Moroccan government programmes target housing deficit problem, rising demand for high-quality office space

 

Although the impact of the 2008 global financial crisis can still be felt in Morocco’s real estate sector, signs of recovery are being seen in certain segments. While high-end housing and luxury developments took a hit, prices for quality developments have remained steady, as foreigners, domestic consumers and Moroccans living abroad continue to look to real estate as a secure investment with long-term prospects. Furthermore, the government’s push to increase the number of affordable homes built each year has boosted the sector through a series of incentives for developers. This is not only helping to reduce the housing deficit for low-income residents, but is also satisfying the growing demand from the emerging middle class.

Framing these efforts, the authorities have improved urban development initiatives, with most of the kingdom’s largest cities implementing a master plan to guide future expansion. Commercial and office space developments have become major segments of the industry, although crafting an offer that is suitable to the Moroccan market has sometimes been a difficult balance to strike. Government regulations aimed at garnering support from the banking sector are also likely to help bring in new financing.

HOUSING PROGRAMMES: Government efforts to encourage the building of new homes for lower- and middle-income Moroccans helped reduce the housing deficit in the country from 850,000 to 400,000 units between 2011 and 2016, according to international media reports. Such an undertaking has required the two-pronged approach of building new housing and refurbishing large sections of low-income accommodation currently in use. Despite this achievement, the need for new homes continues to mount. Demand for new residences alone increases by 125,000-130,000 units per year, according to government figures. This increase has been especially prevalent in the kingdom’s cities; between 2000 and 2015 the country’s urban population rose by 2.3% per year, resulting in 60.2% of the national population living in cities, according to data from the UN Statistics Division. In some cases, this sudden growth has spurred the expansion of illegally built settlements and substandard housing conditions.

Officials are planning to reduce the current housing deficit to 200,000 homes by 2021. Meeting that target will be challenging, with housing authorities estimating that a total of 800,000 new homes would have to be built over the coming years to effectively respond to the growing annual demand. The Ministry of Housing and Urban Policy reported that the housing construction rate averaged 165,000 units per year between 2012 and 2016. This is far ahead of the estimated 120,000 to 140,000 homes that will need to be built each year to reduce the housing deficit by 50% by 2021.

INCENTIVES: The government’s housing policy is centred on harnessing the private sector to build low-income residences with a mix of fiscal incentives for both developers and homebuyers. Incentives are allocated to homes with capped prices that are sold to certain segments of the population, and this support system began over 20 years ago. “There are more than 3500 real estate developers in Morocco, a sector undergoing a crisis. In the 1990s the state was the only operator, and in 1996 King Hassan II launched a domestic programme for social housing,” Iqbal Kettani, former general manager at the National Federation of Real Estate Developers, told OBG. “This scheme was extremely important for the domestic real estate sector and contributed to the emergence of today’s operators.”

For the 2010-20 period, the authorities launched a social housing programme to construct homes ranging in size from 50 sq metres to 80 sq metres – most are 52 sq metres – and sold at below Dh250,000 (€23,200). Under the programme, homebuyers are not required to pay any value-added tax (VAT) on their new units, but are barred from re-selling the house for a period of four years. Any homeowners re-selling their units before that period will be required to repay their VAT benefit.

In order to encourage developers to focus on affordable housing, and because it involves capped selling prices, the programme established a 50% income tax reduction for firms building a minimum number of homes in this category over a five-year period. Initially, the programme put the minimum threshold at 2500 homes. However, this was later reduced to 500 homes in order to maintain equitable conditions between smaller and larger real estate developers.

Another programme, known as the Logement à Faible Valeur Immobilière Totale, encourages the construction of homes with a total area of 50-60 sq metres. It also channels housing acquisition support to the lowest-income Moroccan families, earning less than 1.5 times the minimum wage, which is in the process of being raised to Dh1500 (€139) per month.

Furthermore, in line with broader energy efficiency goals, the country has introduced a thermal regulation for the sector, which should help achieve the goal of decreasing energy consumption by 20% by 2030 (see Energy chapter). “The new thermal regulation now requires newly-built properties to be insulated, which is set to further drive the sector into the ecological, energy-saving construction dimension,” Marouane Zohry, CEO at Sika Maroc told OBG.

BROADER ACCOMMODATION: Equally important has been the establishment of housing policies geared towards the country’s growing middle class. Aiming to expand support for Moroccan households earning less than Dh20,000 (€1850) per month, the government signed an agreement with the National Federation of Real Estate Developers to build homes with areas between 80 sq metres and 150 sq metres. Under the programme, house prices are set at Dh7200 (€667) per sq metre. However, the schemes have not been without their challenges. As reduced land availability pushes the price of urban plots upward, sticking to the set prices can be increasingly difficult. “The only challenge with this programme is that in some of the bigger cities in Morocco, it is hard to find housing that is under the price limit per sq metre set by the government,” Amine El Kourchi, economic intelligence analyst at BMCE Bank, told OBG. By the end of 2016 a total of 22 developers had signed onto the programme and committed to building 10,000 homes with the specified conditions.

The government has also strived to involve the banking sector in credit allocation for middle-income housing by providing loan guarantees through the Central Guarantee Fund (Caisse Centrale de Garantie, CCG), which supports home financing by guaranteeing mortgages. From 2003 to 2016 the CCG assisted with the purchase of around 250,000 middle-income residences. Between 2014 and 2015 the volume of financial support allocated through the CCG to individual Moroccans rose from Dh27.4bn (€2.5bn) to Dh29.2bn (€2.7bn).

Citizens living abroad are also an increasingly important segment in the housing market, leading the CCG to develop specific products that cater to these individuals. According to the most recent government figures, in 2015, 40% of the money coming back into the country from Moroccans living abroad was absorbed by the real estate sector, followed by agriculture at 25%, commerce at 22% and services at 13%.

PRICES: Prices remained stable over 2016, as per the real estate asset price index, composed of information by Bank Al Maghrib – the central bank – and the National Agency for Land Conservation, Registry and Cartography. Overall, sector prices rose by 0.9% for the year, down somewhat from the 1.2% increase in 2015. With the central bank reporting that residential prices stagnated in 2016, the slight pick-up in the price index was driven by non-residential assets. The most visible price hikes were in land and commercial spaces costs, which saw an increase of 2.1% and 4.7%, respectively.

Despite the relative price stability in residential real estate in 2016, an 8.1% rise was reported in the volume of real estate transactions driven by the residential segment. Transactions for home purchases were up 7.8%, fuelled by a significant improvement in several subsegments. Sales of apartments increased by 8% and sales of villas improved by 6.7%.

In the third quarter of 2017 the real estate asset price index rose by 0.6% year-on-year (y-o-y), driven by a 1.3% increase in land, no change in apartments and a 0.5% decrease for commercial premises. The number of sales transactions fell by 18.7% reflecting declines in all asset classes, with sales falling by 21.9% for apartments, 7.4% for land and 8.1% for commercial property.

Although demand for middle-income housing is set to progress favourably, an excess of offer in the luxury real estate segment has affected the sector, with various projects coming on-line. Product development in the luxury housing segment has expanded the choices for higher-income international and domestic clientele. As a result, buyers have become more demanding, prompting developers to invest more in the surrounding amenities, environment and associated services.

“Customers are still willing to pay a high price for a product with sufficient quality, especially if the development is a global project with excellent exterior conditions, green areas and security,” M’hammed El Merini, general manager of the luxury housing developer Eagle Hills, told OBG. Average prices in the luxury housing segment vary between Dh25,000 (€2320) and Dh30,000 (€2780) per sq metre, according to El Merini. Prices can be higher depending on the overall product. “In the luxury segment, the prices are still as high as they were in 2009, 2010 and 2011,” he added.

Cities such as Casablanca, Rabat and Tangiers continue to see healthy levels of demand for high-end developments. However, land availability in major cities is becoming a problem, especially for developers who focus on large-scale projects that combine homes with golfing, retail and common green space.

OFFICE MARKET: In addition to residential offerings, efforts to position the kingdom as a bridge between Europe and Africa have increased the need for high-quality office space. The trend has become especially visible in Casablanca. As the economy has become increasingly integrated with international trade flows, the stock of office space in Casablanca has grown accordingly, moving from an estimated 1.2m sq metres in 2011 to 1.6m sq metres in 2015, according to industry estimates. At the end of 2016 the demand for offices translated into 34,790 sq metres of newly occupied space in Casablanca, according to Statimmo, a sector body set up by real estate consultancies CBRE, Carré Immobilier, JLL and Colliers. The largest proportion of the stock – 32,070 sq meters – was occupied under rental contracts, with the rest of transactions being full acquisition deals. In the fourth quarter of 2017 uptake had increased by 21% y-o-y.

Meanwhile, the average monthly rental price for office space in Casablanca was Dh146 (€13.52) per sq metre at the end of 2016, with a considerable degree of variation depending on the city’s different neighbourhoods. In the coastal locale of Corniche Ain Diab, average prices reached as high as Dh181 (€16.76) per sq metre. At the other end of the spectrum, monthly rents for office space in Casanearshore, a business centre where a number of the city’s offshoring firms have set up, averaged Dh111 (€10.28) per sq metre, according to Statimmo figures. The same report noted that average prices in Casablanca were up 29% y-o-y as of the fourth quarter of 2016.

Overall, 2016 was characterised by a rebound following a 2015 slump: demand fell by 91% in the second quarter of 2015 compared to the same period in 2014, according to figures by Statimmo. The market is expected to see continuing uptake and an improved quality of office space coming to the market. Both of these tendencies should facilitate the ongoing trend of more international companies setting up a regional base of operations in Morocco.

RETAIL SPACE: Retail expansion is another focus, as rising wages have led to an increase in disposable income. This trend has fuelled the modernisation of retail spaces across the country’s largest urban centres. Retail sales reached $39bn in 2016, according to figures from global consultancy AT Kearney. Retail has been growing at an average of 5% per year since 2005, although roughly 75% of retail activity in the kingdom is still through traditional outlets.

Over the past decade, several shopping malls have popped up, with multiple projects in different phases of development. After the opening of Mega Mall in Rabat in 2005, the country’s first modern retail shopping centre, several other projects followed. In Casablanca, Morocco Mall has remained one of the continent’s largest shopping malls since its opening in 2011, hosting around 300 stores. The mall was built and is operated by Aksal Group with an investment of Dh2bn (€185.2m). More recently, the first phase of the Bouskoura Golf City shopping mall opened in Casablanca in 2015, with 3600 sq metres of commercial area. The new retail space is located in a large, upscale residential development. In Marrakech, Egyptian group Pickalbatros opened the Menara Mall in 2015 – a Dh1.5bn (€138.9m) project that includes a shopping mall and a 370-room hotel.

Rabat is also set to receive a new Morocco Mall, developed by Morocco’s Aksal Group and Gulf-Moroccan private equity investment company Wessal Capital. The development is set to extend over 6 ha and be part of the Dh1.1bn (€101.9m) Wessal Bourgereg project, including a library, a museum, a cultural centre and a hotel. Also in Rabat, the Mall La Marina, a development with residential complexes, a hotel, leisure areas, shops and art galleries was announced in November 2015 as part of a mixed development on the city’s coast. The project is set for completion by end-2019.

Efforts are under way to make modern retail more accessible, despite some headwinds. The real estate sector crisis a few years ago and the difficulty matching modern offers with the specific demands of the local market, have made it challenging for some retail ventures to achieve their full potential. Despite boasting several international brands, Morocco Mall, for example, has had trouble keeping its luxury and high-end names, with stores from international retailers such as Prada, Miu Miu and Galeries Lafayette closing their spaces. “There are several shopping malls in major cities that are having difficulty persuading brands to come in, even when the rents are not that high,” Selma Belkhayat, managing director at Aswaq Management Services Morocco, told OBG. “This is partly because the stores on the street generally attract larger volumes of sales.”

Modern retail habits are also still catching on. “In Morocco, the middle class is still emerging. They are starting to have more disposable income, but their priorities in terms of expenditure is on food and not yet leisure. Additionally, most socialising still happens inside homes – it is a more traditional culture,” Belkhayat told OBG.

COMMERCIAL RENTS: Owners of shopping centres in Morocco have typically charged brands an entrance and a monthly fee per sq metre, with contracts generally lasting three, six or nine years. However, increasing options for retailers has meant that mall owners are working to improve rent conditions to attract international brands and franchise owners to new and upcoming developments. “A significant number of mall owners are choosing to drop the entrance fee and just charge a monthly rent,” Malik El Harim, general manager at Mega Mall in Rabat, told OBG.

In addition, some of the country’s malls are moving rent contracts towards a system of payments based on the specific financial results of the renter. Prices can vary because of location and associated services, as well as the importance of the renter and whether or not it can attract sufficient traffic. In a premium location on the street in Casablanca, for example, monthly rents in 2017 reached Dh300 (€27.78) per sq metre, and between Dh300 (€27.78) and Dh350 (€32.41) per sq metre in a shopping mall, according to Belkhayat. “We are seeing a change in franchising. Big names in retail are looking for large financial groups that are capable of ensuring a critical mass. We see less of the model of individuals being handed a franchise to develop on a small scale,” El Harim told OBG.

OUTLOOK: The real estate sector is facing a period of realignment. The impact of the financial crisis has, in some ways, made financing new developments more difficult. However, developers with the combination of product quality, amenities and location still find buyers.

Importantly, middle- to lower-income populations are seeing positive action from the state, as Morocco pushes forward with efforts to reduce the housing deficit. To be successful, it will be important that incentives are correctly aligned with the private developers’ capabilities to increase the number of new affordable units each year. Housing policy is set to continue to reduce the country’s deficit; however, as cities expand into the outskirts, a focus on making adequate land available for middle-income home building will be instrumental.

Retail is expected to remain a dynamic segment of the real estate market. Although new retail projects might not see the same level of activity in Morocco’s major cities as it has witnessed in previous years, smaller projects scaled to the medium cities may prove to be a new avenue of development for commercial real estate.

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The Report: Morocco 2018

Construction & Real Estate chapter from The Report: Morocco 2018

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