Building up: Growth in the industrial, energy and commercial sectors should continue to drive activity

A look at Morocco’s landscape, dotted by worksites in both urban and rural areas, demonstrates the vitality of the construction and public works sector. While building has slowed in some sectors as a result of the global economic downturn, strong demand for construction in housing, public services, industry and energy should continue to stimulate sector activity in the medium term. Public spending on infrastructure especially has created opportunities for both local and foreign firms in the last decade. Two legislative measures currently under discussion stand to significantly improve sector regulation, most notably to address a lack of sufficient building standards and quality control.

SECTOR PRODUCTION: The construction sector has provided between 5.6% and 6.2% of GDP over the last eight years, including a 6% contribution in 2011. Sector GDP has more than doubled in the last decade, but the pace of growth has varied; after peaking during the economic boom in 2007-08 with annual growth of 11.7% and 9.4%, respectively, expansion dipped to 2.6% in 2010 as the global recession tightened budgets and reduced foreign demand for residences and tourist centres. However, the sector is on an upswing and reached 4.2% growth in 2011, the highest rate since 2008, for a value of Dh49.5bn (€4.4bn). An uptick in sales of construction materials is also indicative of sector growth. Most notably, cement sales reached a record level of 16.13m tonnes in 2011, a 10.7% increase year-on-year (y-o-y) from 14.57m tonnes. The pace of growth has slowed slightly in 2012; according to the National Federation of Property Developers, concrete sales were down by 1.6% in 2012 to 15.8m tonnes.

This is likely a result of the normal slowdown of construction activity during the summer months, especially given that the religious month of Ramadan took place in August in 2012. Released APC data shows that consumption was also down 4% by August 2011, although it finished the year up almost 11%.

The number of construction permits has gradually declined over the last five years to reach 42,802 in 2011, down from 57,296 permits issued in 2010, largely due to a push to increase social housing accommodations.

Since 2007, over 70% of permits have gone to residential housing projects aimed at the Moroccan market.

KEY EMPLOYER: The construction and public works sector is also a key employer, with a workforce of roughly 1.02m as of the third quarter of 2012. As Morocco’s economy struggles to overcome its exposure to ailing European economies and lower levels of tourism arrivals, the construction and public works sector created 34,000 new jobs between the second quarter of 2011 and the same period of 2012. However, the economy also suffered the loss of 40,000 jobs from the third quarter of 2011 to the third quarter of 2012, according to data from the Ministry of Housing and Urban Planning (MHUP).

Still, the forecast for the construction sector remains generally positive. In the coming years, sector activity is predicted to expand apace with growth in industry, tourism, housing demand, public expenditure as well as energy production.

ENCOURAGING REFORMS: Sector authorities have been working to streamline procedures in order to attract private investment in construction. Reforms enacted in 2011 pushed Morocco up 21 places for ease of doing business on the World Bank’s “Doing Business” report, to reach 94th place in 2012 out of a total 183 countries. Much of this gain was due to improved regulation of construction permits, as Morocco introduced a “one-stop shop” system.

Obtaining a permit now requires 15 procedures and an average of 97 days, at a cost of 234.6% of per capita income, down from 19 procedures and 163 days, according to the 2011 report. However, Morocco dropped three places in the 2013 report, due largely to a rise in property registration fees. The number of steps and the time required to register property remained the same y-o-y, at eight procedures and 75 days. The average price of registration rose from 3% of property value to 4% in the 2012 rankings, representing the 16th-highest rate in the MENA region.

Moroccan authorities are pursuing two new legislative measures that stand to considerably improve sector regulation. Most importantly, the state is working to develop a national construction code, which would set legal obligations for the input, oversight and execution of all building activities. The government has been working to develop a construction code since 2003, when an earthquake near Al Hoceima revealed the prevalence of sub-standard building practices, particularly in the low-income housing segment.

The MHUP has commissioned the Public Laboratory for Tests and Studies (Laboratoire Public d'Essais et d'Etudes, LPEE), and two architecture firms, Cabinet Begdouri d’Architecture et d’Urbanisme and Berrada Charaf-Eddine, to elaborate the code. Ultimately, the code should provide several elements currently lacking in the construction industry: it will define the roles and responsibilities of all actors in the construction process; establish obligations for testing, quality control and labelling of construction materials; outline norms and oversight mechanisms for building procedures; set and enforce workforce safety guidelines; and introduce a framework to sanction companies that fail to comply with these regulations.

If the code currently in the works is accepted, it may come into effect by 2014. In the meantime, French building codes or Moroccan urban planning codes are most often applied to local projects. But, while publicly funded projects are required to include a quality control component, often by hiring a third-party evaluator, the absence of a national code means that purely private sector projects are self-regulated. While most firms choose to apply strict building standards, this opens the door for informal building, which is especially present in the low-income housing segment.

FURTHER REGULATIONS: Additionally, the proposed contract programme for the insurance sector, an insurance sector regulatory instrument that has been awaiting government approval since mid-2011, will make builder’s insurance mandatory for all construction projects. Once adopted, this new stipulation should help to further reduce the amount of informal building and strengthen sector regulation. Builder’s risk insurance, responsabilité civile décennale, will hold contractors responsible for the security of buildings for 10 years. More over, worksite insurance, assurance tous risque chantier, will protect contracting firms against damage to their property while under construction.

“Adopting a comprehensive approach to the construction industry is necessary to ensure the quality of building materials and practices, and all other matters related to building safety and security,” said Omar Benaicha, the deputy chief executive for North Africa at Bureau Veritas, known as a leader in testing, inspection and certification. “If both the private risk insurance requirement and national construction code come into effect, they could significantly change the way work is conducted in the industry.”

CONSTRUCTION MATERIALS: While the number of construction permits was down in 2011, the strong performance of the construction materials industry attests to the sector’s vitality. Sales of all materials have increased by an annual average of 7-10% in the last three years, according to estimates by the Ministry of Equipment and Transport (MET). Construction materials represent the second-highest volume in the domestic flow of goods, averaging around 25m tonnes in 2010.

GETTING GOODS TO SITE: Building programmes are spread throughout the country, with an estimated 50,000 construction sites in 2010. Given this dispersion and the predominance of informal road transport operators, the flow of goods to construction sites can be costly and inefficient. The MET notes that distribution costs typically represent 10-15% of the value of materials. Up to 97% of building materials are currently transported by truck, and the MET has assessed that the average distance travelled for delivery is some 1.5 times higher than European benchmarks.

To address this challenge, a strategy to overhaul the national logistics network by 2030 aims to develop 17 platforms nationwide devoted to the storage and distribution of construction materials. The plan provides for the creation of 540 ha of dedicated platforms by 2015, which should decrease material transport costs in the medium term and play a part in offsetting the increasing prices of oil and gas.

SOLID TREND: Morocco’s cement industry is particularly dynamic. Between January 2012 and the end of August 2012, national cement consumption was 10.95m tonnes, up 2.7% from the same time period of the previous year. In 2011 eight regions represented 73% of cement sales. The greater Casablanca and Tangier-Tétouan regions represented 15% and 11% of national consumption, respectively. They were followed by the regions of Marrakech-Tensift-El Haouz, Souss-Massa-Draâ, Oriental and Rabat-Salé- Zemmour-Zaer, which each consumed between 1.2m and 1.6m tonnes of cement.

The cement market is composed of five major companies, four of which are subsidiaries of foreign firms. Holcim, part of the Swiss group, has an estimated annual production capacity of 4.5m tonnes. Ciments du Maroc is a subsidiary of Italy’s Italcementi Group and the second-largest producer in Morocco. Lafarge Maroc, part of the France-based multinational, has an annual production capacity of 6.9m tonnes per year. The market is rounded out by Asment Témara, a subsidiary of Portugal’s Cimpor, and one domestic company, Ciments de l’Atlas with an annual production capacity of 3.2m tonnes. The sector has expanded considerably since 2005, in step with growth in construction, public works and real estate. Three new cement facilities were constructed and six were expanded in 2005-11, boosting national production capacity by over 5m tonnes.

SLIPPING THROUGH THE CRACKS: However, while strict legal standards do apply to products such as cement and reinforcing steel bars, the same is not true for producers and importers of secondary goods like marble, bricks, tiles and ceramic. Unlike the structured cement sector, producers of these goods are more fragmented. The MET notes that the dominance of informal practices and the lack of a standardised billing system for these materials has led to wide variety in terms of the quality and price of secondary materials on the market. The application of a national construction code is particularly important for the construction materials industry, as it is expected to introduce legal standards for product composition and quality, and should help to increase oversight in the long term. The Centre for Construction Techniques and Materials exists to help develop the sector and improve quality controls. However, Morocco will need to expand its network of testing facilities to effectively monitor materials produced locally and those imported from Asia, the Middle East and other emerging markets.

GROWTH DRIVERS: In the last two years, growth in the construction sector has largely been driven by public sector projects, while the private sector has predominated housing over Dh250,000 (€22,225) before tax, a trend expected to continue into 2013. While private sector and foreign investment in building projects has slowed somewhat during the global economic downturn, the public sector has been pursuing an ambitious investment programme, particularly in social housing, urban planning projects, and education and health care infrastructure. Furthermore, a 10-year, Dh180bn (€16bn) investment programme in transport infrastructure is nearing completion, thus opening the door for a raft of new projects to develop the supporting logistics network.

And yet, private sector investment in construction is starting to recover after a slump in 2009-10. Foreign investment in construction and real estate peaked in 2007-08 with the arrival of several developers from Gulf countries that primarily invested in high-end projects for a foreign, largely European market, such as luxury hotels and secondary residences. However, the global economic downturn, especially the recession in Europe, has greatly reduced tourism arrivals and demand from foreign markets, and investment from the Gulf has slowed correspondingly. In several cases, foreign funding was withdrawn entirely and Moroccan banks stepped in to shore up these projects.

ON TRACK: Despite continued economic difficulties in Europe and elsewhere, several large-scale construction and development projects are still on track in Morocco and continue to attract international investment. Saudi Arabia’s Kingdom Holding, owned by Prince Al Waleed bin Talal, invested $164m in the construction of a Four Seasons hotel in Marrakech, which opened its doors in December 2011. The firm holds several other hotels currently under construction that will be managed by brands such as Fairmont Raffles Holding International and Mövenpick Hotels & Resorts, a Swiss group in which Kingdom Holding holds a 30% stake. Mövenpick announced plans to open a 380-room hotel in Marrakech by 2014 as part of a national expansion strategy that includes the construction of 11 new facilities.

ADDING ACTIVITY: Another major ongoing project with Gulf funding is the Bab Al Bahr development, which aims to transform a 70-ha area near the Bouregreg river estuary between Rabat and Salé. The project is being developed jointly by the Bouregreg Valley Development Agency and the UAE-based Al Maabar, a real estate and investment consortium, for a total cost of €585.6m. The marina and riverfront areas were completed in mid-2012; the zone will ultimately include hotels, an arts district, retail outlets and residences, of which some units are already being commercialised.

On the whole, demand for such commercial and mixed-use developments continues to stimulate construction activity, as several other projects are also under way. Casanearshore, a 53-ha business park dedicated to offshoring activities, is already operating in Casablanca. The park will ultimately include 300,000 sq metres of office space and is expected to generate Dh5bn (€445m) in revenue through offshoring activities by 2015. The project is being developed by MedZ, a subsidiary of Moroccan development firm Caisse de Dêpot et de Gestion (CDG), and entails a total investment of Dh3.7bn (€329m). Commercialisation of office spaces has been initiated, and delivery is expected by early 2013.

MIXING IT UP: Another upscale mixed-use project on the Casablanca waterfront, Anfaplace, which was being commercialised in 2012. Developed by the Spanish real estate investment firm Inveravante, Anfaplace is home to tourism facilities, including a 234-room hotel and 104 tourist apartments, 260 residential units ranging from 60-300 sq meters, two office buildings and 36,000 sq metres of retail space has been open since February 2013.

In addition, Inveravante is developing Tanger City Centre, a similar mixed-use project that will include 10,000 sq metres of office space and 800 residential units, as well as hotels, commercial spaces and leisure facilities. Finally, construction is ongoing at Arribat Centre, a 5-ha mixed-use development promoted by Foncière Chellah, another subsidiary of CDG, for an investment of some Dh2bn (€178m).

SECTOR ACTORS: As is the case with several of the mixed-use commercial projects under development, the majority of large-scale infrastructure projects are being built by foreign firms. Much of the current building in industrial and energy infrastructure, transport networks, and high-end commercial developments have created opportunities for firms from traditional areas such as the EU, as well as from other emerging countries such as Turkey, South Korea and China.

Benaicha noted that foreign companies often win the bids to develop large-scale and highly technical projects, particularly in the fields of energy and industry, whereas, Moroccan firms tend to prevail on housing projects, as well as on road and dam construction. “In these fields, domestic firms have developed the technical and management expertise needed to direct the project from start to finish,” he told OBG.

In many cases, the presence of international firms meets a demand for expertise at the project management level, while creating opportunities for local players. Moroccan construction firms continue to win an overwhelming percentage of subcontracting work, including studies, land preparation and project execution. However, local players are also facing stiff competition from European, and particularly Spanish firms in search of new business as their economy stagnates.

“It is very important to develop and nurture research and innovation in Morocco, both in the construction sector and elsewhere, since it helps make the country less dependent on expertise from abroad,” Mouhsine Alaoui M’Hamdi, the director-general of LPEE, told OBG.

PUBLIC PROJECTS: Continued demand for private sector projects and foreign investment bodes well for the development of the construction industry. And yet, in the short term, much of sector growth will be driven by public projects. The state is investing considerable funds in several key areas, particularly transport and housing, that should create a steady stream of work for both developers and contractors.

The transport sector has attracted major public investment in the last decade. Between 2003 and 2012, the state invested almost Dh180bn (€16bn) in improving basic infrastructure in ports, airports, roads and railways. The National Ports Agency (Agence Nationale des Ports, ANP) has proposed Dh74bn (€6.6bn) in public and private investment in port infrastructure from 2010 to 2030. The ANP forecasts that maritime traffic will triple to 290m tonnes by 2030, and has outlined capacity-building projects in 15 of the country’s 29 ports in order to meet this expected demand.

Construction projects are ongoing at Casablanca, where a third container terminal is being developed. The largest construction project is TangerMed II, the extension of the TangerMed port. TangerMed II will add a capacity of 5.2m twenty-foot equivalent units (TEUs), bringing total capacity to 8.2m TEUs, making TangerMed a leader in the Mediterranean and Atlantic for container traffic. TangerMed II’s new container terminal is being constructed by a consortium of both local and foreign contractors, including the French majors Bouygues, Bymaro, Saipem, Besix and Somagec. Bymaro and its partners are also set to begin a new project at Nador Port on the northern coast in 2013.

The air transport sector is also set to receive considerable public investment by 2030 to expand both passenger and freight capacity. Casablanca’s Mohammed V International Airport is undergoing construction on Terminal I, which is expected to triple passenger capacity from 6.5m to 21m passengers by 2020. Expansions are also ongoing at the airports in Fez and Marrakech, two of the country’s key tourism centres.

On land, in addition to ongoing road programmes, especially aiming to open up rural areas, transport infrastructure has been boosted by the construction of Africa’s first high-speed railway. With technical support from France’s Société Nationale des Chemins de Fer, Morocco’s national railroad office plans to invest Dh4.5bn (€400m) in 2013 for the construction of a high-speed railway between Tangier and Kénitra, just north of Rabat, which will be extended to Casablanca in the medium term. Morocco’s rail plan aims to construct 1500 km of high-speed rail lines by 2035.

Much of basic transport infrastructure is now in place following the 2003-12 investment programme, which opened the door to new projects in the logistics sector. Morocco has also outlined a 2010-15 National Plan for the Development of Logistics Competitiveness, which aims to strengthen the logistics network to maximise the benefit of the country’s expanded transport links and support its effort to become a regional trade hub between Europe and Africa. Specifically, the plan provides for the construction of 70 logistics platforms nationwide, each devoted to one of several key functions, including storage and distribution activities, container handling, construction materials, agricultural products and cereals. Two logistics zones on the outskirts of Casablanca, in Mita and Zenata, are already in the early stages of operation as part of this initiative.

SOCIAL HOUSING: State-led investment in social housing has been a key factor in stimulating construction activity in recent years. The government has committed to reducing the national housing deficit, which hovered around 840,000 units at the end of 2011. Morocco’s Ministry of Housing has announced it aims to cut the deficit in half to 400,000 units by 2016, and has introduced a number of incentives for real estate developers to boost construction in this segment (see analysis).

In the first half of 2012, the total number of housing units produced reached 66,195, of which 48,286 were social housing units, according to MHUP figures, representing a 16.6% increase y-o-y. In the first half of 2012 construction permits were approved for a further 212,000 units, of which 160,235 are social housing, a 66.4% increase on the number of units slated for construction in the same period of 2011.

Much of this activity has been focused in the greater Casablanca region in order to reduce congestion in the economic capital. The government has launched a Dh35.4bn (€3.1bn), integrated social housing programme in the greater Casablanca region, which includes 85 projects and aims to construct a total of 127,863 homes, of which 97,078 are slated to be social housing. According to statements carried by the national press agency, a total of 7646 social housing units have already been delivered in this area. An integrated social housing project worth Dh240m (€21.3m) was launched in March 2012 in the nearby community of Mohammedia. The new Bayti Sakane development will ultimately hold 1251 social housing units.

Still, some industry leaders believe that further changes will have to be implemented to address the social housing shortage. “The social housing programme is ambitious, but not sufficient to meet the housing shortage. Even with subsidies, many people continue to build their own houses,” said Abdellatif Hadj Hamou, the president of the board of MedZ, a subsidiary of Moroccan development firm CDG.

SPECIALISED INFRASTRUCTURE PROJECTS: In addition, a number of specialised infrastructure projects on the horizon are due to create an opportunity for unique, highly technical building projects. The power sector in particular is expected to present considerable opportunities. Morocco has ambitious plans to increase its production of renewable energies to 2000 MW capacity each of wind and solar power by 2020.

In April 2012 the Moroccan electricity provider, the Office Nationale de l’Electricite et de l’Eau Potable (ONEE), awarded a contract for the construction of a 150-MW wind farm to a consortium of EDF Énergie Nouvelles (EDF EN), the French company’s renewable energy arm, and Japan’s Mitsui. EDF EN and Mitsui will be responsible for the financing, design and construction of the wind farm, located 12 km north-west of the city of Taza. The project will be structured as a build-own-operate-transfer contract, including a 20-year agreement for ONEE to purchase the electricity produced. The second phase of Morocco’s Integrated Wind Energy Programme calls for the creation of five wind farms with a total capacity of 850 MW, to meet the initial target of 1000 MW of wind power by 2015.

In September 2012 the Moroccan Agency for Solar Energy awarded a contract to design, finance and construct a solar energy plant near the city of Ouarzazate in the south to a consortium led by Saudi Arabia’s ACWA Power. The Ouarzazate facility is the first such contract under the Moroccan Solar Plan, which aims to attract some $9bn in investment by 2020 to construct five solar energy plants nationwide. ACWA Power and its partners, engineering firm Aries IS and TSK EE, both from Spain, were retained to build the plant’s first phase, which is due to have a capacity of 160 MW. Construction of the site is slated to begin by the end of the first quarter of 2013 and wrap up by mid-2015.

In addition, growing investment in manufacturing should spur construction activity. French automobile producer Renault inaugurated a manufacturing plant on a 314-ha plot in the TangerMed special economic zone in Melloussa in February 2012. The plant’s construction was carried out by the French firm SogeaSatom for an estimated investment of €1.1bn. In June of that year Canada-based firm Bombardier signed an agreement with Midparc Investment, a Moroccan property holding and management company, to purchase land for the construction of a new plant in the Nouaceur industrial zone outside of Casablanca. Bombardier plans to build an integrated manufacturing facility for aircraft components, to be constructed in phases, the first of which was slated to begin by the end of 2012.

Finally, the state-owned OCP Group, which dominates the phosphates sector, has engaged in a Dh130bn (€11.6bn) investment plan aimed at modernising sector infrastructure and boosting production capacity from 30m to 50m tonnes by 2020. The OCP Group plans to oversee the construction of four new mines in Khouribga and Benguérir, expected to provide an additional capacity of 20m tonnes of phosphate rock per year. Work has commenced on a 300-km pipeline system with the capacity to transport 55m tonnes of raw minerals to processing and export centres annually. The first segment, stretching from the Khouribga mine to Jorf Lasfar with a capacity of 40m tonnes, is expected to be operational in April 2013. By 2020, the OCP Group aims to add a second pipeline between Gantour and its chemical plant at Safi. Finally, the OCP Group is developing new industrial infrastructure at the phosphate centre of Jorf Lasfar, including phosphate washing and enrichment facilities.

FINANCIAL CONSTRAINTS: However, as the number of projects on the horizon multiplies, access to financing for construction projects remains an obstacle to sector growth. Moroccan banks are facing a liquidity shortage and have been for several years, which has squeezed the amount of financing available for new projects and generated a more cautious approach among companies engaged in private projects. An October 2012 report by the ratings agency Standard & Poor’s (S&P) noted that while Moroccan banks’ funding is solid, their loan-to-deposit ratio is becoming strained, as lending has expanded significantly over the last five years. S&P also projects that the flow of deposits from Moroccan expatriates, which made up roughly 20% of the banking system’s deposits in March 2012, will shrink over the year due to the recession in Europe, further reducing liquidity in the system.

OUTLOOK: In the short term, the liquidity shortage has led many developers to approach projects in a very different manner. Rather than deter large-scale commercial projects developers are instead self-financing much of the construction and dividing their projects into several distinct phases in order to ensure profitability before moving on. The public sector will support many of the major building projects in the short to medium term. Meanwhile, growth in industry, energy, and commercial real estate is also attracting private developers. The primary challenges will be to ensure that adequate financing is available and to quickly enact a handful of critical reforms to increase transparency and efficiency.