, and next month, it will be this much. There is no competition." This is expected to change, however, as private investors plan to enter the market over the next few years, increasing competition.

High demand has also led to increased delays in the delivery of wood, which comes to Morocco mostly from Finland , Austria , and Romania . In 2007, companies expected a delay of two months for the delivery of wood. They are now waiting as long as ten months. Lower grade wood, particularly plywood, is available from China and Brazil . The price of wood has been increasing at 10-15% a year for the past three years, according to industry insiders.

Poorly trained personnel and an insufficient local supply of qualified technicians, engineers, and builders are also driving up costs in the construction sector. Price inflation has been reported as the small number of qualified, professional construction workers take advantage of increasing demand in the sector, to demand higher salaries and better working conditions. International construction companies with designs to soak up some of the country's excess demand are wooing workers away from local companies with higher wages and incentives.

Over the past two years, companies from China , Turkey , and Europe have been setting up operations and competing for Morocco 's shallow pool of qualified construction workers, technicians, and engineers. "Morocco is in full expansion mode, and building is booming," said Claude Larrousse, CEO of Groupe Abritez-Vous Chez Nous, a French company that develops and outfits high-tech tents and exterior covers, "but the problem we're seeing today and which will impact cost, is with workers who are increasingly hard to find and less-qualified." Renault is even planning on bringing in Romanian workers to provide labor for the company's factory in the Tangier Free Trade Zone. Morocco must provide technical training in the construction and public works sector to ensure a skilled workforce that will benefit from new jobs-creation in the sector.

Economic Impact
The building sector is not the only victim of accelerating costs. Rising prices for oil, food and other primary products on the domestic and international markets have generated widespread social unrest in Morocco , with recent violent protests taking place in the southern Sidi Ifni region and the northern town of Sefrou .

Luxury real-estate projects are often announced by long panels that cordon off the construction site, portraying elegant European tourists lounging poolside in front of Mediterranean mansions. These wall-sized advertisements must seem unjust to the inhabitants of the garbage-lined slums that ring these construction sites, and which will certainly be torn down by the time the development is finished. And while social housing projects are moving ahead, their construction generally proceeds at a much slower pace and with less efficiency than foreign-managed projects or those earmarked by the government as part of the Vision 2010 strategy.

Some politicians see higher taxes on developments as a means for a fairer distribution of wealth. Developers fear that such measures could slow down the construction sector and impede economic growth. A heated debate is brewing between Prime Minister Abbas El Fassi's government and developers, who claim that the building sector has been harmfully affected by new laws and regulations, a shortfall in property supply, and conflicts with the administration.

The passage of the 2008 Finance Law imposed a 15% corporate tax on developers, which will rise to 30% in 2009. The Finance Law also raises the VAT on sale prices from 14% to 20%. The National Federation of Property Developers (FNPI) responded to the law's passage by vowing to fight the VAT increase and demanding that the government preserve the tax breaks for council housing projects guaranteed under the 2000 Finance Act.

In a press statement, Housing Minister Taofiq Hijira said that "the state has to make significant expenditure due to the current situation, so its time for big property developers to adhere to this tax reform." With political groups struggling to lower the VAT on basic products for a population suffering from rising prices on primary goods, the government risks heightened social unrest if it sacrifices taxing luxury developments. On the other hand, the vitality of the construction sector must be maintained for national strategy plans like Vision 2010 to be carried out and guarantee economic growth.

Whatever the outcome of the tax battle, the government should consider certain measures to safeguard the construction sector and protect local builders from price inflation and foreign competition. Training programs and institutes for construction-related jobs are badly needed to bring the country's human resources potential up to speed with the sector's demand for skilled labor. Regulation of the domestic steel and cement industries would eliminate two significant local causes of inflation, leaving the country better equipped to deal with the unusual augmentations of prices on the international market.

In the end, while rising prices are causing some concern in the building industry, builders and investors remain overwhelmingly optimistic about Morocco 's prospects for the future. Hamza Kabbaj thinks there is still a margin for prices to increase without threatening the profitability of development. "If we build for higher prices, they're going to have to sell for higher prices, and this is compounded by rising land prices. Real estate has been going up so much in the last three years that developers and promoters, having bought expensive land, are now buying expensive construction, and so will have to sell expensive houses, buildings, and apartments. And this may be a problem for people that used to find Morocco to be a bargain. But prices are still much lower than in Europe , which gives Morocco a very strong position in the future real estate market."

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1 comment:

sanjay said...

Paphos developers are facing some red tapeism with government regulations. roperty developers point the finger of blame at the planning authorities, local authorities and the government, while the government, planning authorities and local authorities point the finger of blame at the property developers.