Political and currency risk will pose market-specific challenges in the Middle East and North Africa once the region emerges from COVID-19. But, as in other parts of the world, logistics is the likeliest winner if the pandemic is brought under control, and retail is the surest loser.
The push towards e-commerce is encouraging industrial tenants to take up more space to match demand, particularly in the United Arab Emirates (UAE) and Saudi Arabia, where online shopping and the networks to supply it were already strong. The supply-chain disruption that has occurred during the pandemic has also caused logistics shippers and retailers to consider expanding their inventory-carrying capacity.
Grade A logistics space has produced some of the strongest leasing performance in the region. That in turn has attracted investors from outside the region, keen to develop space that can compete for long leases with regional and international warehouse operators.
The outlook for conventional retail is subdued. The pandemic has produced an economic downturn that has placed an additional burden on a sector that was already struggling.
“In the medium term we would be bearish on select large regional malls, and retail in general,” Ihsan Kharouf MRICS, the head of the Oman office at Savills, says. “There were existing pressures of over-supply in the market for a number of years, and despite delays and cancellations of several projects, the issues associated with COVID-19 exacerbated the situation further.”
Kharouf says markets that depend more on inbound, tourism-linked retail are particularly vulnerable. He anticipates that the UAE, Morocco, Bahrain and Egypt have the greatest risk in that regard, with Saudi Arabia least affected since it is mainly a domestic economy with an annual boost from religious tourism.
“In the medium term we would be bearish on select large regional malls, and retail in general” Ihsan Kharouf MRICS, Savills
The economic fluctuations outside the MENA region have a profound impact inside it due to currency effects. Countries with currencies linked to the US dollar – most prominently the UAE and Gulf nations – are proving a safe haven. Investment-grade property assets there command a premium as a result: “safe-as-houses” property assets in a safe-as-houses currency.
North Africa does not share the same characteristics. As a result, property with leases that are denominated in US dollars or euros are in demand.
Kharouf highlights Cairo as an exception. The Egyptian capital remains attractive to international investors due to “massive growth” since 2018 in the number of multinationals moving into the city. There has been growth in industries such as pharmaceuticals, technology and finance, focusing on serving both Egypt and the MENA region.
It is worth watching the political situation in MENA, perhaps now more than ever. Social tensions have heightened the world over during COVID-19, and politicians may struggle to soothe tempers should they become frayed.
“Political stability will be the most important factor determining real-estate resilience across the region,” Kharouf says. “The current economic downturn is limiting the number of tools typically available to local governments to manage any potential tensions.”
Gulf nations have the boon of natural resources to fall back upon. But that has proved a liability – certainly since March, when Saudi Arabia and Russia began waging a fierce price war over oil. Saudi Arabia sought to punish Russia’s refusal to curb oil production, essentially by tanking oil prices.
At the time of writing, oil was around $30 a barrel. The Gulf Cooperation Council countries require stable prices above $50 per barrel. That’s a level that would support local bond issues and enable direct government spending to support the property sector.
North Africa does not have the luxury of oil and gas. It will continue to rely on international support and emergency funding instruments, Kharouf believes, particularly in Egypt, Tunisia and Morocco. Should the political situation remain under control – and it’s well worth watching – those nations offer the greatest opportunities for growth in 2021, he adds.
A lack of institutional-class, lower-risk assets had been pushing investors into speculative development before the pandemic. That willingness to take on risk again will require greater stability than the MENA region currently provides as it works through COVID-19. Until then, property investors will seek out safe bets.
“A build-to-suit, or a sale and lease back for a well-capitalised entity, would offer the greatest protection in the current market,” Kharouf says. “Top of the pile would be large telecom or utility providers with a full or semi-monopolistic position, with high barriers to entry over the term of the lease.”
“The current economic downturn is limiting the number of tools typically available to local governments to manage any potential tensions” Ihsan Kharouf MRICS, Savills