Just 18 months ago, the desert town of Oued Chbika was a sparsely populated settlement in the Sahara Desert. That was before Egyptian real estate company Orascom Hotels & Development won permission to build a 15-square-kilometre tourist development including hotels, homes, shops, leisure facilities and an 18-hole golf course. Orascom has not said how much money its Moroccan development has made so far, but its scale is enormous.

The Sahara Atlantique development in the southern Moroccan province of Guelmim is Orascom Hotels' first sizeable project outside Egypt, and other Middle East real estate companies are following its initiative. UAE property giant Emaar is merely the largest of several real estate companies to start building in Morocco.

The influx of these real estate giants has created a property boom in Morocco that has benefited local companies, as well as investors from the Gulf and Egypt. Douja Promotion Group and Compagnie Generale Immobiliere are the largest of many private companies that have benefited.

Index boost

The two companies have helped the Bourse de Casablanca's main index, the Morocco All-Share index (Masi), nearly double in value over the past two years, from 7,968 points to 14,388. The Masi's growth has been uneven, however, with some sectors losing value over the period. The country's oil and gas companies are worth less today than they were in May 2006. As a country with no oil or gas reserves to speak of, Morocco's energy companies are limited to refining and distributing.

Investor sentiment has been negative because profits margins are being squeezed by the government's need to keep energy prices low at a time when costs for skilled manpower and materials are rising.

More surprisingly, the telecoms sector has also underperformed the Masi even though it is a key growth sector. The Bourse de Casablanca's telecoms sector is essentially just one company: Itissalat al-Maghrib (Maroc Telecom).

Just 17 per cent of the former state-owned telecoms monopoly is floated on the exchange. Another 32 per cent is listed on the New York Stock Exchange Euronext (NYSE Euronext) in Paris. French media conglomerate Vivendi bought a 51 per cent controlling stake in Maroc Telecom three years ago and the company has since performed well.

Unfortunately for Maroc Telecom's private shareholders, the management team appointed by Vivendi decided to build market share at the expense of revenues. Maroc Telecom still has a 68 per cent share despite losing its monopoly in the mobile phone market in 1999. However, revenues in the first half of 2007 were MD4.7bn ($650m), down from MD4.9bn in the same period of 2006.

The biggest uncertainty surrounding Maroc Telecom is the risk that its regulator, the Agence Nationale de Reglementation des Telecommunications (ANRT), could issue a third mobile licence to an aggressive multinational operator.

The real estate sector suffers from none of the worries afflicting other parts of the Moroccan economy. The biggest real estate company, Douja Promotion Group, has been transformed into one of the 30 largest listed companies in the Middle East, with a valuation of MD61.2bn. Last year, Douja generated MD3bn in revenues and MD703m in net profits. Its rival Compagnie Generale Immobiliere has reached a similar size, with a market cap of $6bn.

Related sectors have benefited from the boom. Morocco's Lafarge Ciments has become a bigger cement producer than Saudi Cement Company as real estate groups rush to develop tourist developments along the Atlantic coast.

Local cement producers always benefit more than other suppliers from construction booms in their countries. Cement is cheap to produce but expensive to transport, compelling real estate companies to buy what they need locally.

Accessing markets

Lafarge Ciments is well placed to access some of the large European markets, especially Spain. Investors across North Africa have been building cement factories, both for domestic consumption and to build capacity before exporting to Europe. Cement from Morocco has a much shorter distance to travel.

"Cement is a great business because it is energy and labour intensive," says Marwan el-Araby, a partner at Egyptian private equity firm Citadel Capital. "European factories will move out of the EU to areas with cheaper units of input, and Eastern Europe does not provide cheap feedstock so it cannot compete with North Africa."

Morocco also benefits from the economics of shipping in the Mediterranean. Freight costs are more expensive for ships travelling from Europe to North Africa than they are on the return leg back to Europe. North Africa still imports more goods from Europe than it exports the other way.

The banking sector has been the other big winner over the past two years. The sector has doubled in value since 2006. Attijariwafa Bank has become the second-largest company on the Bourse de Casablanca, with a market cap of MD63bn. It generated MD2.5bn in net profits from revenues of MD8.8bn in 2007. Banque Marocaine du Commerce Exterieur generated MD666m in net profits from revenues of MD2.1bn. Its market cap is now MD11.5bn.

Most of the impetus for the real estate boom comes from King Mohammed VI, who set the government of Prime Minister Abbas el-Fassi the task of increasing the number of tourists visiting the kingdom to more than 10 million by 2010.

Morocco's proximity to Europe has made it a popular tourist destination for decades. King Mohammed needs the tourism sector to grow as quickly as possible because his 34 million-strong population is suffering high unemployment. Disguised unemployment in Morocco is massive. Many public sector jobs pay too little for people to survive so employees take second jobs. Often they fail to turn up to work for their public sector employers.

Morocco's tourist developments are being built at a faster rate now than in the past. Marrakech, probably Morocco's main tourist attraction, has spread far beyond the walls of the 11th century city. Tourists who take a bus-top ride around the city spend most of their time driving past building sites for new developments.

Unfortunately for investors, there are three clear threats to the continued upward movement of the Masi. The first is the practice of listing a small minority of each company's shares on the Bourse de Casablanca. Maroc Telecom is Morocco's biggest stock, but only 17 per cent of its capital is listed on the national stock exchange. Attijariwafa Bank is even worse - just 15 per cent of its equity has been floated.

No major company in Morocco lists the majority of its shares on the stock market. The ultimate owners of Morocco's main businesses are desperate to retain control. Some 26 per cent of Banque Marocaine du Commerce Exterieur is floated. Douja Promotion Group and Compagnie Generale Immobiliere have listed 35 and 20 per cent of their capital respectively.

The contrast with Egypt, North Africa's largest capital market, is stark. Even Orascom Hotels, a family-run business, has listed 44 per cent of its capital on the Egyptian stock market.

Price bubble

The second threat is that investors have created an asset price bubble by backing the real estate story so wholeheartedly. Douja Promotion's share price has reached 96 times its revenues. Banque Marocaine du Commerce Exterieur and Lafarge Ciments also have stretched price-earnings ratios, at 59 and 41 respectively. The only companies with more realistic ratios are those from the out-of-favour sectors. Maroc Telecom's share price is 22 times its earnings and Groupe ONA, a conglomerate, is trading on 28 times earnings. At some point, share prices will have to more closely reflect fundamentals.

The third threat is that the government's finances will deteriorate further as it maintains subsidies at a time of rising oil and food prices. The country's deficit had already reached 2.4 per cent of gross domestic product by the end of December last year. Commodity prices have risen further since then.

"They told us they will rationalise subsidies, but they will not go immediately for full-blown indexation," says Luc Marchand, analyst at ratings agency Standard & Poor's. "They are probably not going to touch indexation."

The increase in prices in the first three months of the year makes it less likely that any North African government will attempt to reform subsidies. "I think the political message learned is that you do a big band deregulation of energy at your peril," says El-Araby.

Morocco's stock market has surpassed the expectations of its investors since 2006. But over the next few years, the growth of the index will be less spectacular.

Morocco all-share index (rebased) - top 5 firms by market cap

1. Maroc Telecom - $23.8bn

2. Attijariwafa Bank - $8.5bn

3. Douja Promotion - $8.3bn

4. Lafarge Ciments - $5.2bn

5. Banque Marocaine du Commerce Exterieur - $1.6bn

Source: Bourse de Casablanca