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Thu 30 Oct 2008 04:00 AM

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North Africa faces a real test

Gulf real estate investment has flooded into North Africa, but can developers deliver on their promises?

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.

Although investor sentiment in the Middle East is still relatively strong, no one will be immune from what is happening globally.

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.Blair Hagkull, managing director of real estate consultant Jones Lang LaSalle in the Middle East and North Africa, says the speed of construction is slowing across the region.

"Up until now, Gulf developers in North Africa have been focused on planning and approval. Now they are looking at building the infrastructure and their plans have become less aggressive," he says.

"There will also be a slowing down in the proposed rate of development. Although investor sentiment in the Middle East is still relatively strong, no one will be immune from what is happening globally."

Emaar admits its projects in Morocco hinge on tourism, so how much demand is there out there for holiday homes in the North African country?

UK estate agent Winkworth International is selling off-plan apartments and villas at a number of holiday hotspots in Morocco, like the Mediterranea Saidia coastal development on the north coast and the Riad Villas project on the outskirts of Marrakech. Prices range from $120,000 for apartments to $1.17m for the villas. Sales are way down, though.

Giles Wickham, a negotiator for Winkworth in London says: "Morocco is very dead. There is no buyer interest. Things are plodding along and we are just hoping for the market to pick up again."

Emaar has a vast presence in North Africa. It is planning two huge developments in Cairo, aimed at the burgeoning middle class population, made up of a mix of residential, leisure and retail space.

The $1bn Uptown Cairo project, due for completion in 2013, will be built in the Muqattam Hills, close to the city centre. New Cairo City, a residential development to the east of the capital, will also cost $1bn.

Despite roaring inflation, Egypt's economy is growing at around 7 percent and disposable incomes are rising. Low land costs and rapid urbanisation, combined with a more favourable mortgage market, has created a strong market for residential and commercial bricks and mortar.

Increased economic prosperity across North Africa is evident across the entire region. Tunisia is seeking investments of $50bn to $60bn from Gulf investors - three times its annual gross domestic product of $20bn.

In April 2006, Emaar announced plans to develop the $1.88bn Marina Al Qussor project on Tunisia's east coast.

The 442-hectare marina development will offer a mix of residential properties such as villas, townhouses and apartments, set among beach and sports clubs. Other developers active in Tunisia include Bahrain's Gulf Finance House, which is building the $3bn Tunis Financial Harbour in Tunisia.

Some experts, however, are concerned that Tunisia will be not be able to absorb this money into its small economy, with inflation at a three-year high and a liquidity surplus in the market.

But those putting the money into these North African mega-projects are naturally more optimistic.

Privately owned Abu Dhabi Investment House (ADIH) will unveil new developments in North Africa next year. Its $7bn ‘Style Cities' project spanning the Middle East and India will also reach deep into North Africa.

The Style City development in Morocco - comprising of shops, museums and exhibition centres focused on fashion and jewellery - is costing $1.5bn alone.

ADIH is close to raising the $230m of equity to help finance the project. The remaining $1.3bn will be paid for through pre-sales and debt, which has already been secured.

Fawaz Ali Al Jowder, the group's new deputy chief executive is upbeat about the outlook for investment in the region.

"There are a lot of supporting sectors of the economy in North Africa that will make it shine. Not just property, but oil, gas and petrochemicals are taking off. The governments are opening up as well, and politically it's getting better," he says.

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