Recep Tayyip Erdoğan, the prime minister of Turkey, has an expansive vision of the future of the country’s capital markets. In an April 2013 speech opening the first session of Borsa Istanbul under its new name, he said that the exchange’s restructuring would “reinforce Istanbul’s bid to be a finance centre just like New York, Tokyo and London”.
Promoting Istanbul’s potential as a financial centre has become a prominent part of Erdoğan’s and his party’s policy platform. The effort is embodied in a construction project, called the Istanbul International Financial Centre (IFC), which, it is hoped, will become the nexus of a new financial district on the eastern outskirts of Istanbul, located on the city’s Asian side.
Istanbul obviously has a long way to go to catch up to Tokyo as a global financial centre, let alone New York or London. According to the Global Financial Centres Index, a ranking compiled by UK-based consultancy Z/Yen Group, London and New York are the top two, Tokyo ranks sixth and Istanbul comes in at 57th. Even among Middle Eastern financial centres, Istanbul ranks only fifth, after Dubai, Qatar, Riyadh and Abu Dhabi, according to Z/Yen’s list, which is sponsored by the Qatar Financial Centre. Istanbul does not make it into Z/Yen’s European top 20 either. But even if the end goal seems far away, Turkey’s capital markets are benefitting from the government’s efforts to develop and promote the sector. The jury is still out, however, on whether the project will ultimately succeed at its central goal.
Building Under Way
The core of the IFC project is the real estate development. It is planned to eventually draw to it most of the major state institutions in the financial sector, including Borsa Istanbul, the Capital Markets Board (CMB), the Banking Regulatory and Supervisory Agency (BRSA), the central bank and the headquarters of the state-owned banks.
The development was allocated 0.8 sq km of land, and state-owned developer Emlak Konut has overall responsibility for the project. Each state institution was then given land parcels and directed to finance construction of their own buildings.
Financing for the project began with Emlak Konut’s $676m initial public offering (IPO) in 2010, and construction began with two mixed-use office, shopping, hotel and residential projects that seek to rival Dubai for fanciful ultra-modernity, called Sarphan Finance Park and Metropol Istanbul. A further step was taken in December 2012 when Akdeniz İnşaat ve Eğitim Hizmetleri, a unit of Turkey’s Ağaoğlu Group, won a tender for building the commercial and common areas for the project, including ground works, roads, car parks and a subway station. In March 2013 the group’s owner, Ali Ağaoğlu, announced plans to raise $2bn for the project from issues of sukuks (Islamic bonds), starting with a $250m issue in the near term.
Turkey’s construction sector, which has undertaken similar projects in Dubai and Moscow, is touting the financial centre as a showcase of its abilities. Indeed, as English-language advertisements on the internet for apartments at Sarphan Finance Park boast, “The IFC will awe the world”.
Halkbank, meanwhile, raised funds for its new headquarters at the site with a TL250m (€105m) IPO of its real estate arm, Halk GYO, in February 2013. Halk GYO will build a 46-storey tower that will house the bank’s headquarters and four other buildings.
One purpose of the IFC is simply to bring state financial institutions and the private sector closer together. The central bank, CMB, BRSA and the headquarters of some state banks are currently located in Ankara. It would be difficult to move so many institutions into Istanbul’s current financial district, which is clustered around the Levent neighbourhood on the European side.
However, the project aims for much more. The hope is to create a base from which to develop a bigger, more internationally active financial industry than Istanbul has today, attracting both domestic and foreign players. Promoters of the project say that goal is achievable so long as the government continues to work towards it in a systematic and practical fashion. They point, for example, to Turkey’s recent upgrade to investment grade as confirmation that the government is moving in the right direction.
As Süleyman Aslan, the CEO of Halkbank, told OBG, “There need to be more improvements to regulations and the tax system. Compared to fund management businesses of leading financial districts, Turkey’s is not sufficiently experienced with working on a global scale. Still the attraction of Istanbul is quite clear, with the close proximity to Russia, the Middle East, North Africa and Europe, plus its own young, rapidly growing population. I believe we can build an international financial district here in Istanbul.”
Indeed, the IFC project has been a motivator for many practical and progressive reforms adopted in recent years, including improvements to corporate governance standards included in the new commercial code and capital markets law, and the recently enacted pension reform, which seeks to boost savings in private pension funds by offering matching government payments (see Insurance chapter). Those changes are expected to help increase the low domestic savings rate and the small portion of savings allocated to capital markets, which are arguably among the greatest impediments to Turkey’s becoming an international financial centre.
Others have pointed out that the transformation may not come as quickly as hoped, but it will happen. As Martin Spurling, the CEO of HSBC Turkey, told OBG, “The idea that Istanbul will become an international financial centre is very possible. However, this will be a very gradual process. We need to start with small steps before we begin comparing the city to London or Dubai.”
Another issue that may slow development is Turkey’s shortage of experienced fund managers, especially in the equities field. As Özgür Güneri, the CEO of Finansinvest, told OBG, “Our young population has made it difficult for us to produce a critical mass of highly experienced financial professionals and asset managers. After all, this is what you need to create a real financial centre in Istanbul.”
There are even fewer Turkish fund managers with international experience. Moreover, the domestic financial sector is advanced enough that it would be politically difficult for Istanbul to follow a development model similar to that of Dubai, where talent was imported wholesale from the West. As Attila Penbeci, the CEO of Ak Yat›r›m, told OBG, “The IFC is feasible. Still, to develop a sophisticated investment community, you need to attract top talent. This has been difficult for Turkey, which can’t offer the same attractive tax rates as Dubai.” Another impediment is Turkey’s status as a resource-importing manufacturer, which puts it at a disadvantage to Middle Eastern oil exporters that accumulate large concentrations of investable capital. Turkey’s richest people are owners of large conglomerates who generally prefer to reinvest their earnings in their businesses.
Three Financial Districts
Another big question surrounding the project is how successful it will be at drawing Istanbul’s private sector financial industry to the location on the city’s eastern edge.
The architects’ drawings of the new project are certainly attractive, especially when compared to Istanbul’s current financial district in the city’s Levent region, which is essentially two rows of towers stretched along either side of a single strip of congested highway. Getting to a location directly across the highway can mean a 20 minute crawl to the nearest turnaround and back again. But the financial industry is deeply entrenched in Levent, which features pleasant residential neighbourhoods where financial industry professionals live. Many can hardly imagine living on the eastern side of Istanbul, and cross-city commutes can take well over an hour.
For at least the initial stage of the IFC’s development, Istanbul appears likely to have not just two financial districts, but three. Most Islamic banks are headquartered in another small financial district on the Asian side of Istanbul, Ümraniye, about a 10-minute drive from the IFC’s location in Ataşehir.
To help craft a coping strategy, the government has commissioned Vezir Strategic Consulting and Corporate Finance to research the demands that the new financial centre will place on Istanbul’s infrastructure, including transport. Murat Kas›moğlu, project director, said the IFC is part of a long-term vision for Istanbul and must go hand-in-hand with other major infrastructure investments. His project is aimed at helping determine the investments that are most needed and how to finance them.
Kasimoğlu explained that the long-term goal is to develop Istanbul into a regional financial centre. “Istanbul should not try to compete with such cities as London and New York. The city will have to learn how to cooperate with these global centres.”
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