Construction demand is rising rapidly, but good management has averted the supply squeezes seen in the Gulf.
First-time travellers to Morocco are usually captivated by its unique blend of cultures, geography and people. Once back home, friends are regaled with stories of the historic medinas of Marrakech and Fez, the sandy beaches of Essaouira, landscapes that range from towering mountains to sprawling desert seas, and the openness and hospitality of the local people.
In recent times, however, another element has crept into the tales. “They’re just building everywhere,” says one traveller recently returned from two weeks in the kingdom. “Marrakech is full of construction sites, and there are massive building projects even at Ouarzazate in the mountains.”
With a housing deficit of more than 1.2 million units and residential demand growing by about 125,000 a year, construction activity in the country is becoming increasingly frenetic. The annual rate of housing construction has increased to 120,000-130,000 units in 2006 from 40,000-50,000 in 2000. Add to this the needs of an ever-increasing number of tourists and it is no surprise that the construction sector now employs 10 per cent of the active urban population.
Inevitably, such a rapid increase in construction activity has put pressure on the supply side of the industry. In the Gulf, the breakneck pace of construction has created an acute shortage of labour and materials, to the extent that rising input prices are driving up project costs (see Introduction, pages 37-40). But for Morocco, a more integrated and sustainable approach to construction - coupled with a low cost base and increasing materials production - has helped to insulate the industry.
“There is a huge difference between North Africa and the Gulf,” says Salman Lekhlit, head of Jet Asset Management, the investment arm of the local Jet Group. “The problem in the Gulf region is that they don’t plan. They don’t do the research to see whether the supply is there for what they want to build - they just want to do great things. Tunisia and Morocco have controlled the switch to public-private partnerships, and the same is now happening in Algeria. But in the Gulf it has happened out of the blue, without any planning.”
Rabat has adopted a rigorous and centralised approach to construction issues. “The rapidly growing construction market brought a need for a new approach to the whole project chain, from materials and labour to infrastructure, transport and distribution,” says Lekhlit. “But for a small-to-medium-sized market such as Morocco, it is easy to forecast market requirements. We are now into a development dynamic to solve the kingdom’s housing problems, so all government policy is completely oriented to tackling the issue.”
Unlike the Gulf, Morocco has seen a gradual and predictable increase in construction activity, allowing the kingdom time to adjust well before materials and labour shortages gripped the wider, regional market. And any cost increases have also been from a very low base. “In the 1980s and 1990s, profit margins in Moroccan real estate could be as much as 200-300 per cent, whereas in the industry at large, margins of 10 per cent are still considered to be very good,” says Lekhlit. “Cost increases have just led to a maturing of the kingdom’s construction sector. Even after the recent increases, developers in Morocco can still enjoy a return on investment of about 15 per cent.”
Similarly, an extremely low labour cost base has meant that recent increases have not been a deterrent for investors. “Labour costs have increased about 20 per cent in the last 10 years, but while proportionally this is a significant increase, it was from a low base, so actual costs still aren’t prohibitive,” says Lekhlit.
Even when prices have been beyond government control, their impact has been effectively managed. The price of steel, a globally traded commodity, has increased by about 40 per cent since the beginning of the year, but Morocco has been shielded from its worst affects. “Because the government took a strong policy lead, contractors knew beforehand that there would be high demand for real estate development in 2006-07 and procured the necessary steel in advance,” says Lekhlit.
Domestic supply of materials has also softened the impact of global price increases. The kingdom’s demand for steel is met entirely from its two privately-owned steel factories, operated by Sonasid and Maghreb Steel. Cement demand is also met in full by local private facilities run by Lafarge, Italcementi, Holcim and Cimpor, all of which have increased production at their plants in an effort to create a surplus for the lucrative European export market. The kingdom is already working on developing new energy systems such as wind farms to fuel further capacity increases.
New construction techniques are also being introduced to lower the impact of rising materials costs. “Costs can be offset by structural engineering optimisation,” says Lekhlit. “Rather than using 10 tonnes of steel for a project, new techniques can be employed that mean the structures can bear the same weight with only 5 tonnes of steel.”
Morocco’s construction sector is not without its challenges. Although Rabat is increasingly making public land available for developers of low-cost housing at knock-down prices (Real Estate, MEED Special Report, 6:10:06, pages 54-56), rapidly increasing land prices are still the biggest barrier to construction development. “So many developers have come into the market in the last year or so that land prices have increased significantly,” says Lekhlit. “In Marrakech, for example, land prices have increased by about 300 per cent since 2000.”
Further ahead, labour shortages are also likely to become a problem. The school leaving age is gradually rising and an increasing proportion of the young population is going on to university, paving the way for a deficit of unskilled labour in future years. “We need to investigate how we can use technology to help build faster, cheaper and with less labour,” says Lekhlit. “Leisure projects are increasingly using pre-cast and pre-fabricated units, and as margins continue to shrink in years to come, they will increasingly be used for residential housing as well.”
While the prognosis is good for the short and medium term, Rabat will need to continue its careful management of construction projects, further develop its domestic production of materials and find a way of managing a slow-burning labour crisis. “I have heard no echoes from my counterparts in the steel industry and other material supply industries that there will be any shortage in the next one-two years,” says Lekhlit. “But the future is difficult to predict.”