North Africa faces a real test

Gulf real estate investment has flooded into North Africa over the last two years as developers have sought to introduce large-scale themed residential projects across the region. But can developers now deliver on earlier promises?

It has been described as ‘europe's new frontier'. Some Gulf businessman view it as the single largest untapped investment geography left in the world.

As the reverberations of the world financial crisis are felt, Gulf-based companies, less concerned about their balance sheets than their Western counterparts, are clamouring for share of North Africa.

Morocco, Egypt, and more recently Libya and Tunisia, are attracting massive Gulf-financed real estate development. The value of GCC-backed projects in Morocco is potentially worth $30bn alone. Dubai's Emaar, the largest developer in the Middle East, is set to transform Egypt's capital Cairo with two projects costing $2bn.

But is this about to change? With a global economic slowdown already a reality and the threat of global recession worrying investors, are the region's heavyweight investors holding back?

The world financial crisis may not be blowing through the sands of North Africa just yet, but indirectly its impact may be far reaching, with the holiday home market in Morocco dominated by investors from the UK and France - both countries that are experiencing a downturn in real estate prices.

Jonathan Hull, executive director of EMEA (Europe, Middle East and Africa) capital markets for property adviser CBRE in London says that some property funds in the Middle East are beginning to be more cautious.

"North Africa will continue to be of interest to GCC investors. However a lot of funds are looking very carefully at their strategy and will be reassessing risk. The risk profiles are changing in some of these markets," he says.

Credit rating agency Moody's latest foreign currency government bond rating - a barometer of the financial health of a country - for Egypt was downgraded in June from ‘Ba1 stable' to ‘negative' on fears rampant inflation is beginning to stunt growth in the economy.

Tristan Cooper, senior analyst at Moody's sovereign risk unit, says the negative rating was primarily motivated by the country's soaring consumer price inflation, which exceeded 20 percent in May, the highest level in the North African nation in 20 years.

"Egypt is more fiscally constrained than similarly rated countries, thereby reducing the country's room for manoeuvre in terms of increasing fiscal expenditure in order to offset the pernicious social effects of inflation. Egypt has the widest fiscal deficit and the highest public debt burden in relation to government revenues of any Ba-rated country," Cooper says.

Moody's predicts GDP in Egypt will shrink from 7.2 percent this year to 6.8 percent in 2009, with sky-high inflation topping 22 percent this year and falling back to 15 percent in 2009.

Residential developers such as Dubai-based Damac, which is building the upmarket $7bn, 4.7 sq m villa project, Hyde Park, in Cairo, appear not to be concerned by the ratings agency's findings.

Peter Riddoch, chief executive of Damac Properties says: "We do not plan to make any fundamental changes in our current business activities and processes, even though the general property market is experiencing difficulties at this time."

In the last five months there are signs that, after several years of multibillion-dollar investment by Gulf property companies, headline projects are struggling to get off the ground and compared to the speed at which buildings appear in Dubai, the pace is slow.

A spokesman for Emaar, the largest real estate developer in the world, says none of the firm's projects are experiencing delays. "North Africa is a promising market and, like much of the Middle East and North Africa region, has been able to largely withstand the global financial crises because of domestic growth drivers," a spokesman says.

"Our projects in Morocco and Egypt are principally led by tourism, and as such they have strong growth potential. Work on our projects is progressing as per schedule," he adds.

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