With property values rising, the rest of the world has turned its attention to Turkey’s booming real estate market. In addition to the obvious attractions of portfolio investments in this emerging market, the past several years have seen many foreigners buying Turkish property as a first or second home. Moreover, legal changes are expected to expand this roster of home-buyers, especially by opening up the Gulf market.
HISTORICAL TRENDS: Net foreign direct investment (FDI) inflows into the real estate sector grew from less than $1bn in 2003 to top $2.9bn per annum between 2006 and 2008. Although the market took a hit during the global credit crunch, dropping to $1.7bn in 2009, interest picked up in 2010 with $2.49bn before tailing off slightly in 2011, to $2.01bn.
Foreign investment in Turkish real estate has a complex and thorny legal history. For many years, a 1934 property act made it next-to-impossible for foreigners to invest in Turkish real estate, but a law in 2003 opened the sector to nationals of countries where Turkish citizens were eligible to buy property. This decision proved controversial in Turkey, where fears of foreign encroachment on property dates back to pre-republican times, and a Constitutional Court decision in 2005 temporarily suspended all property sales to foreigners. In 2006, a law was introduced that re-opened sales, but it limited purchases to 2.5 ha and less than 10% of land in any designated town. It is also necessary for buyers to receive explicit permission from the military that their investment does not threaten national security, which can take several months but is usually pro-forma.
RECIPROCITY: The focus now is on eliminating the reciprocity requirement, which is holding back capital from investors in Turkey’s near abroad. The US and most European countries allow Turkish nationals to buy property, enabling their citizens to buy real estate in Turkey. However, citizens of most Gulf countries, including Saudi Arabia, Kuwait and the UAE, cannot buy property, while Russian citizens must have a residential permit. As a result, the foreign investment profile for Turkish real estate strongly resembles tourist arrival data. Most purchases are second homes, dominated by British and German citizens, and concentrated on the coastal regions. As of August 2011, nearly 120,000 foreigners from 89 countries had purchased a total of 111,194 properties. British citizens lead the way at 35,249, with Germans second at 27,021, and followed by Greeks, Irish, Danes and Russians. The coastal cities of Antalya, Muğla and Aydın were the biggest draws for home buyers, followed by Istanbul in fourth place.
A law currently on the parliament’s roster, and expected to be passed during the first half of 2012, would remove the reciprocity requirement and allow residents of 39 countries to buy Turkish real estate for the first time. Analysts have estimated that the liberalisation could double foreign investment in the sector. The regional focus would shift with an influx of Gulf buyers, who are interested in Istanbul, especially luxury residences along the Bosphorus. In addition, the draft law would allow foreigners to purchase areas of up to 30 ha without having to seek approval from the Council of Ministers, as was previously the case.
BUSINESS BUYERS: Real estate investment laws differ for foreign corporate, as opposed to individual, buyers. Corporate investment can take place either through companies registered in Turkey with foreign capital or by fully foreign entities. Although FDI in the real estate sector is much lower than direct home purchases by individuals, it grew strongly from 2010 to 2011, rising from $412m to $560m. Unlike individual purchases of real estate, meanwhile, Turkish-established companies with foreign capital are focused on Istanbul. Of the 4414 companies based in Turkey with international investment, 53% were located in Istanbul.
Turkey’s rising profile is drawing buyers of all stripes: major investors seeking premium returns through portfolios, small investors looking for an additional revenue stream and individuals hoping to relocate full- or part-time to Turkey. The latest regulatory changes should inject further life into a market that is already buzzing.
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