Kingdom of the future

Morocco is building lasting ties to Europe and the Middle East. A growing number of real estate investors are flocking to the country in an attempt to ride an expected rising tide of wealth. But poverty and regressive tenant laws present real challenges. Robin Marriott reports from Casablanca.

For the first-time visitor, Casablanca's charms compete with its more noxious qualities: dirty, congested, slum-filled. The taxi drivers are aggressive and few locals speak English (although French is widely spoken).

At night it is worse. With women off the streets, men fill dingy doorways, bars and nightclubs of this bustling Moroccan city. It is not the kind of image King Mohammed VI wants for his city. After all, he has put tourism at the heart of structural change. Under the Plan D'Azur the government target is to grow visitor numbers from 5.5 million in 2005 to 10 million by 2010. What is more, The King wants to establish the country as an international property investment hotspot.

The tourism growth targets (which have withstood setbacks such as suicide bombings that killed more than 40 in 2003) are beginning to attract foreign investors. But tourism is not the only catalyst. A move away from an agriculture-dependent economy and an average GDP growth of 5.4 percent since 2001, according to data from the International Monetary Fund, are also helping to lift the investment outlook for the country.

Foreign companies such as Dell have invested in opening back office functions in the country, including call centers, to take advantage of low wages and other competitive costs. Meanwhile, the country is investing in infrastructure projects such as the Tanger-Med port near Tangier in the north and a highway linking Tangier with Casablanca, not to mention a 28 kilometre tunnel between Morocco and Spain under the Straight of Gibraltar. All of this is persuading a handful of private equity firms to invest in hotel and residential complexes, and commercial property.

Though real estate laws in Morocco are remarkably protective of tenants, property owning funds are beginning to emerge. Hicham Ibn Brahim, who runs an advisory firm called Business Experts in Casablanca, says that the three local private equity real estate funds raised to date have been sponsored by Moroccan banks or financial institutions. Now the first non-Moroccan funds are being set up.

Going international
RREEF, Deutsche Bank's alternative assets division, has set up a real estate fund overseen from Spain by country head Ismael Clemente. Another new group is sponsored by French bank group Société Générale. Earlier this year, the Paris-based bank with a heavy retail banking presence in Morocco recruited two people in Casablanca to start up real estate funds. Director of property fund management Wafi El Yacoubi and director of asset management Zined Bennani began speaking with potential investors in September about a 500 million Dinah (€50 million) opportunity fund investing in office property, industrial, logistics and tourism projects. A second fund, seeking €100 million, is more of a core-plus vehicle. The difference is that it will not be taking on construction risk.

When asked why more foreign funds had not raised vehicles targeting Morocco, Société Générale's Yacoubi says, “There is not enough structured information or market studies about supply and demand. Perhaps investors have struggled to get good information.”

To underline the point, Société Générale used Hicham Ibn Brahim's Business Experts to supply it with data rather than use an established global property consultant. It had very few alternatives. The only globally recognisable property services firm with its own offices in Morocco is Richard Ellis, though some international firms have alliances with local players.

Richard Ellis opened its office within the past 18 months. In a sign of how much potential it believes the market has, it has hired 20 people so far. Youssef Benmansour, who used to work for a bank, is one of those who joined the Los Angeles firm recently, as a consultant valuer. He says that while local firms do exist for valuation purposes, their practices are fairly rudimentary. This has left a gap for CBRE to exploit. One man's lack of information in Morocco is another man's opportunity.

Moroccan law
Over coffee close to CBRE's new offices in Racine, one of the smarter districts where women like to shop, Benmansour points out that Morocco has some issues in real estate that on the face of it makes the country a difficult place for investors. For one thing, tenants are extremely well protected. So much so, that it does not always pay to become an owner of real estate. Under the Dahir law of 1955 (Dahir being the name given to the legal instrument through which the King exercises power) if a property owner wants to force a tenant to quit a building it can be costly. As long as the tenant proves they have found an alternative location, the landlord has to foot the bill to pay for relocation costs. That is not even the main problem. The landlord must also pay a kind of opportunity cost incurred by the tenant. This could get expensive in the case of a business that successfully argues it will lose 50 percent of clients because of moving further away.

There is another potential problem as well. If a tenant occupies some space for more than two years, the tenant can sell his “interest” to another tenant. This goes for offices and retail. Logistics property is slightly different. If the property is only used for storage, the tenant has no property rights. If the tenant can prove that clients go there to sell merchandise directly from the warehouse, then the law does apply.

What started out as law to encourage enterprise has stifled the property owner-occupier model. At least, that is what you would think. Benmansour says problems typically happen with “liberal professions” that have been renting their space for a long time. But things are changing. “Nowadays, lease contracts are much more elaborate to protect landlords. Quality tenants are becoming more and more available thanks to the professionalization of the market. The arrival of many international investors and the rise of Moroccan investment and development funds can testify to this.”

Lawyers in Morocco are exerting considerable energy trying to protect landlords further. According to Benmansour, at a recent gathering of real estate professionals in Casablanca one particular idea was discussed involving a very direct approach: cutting off their electricity and power. The idea is that the property owner can take responsibility for paying the gas and electricity bills instead of the occupier and passes the cost on. This way, the landlord can exert more control over the tenant. The theory, which is effectively that you can turn out the lights on a tenant, is yet to be put into practice.

Given the current position for many tenants, it is hardly surprising that shops tend to be owned by retailers. Even for the quality multinational tenants, maximum lease lengths tend to be around 4 to 5 years only. On top of that, an owner can only raise rents a maximum of 10 percent every three years. No wonder developers like to take advantage of one of the laws in their favor: the possibility of selling an intangible property right called Pas de porter or Fonds de commerce in order to hedge the risk before a project is complete. The local retail development company, Al Amine Investissement, which is behind North Africa's largest mall on the beachfront in Casablanca called Morocco mall is one of the most recent to sell an intangible property right, according to Benmansour. Being a developer in Morocco is not that bad, after all.

Investors active in Morocco

Name of Firm Snapshot
Société Générale The French banking group has launched two funds – one €50 million
opportunity fund and one €100 million core-plus vehicle.
Colony Capital The LA-based global firm is behind a $1.1 billion resort complex
in Taghazout.
RREEF Has launched a Morocco-focused fund which is run out of Spain and
overseen by Ismael Clemente.
Fadesa The Spanish homebuilder has a number of development projects across
the country, including two recently awarded by the government at Titouan,
dubbed “Tamuda Bay.”
Qatari Diar The Qatar group is behind Al Houara coastal resort near Tangiers.
Kerzner International JV with Moroccan government to develop a $230 million Resort Casino
near El Jadida, 50 km from Casablanca.
Sama Dubai Behind various projects including $600 million Dubai Towers in Casablanca,
the $500 million Marina de Casablanca (see photo), and $3 billion Amwaj
development in Rabat.
Emaar Properties and Dubai Holding 10-year projects including a new marina in Casablanca, a $650 million
residential and tourism complex in Tangier. Also, $5.1 billion worth of
riverside and waterfront projects in Rabat.
Venture Capital Bank (Bahrain), An alliance to invest in a number of projects around the country.
Commercial Real Estate Company
(Kuwait) and Morocco state-owned
Caisse De Depot et De Gestion.

Speculation problems
Lamrani himself is a good example of the changes afoot in Morocco. Bright, educated, and English speaking he finds himself in a good job. He has been able to buy his own home in Casablanca and has watched it double in price. Residential property has doubled in price not just in parts of Casablanca but in other cities too, which he puts down to the way people have ascribed value to property in recent times.

Interest rates, he notes, are no longer at ridiculously high levels of 30 percent that were witnessed some 20 years ago. Instead they are at 4.5 percent. Economic growth is among the fastest in Africa. In Morocco nowadays everyone wants to own property.

In a bid to tackle some of the slum dwellings, the King passed a law enabling people to buy social housing in new areas for as little as $20,000. The trouble was that people who could afford to pay more, took advantage and started buying up. The law that was supposed to help the poor out of poverty only fuelled property speculation. Such is the level of speculation that many owners are not renting out their properties because they fear they will be unable to get a tenant out when it becomes time to sell. Instead they just hold onto the property and wait for the value to rise.

Property speculation is a serious issue hindering the King's rush towards hotel and tourism development, according to Hicham Ibn Brahim, whose firm advises the tourism ministry. “Land prices are rising 600 percent,” he says. “People are buying agricultural land before it changes to urban use. In Tangiers, all of the land is owned by speculators. It is a problem for developers.”

Fadesa, the Spanish developer, has been particularly successful at buying land. It has five major projects in the country and has veered away from its usual residential expertise to incorporate hotel development. Los Angeles' Colony Capital is also investing in the hospitality market. At Taghazout near Agadir, Colony is teaming with Grupo Satocan and Grupo Lopesan, the tourism leaders in the Canary Islands, to develop a hotel and residential complex.

Reaching out
The interest in owning hotels in Morocco has led to the emergence of hotel funds in the last two years, says Ibn Brahim. “As tourism is exploding we have a lot of pressure on hotels,” he says. But equally, commercial property is drawing interest. Société Générale has added office and logistics property The interest in owning hotels in Morocco has led to the emergence of hotel funds in the last two years, says Ibn Brahim. “As tourism is exploding we have a lot of pressure on hotels,” he says. But equally, commercial property is drawing interest. Société Générale has added office and logistics property

But what has not happened in Morocco to any meaningful extent is development of quality real estate. He says the total amount of office space occupied by firms is 1.8 milion square meters. Only 10 percent of that is category-A offices, he says. “This supply is not enough. There is huge demand from international firms which are locating here.”

He hopes that the two real estate funds will be able to profit from that demand and that European-based limited partners could invest alongside Moroccan investors. And it seems Morocco is reaching out to Europe in more ways than one. As well as the tunnel linking Morocco with Europe, Morocco's leading telecom operator, Maroc Telekom, completed a 1,600 kilometer submarine cable between Asilah and Marseilles in France in April. This links with several European telecoms operators. “Cables under the ocean are having a great impact on real estate,” says Ibn Brahim of Business Experts. “A lot of people have started in businesses and this is space consuming. It has had a huge impact on the office market. The largest end users are call centers.”