Construction Contracts


Economic News

22 Jul 2010
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Although an upturn is expected in 2010, the correlated real estate and construction sectors have been scaling back as the global economic crisis takes effect, with predictions of a lean year.

Both the real estate and construction industries have experienced high levels of growth over the past few years, driven by the expansion of the Turkish economy as a whole. Between 2002 and 2007 inclusive, Gross Domestic Product (GDP) grew by an average 7.4%, sparking increased investments in property.

The two sectors have also benefited greatly from dramatic falls in both inflation and interest rates since 2001 - both were well over 100%, compared to the present levels of just over 8% and 13%, respectively. This in turn prompted banks to begin offering fixed-term mortgage loans, sparking a surge in both the property market and the construction industry, which had to gear up to meet the rising demand for residential units.

Demand is now easing as the economy enters difficult times, and local lenders have cut back on funds available for new loans. According to a report issued in early February by the Bahcesehir University Centre for Economic and Social Research, economic growth slipped into negative territory in the last quarter of 2008, with the situation expected to continue through the first quarter of this year.

There was some good news though, with the report saying, "from the second quarter on, a moderate revival driven by domestic demand will begin". It is this outlook that is sustaining confidence of realtors and developers, many of whom are also tipping a turnaround either later this year or in 2010.

Though he has $124m worth of residential property ready for sale and a further $496m under construction, Erhan Boysanoglu, chairman of construction firm Mesa Mesken Insaat, reckons that having high levels of stock in hand will allow the company to take advantage of the predicted pick-up in the market.

"We expect the market to be revived by the last quarter of the year, which will hopefully enable us to get rid of our housing stock by the spring of 2010," he told the local press on February 4.

Another area of the real estate sector that has generated increased interest in the past few years, in both the domestic and foreign markets, has been the holiday house and village segment. Much of this market is concentrated on Turkey's Aegean and Mediterranean coastal strip, and has seen solid growth since 2005, when the country first moved to allow full foreign ownership of residential property.

This segment of the real estate sector, and the part of the construction industry that feeds this demand for new holiday homes, could see a decline in 2009 as the economies of countries such as the United Kingdom and Germany - two of Turkey's main tourism markets - slide into recession.

A reflection of the slowdown in the construction and real estate sectors is the recent sharp fall in the number of applications for building permits. As early as the second quarter of 2008, the number of building permits being issued was down 20% compared to the same period in 2007, according to a study by EFG Istanbul Securities. The contraction is predicted to continue through 2009.

On a more positive note, a report released by the Turkish Statistical Institute in late January showed construction costs dropping 3.9% in the fourth quarter of 2008. However, the institute also said that activity in the building sector was down by 4.3% in the third quarter, despite lower prices for materials.

The construction sector is looking to the government for some short-term relief to help tide it over, said Erdal Eren, chairman of the Turkish Contractors Association, on February 4.

"We have explained at a meeting of the Economy Coordination Council that the efforts of the private sector would not be enough to revive the entire construction sector," he told the local media. "Therefore, we told them that the state should help the sector stand tall."

Promises of assistance have already been forthcoming, with Deputy Prime Minister Nazim Ekren announcing on January 19 that new measures to support industry, along with the iron-steel, shipbuilding and tourism sectors, were being finalised. However, details of an aid or stimulus package have yet to be revealed.

The government may find itself limited in its spending options, as the International Monetary Fund is seeking austerity requirements in return for a stand-by agreement currently under negotiation with Ankara.

Away from home, the global economic crisis is also taking effect on Turkish construction firms operating in the overseas market, where they have established a sound reputation as contractors in Russia, the Central Asian republics and, more recently, in the Middle East.

According to Foreign Trade Minister Kursad Tuzmen, Turkish construction firms signed contracts valued at $23.6bn for overseas projects in 2008. As of the end of last year, the total volume of business conducted by the construction industry in global markets was some $130bn, Tuzmen said during a visit to Egypt in late January.

Though firms operating overseas may have a solid number of projects contracted for 2009, the segment will have to contend with the global downturn. As a result of the contraction of economies in prime markets such as Russia, the sector could see fewer new developments get off the drawing board this year, while some ongoing developments could be halted. This was evidenced by a report in mid-December that some 20,000 Turkish workers had been laid off from construction projects in Russia over the last months of 2008, according to the local press.

While the real estate and construction sectors are both in the doldrums at the moment, with little prospect of a quick turnaround, their longer term prospects are better, as many predict the economy will either avoid recession or only experience a minor contraction before returning to positive growth in 2010.

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