25 Jul Interview with Nawfal Bendefa, CEO, Aradei Capital, Morocco
What factors have allowed for the country’s real estate market to remain consistent despite challenges the world has faced following the pandemic?
In the residential market, the state has launched several programs to support residential development of secure, low-income housing which has been a successful program for several years. After the low-income wave, there are some key initiatives in the last finance legislation for middle income housing as well. Since that has come out, there is a clear improvement of the fundamentals but also of the financials for some of the developers on the Stock Exchange, who have seen a rise in their valuation. Aradei Capital operates on the commercial real estate side, our role is as a financier to a lot of sectors, from healthcare, industry or retail sectors. We are probably the largest listed player in commercial and yield real estate in these areas. Fundamentally, we have had a healthy debt market for many years which has favored this side of the real estate business.
The number one factor behind Morocco’s real estate growth has to be the stability of the currency. The second factor is the cost of commercial debt. You look at the Moroccan base rate or the intra-bank base rate in terms of interest rate and you look at the premiums or the rate at which companies borrow money to be able to afford doing investments in the country. We’re still looking at 250 and 300 basis points above base rate, meaning we can source commercial debt somewhere around 5-6% at most. This is long-term debt. These are extremely competitive rates compared to the double digits you would usually find in frontier markets and emerging markets and this is one of the key fundamentals supporting this type of industry.
The third element is the tax regime and the incentives that come across from the tax regime. From that perspective, I think the government has implemented high-impact initiatives. The healthcare sector, for example, has just undergone a major transformation with the generalization of healthcare coverage which has created a significant amount of new demand for private sector healthcare. It has also launched private sector healthcare into a major investment process which creates a new opportunity for that whole ecosystem. We’re not talking just about private hospitals, but the whole ecosystem that surrounds it. In the retail sector, the opportunity to move from traditional retail to modern retail is still high despite the dynamic of digitalization and e-commerce. We still are very much per capita underprovided in terms of the number of square meters of retail space in the modern sector per the 100,000 capita measure we take. That creates a clear investment opportunity in these areas.
These dynamics need to be supported by commercial viability and return on investment. That return on investment on a very simple basis must be much higher than the cost of debt. As long as you enter these sectors with a much higher return than the cost of borrowing to build infrastructure for these sectors, that creates an opportunity. We have been seeing that opportunity grow for the past 10 years while other markets, whether in Europe, in the US or elsewhere, have been seeing that shrinkage because of the rise of the cost of debt above the return of these sectors. That’s the reason why we still see opportunity here where you are not able to see opportunity in most liquid or developing markets.
Morocco’s construction sector is gearing up for many major developments in 2024 and beyond as the country revamps its tourism assets and gears up to host the World Cup in 2030. How is Aradei Capital preparing to be in position to take advantage of new mega projects in the country?
As a country with such large infrastructure needs, we first need to wonder if we have enough local construction companies, with the expertise, the know-how and ability to execute such complex projects in confined periods of time. The answer is yes. The second question is how easy is it for foreign construction companies and foreign investors in the sector to come in and execute large projects in the country? The answer is also positive: it has been done in the past, it is easy and proven that there are no entry barriers for foreign development construction companies coming in and doing that work. When we tick these two boxes, we can then go to the other fundamentals which is the financing and this is where Aradei Capital comes into play.
Our World Cup investment is opportune for us as a country more than it has been for any other country or any other World Cup in the past. The World Cup is in three countries and the three countries will be putting in infrastructure in their developed nodes. In Morocco, these will be cities like Marrakesh, Rabat, Tangier and Agadir. These cities have populations from 1 million to over 5 million. We will connect road infrastructure, train infrastructure, retail and sports infrastructure into these larger cities.
We’re preparing ourselves in terms of capital and in terms of building the right technical relationships with local experts and foreign experts. We are working with foreign investors coming into the country to be able to capitalize on that even more, whether that’s in food and beverage, healthcare, tourism or lodging, education, or student housing. These are all the areas where we are preparing to partner with experts and technical partners to provide these infrastructures within the overall investment.
Aradei Capital is one of Morocco’s leading real estate investment trust platforms with a diversified portfolio across 28 cities in the country. Can you give our readers an overview of Aradei Capital and REIM Partners’ current portfolio? What is its position in the real estate market?
We are a real estate platform that can develop and maintain under investment several assets in different asset classes. We’re in retail, we are in healthcare offices, in industrial assets and our vision is to be the premier real estate platform with investments in sectors that are active and in demand in the country. In a way, our role is not very different from the Moroccan banks. We’re a key financier to these sectors because when you look at the split between real estate and what’s inside the real estate — hotels, offices, industrial assets — 60-65% is real estate and about 35-40% is what is inside. When you go to a company that is trying to grow a business in Morocco, whatever its industry, talking to or investing with Aradei Capital means that you have 60% less to invest in growing your business. We are a financier to local and foreign investors supporting their growth in the Moroccan market. That is what has allowed us to grow significantly. Yet the most important part is our people and having a team of professionals capable of dealing with foreign investors, of understanding concepts coming in from the US or Europe and being able to help investors implement those concepts in Morocco, as well as being able to source land and develop.
What are some of the flagship projects that the company is currently involved in to grow its footprint in Morocco, such as the Sela retail park in Casablanca? What kind of growth and development strategy is the company currently following?
We’re very much need-based in terms of our development strategy. We look at the needs of the different communities in different sectors. Our goal beyond the need for financial return is the need of our customers and the need of our communities. There are many residential communities within Morocco that still require access to basic retail infrastructure or healthcare infrastructure so we’re very much focused on those two areas in terms of providing space to address those needs such as the need for hospitals, local clinics, or larger units of retail or other multi-use complexes.
We still see opportunity in Casablanca as a major node. We also see opportunity in secondary or even tertiary cities. I think you see through our portfolio that we are in some of the smallest cities in the country. The needs of these populations are not to be underestimated. We’re able to operate a model that is adapted for that smaller population and we have other models in healthcare and retail that are adopted to larger populated cities.
Morocco is committed to reducing its greenhouse gas emissions by 18.3% by 2030 and the residential sector alone contributes to 12% of national greenhouse gas emissions. How is Aradai Capital working to cut down its carbon footprint and make real estate assets in Morocco greener and more sustainable?
Reducing our environmental impact has been key on our agenda as a company. Beyond the initiatives themselves, our first step, being serious about our environmental impact agenda, was being able to integrate environmental issues within the management structure and governance structure of the company by establishing a proper subcommittee from the board that oversees all our ESG initiatives. That subcommittee oversees the tools and initiatives that we put in place for our environmental impact. We have received the Edge environmental certification for a couple of our assets and we are continuing to seek more.
There is a new development model in Morocco that has these key environmental goals and we had to align our strategy to ensure that at least three quarters of our goals fall within the new development model goals of the country, so that we are aligned as a company with the country. Currently we are working on a variety of initiatives, whether it’s the certification or identifying waste management initiatives, identifying all the technical tools we’re putting in place for tracking the consumption of our buildings for tracking the efficiency of construction.
We would like to be leading in that trend and creating momentum rather than waiting for it to gain speed. We’re trying to do more than what our investors are asking today because we know that in a couple of years they’ll be asking for more and we want to be ahead of the curve.
What social contributions is Aradei making under its Bricks for Impact ESG strategy to strengthen the communities it works in, in what areas are you hoping to have an impact?
Sustainability goes well beyond just the environmental impact. Being a sustainable company means being anchored in our communities and being part of a community means that we would have to have some form of impact on that community. The social impact is a big part of it. We need to be extremely careful in listening to European and US pressures and making sure that we are not slanting and going more towards the environmental side and foregoing or forgetting the key impact opportunity on the social side. When you have an investment opportunity, do you invest in job creation or gender equality? Or do you put that same dollar and invest it in solar panels? It is a hard decision because solar panels versus gender equality in our assets is complicated. We’re putting the infrastructure in place to be able to allocate appropriately within both initiatives.
One of the key areas high on our agenda is job creation in our communities, especially for small and medium size enterprises. We are a provider of trading space in our retail assets and some of these traders are not yet structured, so we need to create an opportunity for SMEs to be able to come into our assets to operate. Some of the improvements we are working on for SMEs in our communities is related to the quality of healthcare access and services. For example, last year we supported one of our partners by introducing oncology to several cities that never had an oncology department. We’re looking for youth inclusion initiatives. We’re providing jobs at the lower level. We provide the space for Carrefour to be able to create the employment impact through Carrefour. We provide the space to AKDITAL to be able to create employment and access through AKDITAL, the healthcare operators.
Morocco has built strong and steady relations with the US and is the only country in Africa to benefit from a free trade agreement with the US. What major global partners is the company currently working alongside under its diversified portfolio?
A lot of US companies are looking at the country in areas like lodging and doing their penetration programs. We’re looking at some of those companies as future partners in the country. We’re helping facilitate their access into the country whether through office space or industrial space. We are looking at healthcare, but there are many areas. There are healthcare operations or distribution and many other aspects where some of the American companies are involved. We’ve attracted investments from South Africa and other parts of the world thanks to our team that operates in English and French and acts as translator between an operation that’s in English and an administration that is mostly in Arabic and French. We have played that role fantastically for several other partners and that’s why today we are very well positioned to help our American partners who are coming to take advantage of the next wave of growth in the country and the next wave of expansion that will be going on for the next 5-6 years.
Lodging and energy infrastructure offer high potential for investors, including the high-scale infrastructure projects as well as the less capital intensive and more tech driven aspects of energy. There’s going to be a strong need for tech solutions for property especially with all the infrastructure going in. I think that’s very interesting for some of the US companies. Healthcare is another dynamic sector, with the increase of the number of beds per capita. There is a deficiency and we are now very much working towards closing that gap, so that we get to an appropriate level of beds per capita.
There are so many opportunities for growth driven by the macro and micro fundamentals of the country which have been propelled by the World Cup announcement and the infrastructure spending that will go into the World Cup in Morocco. With these two fundamentals, it is very hard for us to put our focus and attention anywhere else other than Morocco today. We may have an opportunistic approach in some other countries, but our focus will primarily be in Morocco for the next 6-7 years.
Are you looking to maybe diversify your partnerships for the company to reach out further to international American partners?
Absolutely. We have built a set of infrastructure and we have built a team that is welcoming partners or foreign partners into this country. We are particularly well positioned to work with US and other Anglo-Saxon partners to penetrate the country, to facilitate their growth through our real estate portfolio, sourcing real estate suitable for them.
Aradei Capital is a necessary stop for any US company looking at Morocco regardless of the sector. We can be a partner in their due diligence process whether to understand the local infrastructure and real estate landscape in place or to explore ways to capitalize on the growth opportunity in Morocco. We have become the largest listed real estate platform and we have become a necessary stop for any investor to understand and get a clear view of the environment before going forward.