Rapid economic growth, a young demographic profile, and the stirrings of gentrification in Europe’s largest city combined make Turkey one of the hottest real estate attractions around. In line with other markets exposed to the European debt crisis, however, it may see a speed bump in the near term.
External factors aside, Turkey offers a healthy long-term growth horizon. However, investment in the country is subject to the typical risks of an emerging market: red tape, demand volatility and lack of transparency. Nonetheless, investors and developers are excited by Turkey’s short-term prospects, and Istanbul in particular. According to a January 2012 survey by global consultancy PwC, the country’s commercial capital was the only metropolitan area in Europe to have “good” investment prospects for all three categories considered (existing investments, new investments and development). Although analysts stress that Turkey’s country risks and the current cautious investor sentiment make a surge in the value of properties unlikely, they make clear that there is much potential for investors who understand the market.
GROWTH DRIVERS: The reasons for optimism are well-documented. Turkey is a classic emerging market growth story, with a large, young and increasingly affluent population looking for modern housing and international shopping experiences. Turkey’s Real Estate Investing Partners Association (GYODER) has estimated the annual demand for housing stands at around 600,000-650,000 units. Consumer spending, which is driving the booming retail sector, rose by 15% in Istanbul and 10% outside of the city in 2011.
Meanwhile, the increasing prominence of Turkey as a regional business centre is boosting commercial real estate rates. Moreover, expected regulatory changes, such as a urban renewal law and liberalisation of property sales to foreigners, promise new developments and higher rents. The risks that Turkey represents – moderate concerns regarding a consumer-spending bubble, unclear development policies – are real, but they have not been enough to dampen the enthusiasm of sector players. “I believe 2012 will not be any worse than 2011. The numbers are amazing, and we are hoping to grow further, at least 5%,” Hakan Yener, the coordinator at the Urban Land Institute Turkey, told OBG.
A HUMAN STORY: One of the basic pillars supporting growth in the real estate sector is the country’s demographic profile, with 26.5% of the population under the age of 15 in 2010, compared to an OECD average of 18.4%. Similarly, annual population growth in 2010 was 1.14%, versus 0.49% for the OECD. Meanwhile, internal migration continues to transform Turkey, with an urbanisation rate that has risen from under 30% in 1950 to more than 70% today. Between 2007 and 2010, on average more than 50,000 people moved to Istanbul each year. Indeed, in 2010 migration alone accounted for more than 30% of population growth in the country’s largest city.
The last demographic driver of residential demand is household size. As the country modernises and moves away from large, multi-generational cohabitation toward the Western model of small households, the ratio of people to housing units will decrease. The average size of households dropped from 5.25 to 4.5 people between 2001 and 2008, the result of falling birth rates and increasing homeownership.
This burgeoning, urbanising population translates into strong demand for housing, retail and commercial space. Turkey’s homeownership rate was 68% in the 2000 census, although it has jumped to 74% since, according to the OECD. Given space limitations, ownership is lower in urban areas – it averaged about 60% in the largest cities in 2000 – but affordable mortgage rates may soon change this.
LENDING A HAND: Housing loans only became significant in Turkey in the last decade, as part of an overall growth in consumer lending. According to figures from the Banking Regulation and Supervision Agency, the total volume of housing loans stood at just TL2bn (€850m) as of December 2004, growing to TL35.3bn (€15bn) by the end of 2008, equivalent to a compound annual growth rate of 205%. Although the 2008-09 financial crisis temporarily slowed this expansion, the mortgage market subsequently picked up, growing by 40% and 25% in 2010 and 2011, respectively, reaching TL73.3bn (€31.2bn). This was paralleled by an unprecedented 35% expansion in new construction permits in 2010, from 516,229 to 853,703.
MORTGAGE PRICING: One driver in mortgage growth has been the drop in interest rates, which had long been so high as to discourage all but the wealthiest borrowers, with rates as high as 35-40% (2.53-2.84% monthly) prior to 2008. However, the cost of a mortgage began to fall in late 2008 and sharply declined in 2009. By March 2011, rates had hit as low as 0.56% month, according to GYODER. However, costs subsequently went up, as the central bank worked to cool the economy and increased funding costs to banks, with the cost of a mortgage ending 2011 at 1.19%.
According to Burak Berki of İş Yat›r›m, however, the relatively low rates are here to stay. “We expect interest rates to slightly increase and then normalise towards the end of 2012 or the beginning of 2013,” Berki told OBG. Another change has been the increasing maturity of loans. Where once it was difficult to find even six-month loans, most banks now offer mortgages of 10 years or more, with the majority of these loans having a tenor of 5-10 years. While this is an improvement, these mortgages are still far shorter than the 20- to 30-year home loans that are typically available in more developed economies.
One drawback of the current mortgage market is the mismatch between housing loans and the short-term safety deposits that banks use to fund them. Increasing the tenor of the loan only makes this mismatch greater. Turkey’s 2007 mortgage bill attempted to address this issue by allowing consumer finance companies to broker loans and permitting the securitisation of mortgages. The former reform has seen results, with the formation of the first mortgage company, Doğan Group’s DD Mortgage, but Turkey has yet to see significant securitisation activity.
Finally, despite fears that the expansion in consumer credit was creating a bubble, the housing market itself shows little sign of unsustainability. The share of non-performing house loans has actually dropped in recent years, from 2.10% in the fourth quarter of 2009 to 0.93% in the final quarter of 2011. With soured mortgages at the core of the recent global financial crisis – more than 8% of housing loans in the US during 2008 were non-performing – bankers are naturally cautious to avoid imprudent lending.
RESIDENTIAL MARKET: The forecast for near-term residential demand remains strong, although the heights of construction experienced in 2010 and early 2011 are unlikely to be matched in 2012. Home sales grew 21% year-on-year in the third quarter of 2011, while home prices jumped 5.7% in the first 10 months of the year. Looking ahead, nearly 5% of consumers in a February 2012 poll conducted by TurkStat said that they were very likely or fairly likely to buy or build a house in the next year, the second-highest monthly figure recorded since 2006.
Istanbul is, unsurprisingly, the largest market for housing. Turkey’s biggest city is home to 16.9% of the country’s households, but it commands a disproportionate share of the real estate market. According to the Global Property Guide, Istanbul will account for about half of the 500,000 homes needed in Turkey by 2015. With some 35% of households renting, meanwhile, there is a considerable market here for investors and ample profits to be made. The Global Property Guide, which argues that Turkey is one of the top global real estate investments, reports that Turkish rental yields were the fifth-highest in Europe, behind lower-profile Balkan countries. This is due primarily to low acquisition prices, which average €2386 per sq metre in Istanbul, making it the eighth-least expensive out of 36 cities in the report. Moreover, these low costs persist even in central districts like Beyoğlu.
REGULATION: The future of the housing market hinges in large part on the regulatory environment and the government’s urban planning policies. Urban renewal will be the watchword of the real estate sector for the next decade at least, with two flavours of redevelopment in the works. The most high profile project calls for the replacement of all unsafe buildings – estimated at more than 50% of Turkey’s housing stock – with earthquake-safe buildings. A law enabling this process, which would make it easier for developers to buy out residents of a building and demolish it, was making its way through parliament when OBG went to print (see Construction overview).
URBAN RENEWAL: The second project is directed at revitalising historical districts in Istanbul by replacing current buildings with higher-rent residential and commercial areas. Law 5366 (“Preservation by Renovation and Utilisation by Revitalising of Deteriorated Immovable Historical and Cultural Properties”), which was passed in 2005, allows authorities to designate sectors of the city as “regeneration areas”. The historic districts of Tarlabaş›, Sulukule, and Suleymaniye were the first projects taken on, but the list includes up to 50 neighbourhoods. The model applied to redevelopment is a public-private partnership; in Tarlabaş›, for example, Gap Inşaat will be carrying out the work. Finally, a law allowing the sale of 2B land – deforested land held by the Treasury – was approved by parliament in April 2012. Land designated as 2B represents 3.4% of the metropolitan area of Istanbul, and some analysts have estimated that its sale could bring in TL20bn (€8.5bn) in revenue.
Given the commercial attractiveness of prime central districts, property developers are understandably keen on these projects, but many worry about receiving clear directions from authorities. According to Yener, the viability of urban renewal projects is threatened by the lack of a master plan for Istanbul and a web of bureaucracy and taxation. “Developers buy the land, they plan a project, but the municipality or the government has the right to change the plan,” Yener told OBG. He added that the lack of organisation in renewal projects often means that “the result is not a cohesive neighbourhood but a collection of different, separate parcels without the necessary social facilities.” Moreover, the urban renewal plans have drawn criticism from the residents of targeted areas and from advocacy organisations that say the plans will push poor people to the outskirts of the city.
AFFORDABLE HOUSING: Turkey’s Housing Development Administration (TOKİ) will have an important role to play in the development push, particularly when it comes to re-settling people evicted from the affected neighbourhoods. TOKİ’s affordable housing developments are one of the mainstays of the country’s social welfare network, and the organisation has built 483,000 houses in Turkey since the current government came to power in 2002. TOKİ is expected to be on the front lines of the development of earthquake-safe housing, since the project is largely government-driven and many of the targeted areas are outside the prime central districts.
At the same time, there are concerns that the government’s involvement in low-income housing is crowding out the private sector. TOKİ owns a majority stake in Emlak Konut REIT, one of Turkey’s top four real estate developers, which can purchase land from TOKİ at appraisal value without tenders. In fact, a March 2012 investment prospectus from EkspresInvest highlighted Emlak as a major beneficiary of urban transformation and 2B laws. Some observers argue that the lack of a level playing field hurts the market as a whole. “Private companies want to get involved in developing affordable housing, and it would be possible if they had the same opportunities as the public sector,” Yener told OBG. “But the current prices will not allow it. Land prices and taxes are too high, and so they are not competing on the same level as the government.” Ali Pusat, the general manager for development of Koray Construction, agreed, telling OBG that while “theoretically, the demand is very high” for affordable housing, “we won’t go that direction.”
A NEW HOME: One regulatory change expected to boost the sector is the liberalisation of foreign ownership laws. Turkey currently limits purchases of real estate to citizens of those countries in which Turkish nationals are allowed to purchase real estate, which excludes Russia and many Central Asian and Middle Eastern countries. A new law under consideration by the parliament would remove this reciprocity requirement, as well as raise the limits on the maximum land available for purchase from 2.5 to 30 ha. Foreign property ownership is currently dominated by second-home purchases by British and German nationals in the Mediterranean and Aegean coastal regions. The legal change is expected to especially benefit Istanbul, which has attracted attention from wealthy Gulf residents in recent years (see analysis).
OFFICE SPACE: The commercial real estate sector is also growing rapidly, thanks to the strength of Turkey’s economy and the influx of foreign capital. The “big three” cities of Istanbul, Ankara and Izmir are the centre of the office market, with 2.88m, 400,000, and 85,000 sq metres of Class A office space, respectively, according to the global real estate services firm Jones Lang LaSalle. Izmir is projected to grow the most in relative terms, with its supply of top-grade office stock expected to double by 2013. However, Istanbul is by far the biggest growth area by volume, with the city expected to add 682,000 sq metres of office space by 2013. Of this new supply, 44% will be located in the central business districts (CBDs) of Levent and Maslak, in line with the current distribution of office space.
Meanwhile, the Asian side of the city is expected to receive increasing focus, especially with the government’s promotion of the Ataşehir district as the Istanbul Finance Centre. Proponents of this plan hope to make the city one of the top five centres of global finance by 2035, joining London, New York, Shanghai and Tokyo. Under the plan, a 2.5m-sq-metre area at the intersection of two key highways would be parcelled out to financial institutions and supporting facilities. The government has announced that Ankara-based organisations, including the Banking Regulation and Supervision Agency, Capital Markets Board and the central bank, would move to the new site. State lenders Halkbank, VakıfBank and Ziraat Bankası would join them, although it is unclear whether or not the top private lenders would move there.
As a district, Ataşehir is envisioned as a cluster of high-value office, retail and residential properties, with housing for 80,000 individuals. The area has already attracted a number of prestige projects, such as the Ataşehir Tower, which bills itself as Europe’s future tallest building. At around 300 metres in height, the 500,000-sq-metre development would include three towers, with offices, apartments, stores and a hotel. Ataşehir has been the fastest-growing district over the past couple of years, with the opening of the Akkom Plaza alone adding over 70,000 sq metres of office space in 2011. Other developments in the works include the 88,000-sq-metre Renaissance Tower and the Varyap Meridian, a five-tower apartment and hotel project slated for completion in 2012.
Office rents in Istanbul vary by region. According to a report from real estate services group DTZ, the Levent region had the highest asking rates in 2011, at about €60 per sq metre per month, while rates in Maslak were lower, at €40 per sq metre. Prices on the Asian side were less expensive, with the highest asking rents at €33 in Kozyatağ› and €29 in Ümraniye. Vacancy rates were low in 2011, but with major projects expected to be completed soon, this could push up vacancy rates and hold down price increases.
RETAIL: The retail market was one of the first real estate segments to benefit from Turkey’s rapid economic development, as foreign investment contributed to the growth of hypermarkets in the 1990s and malls in the past decade. Gross leasable area (GLA) has more than quadrupled since 2000, reaching just under 7.6m sq metres in 2011, according to Jones Lang LaSalle. These investments are both a reaction to and a stimulant of consumer spending, which has also been boosted by easy access to credit. Household consumption grew an average of 9.25% in 2011, during which time total leasable space expanded by 16.7%.
The density of retail development is highest in Ankara and Istanbul, with over 230 sq metres of GLA per 1000 residents, compared to a national average of 103. And while the big cities are not quite “over-malled”, attention is turning to secondary cities, with the hope of capitalising on large cities that lack major retail facilities. The three fastest-developing areas were the Mediterranean, Central Anatolian and Marmara regions, with considerable growth coming from cities like Kayseri. Over the long run, meanwhile, analysts see the underserved Black Sea and South-east Anatolian regions as prime candidates for investment. As Berki told OBG, “There are so many big metropolises along the Black Sea coast, and so few shopping malls serving these places.”
That being said, Istanbul represents about 40% of the country’s retail space, while its 53% share of the development demonstrates that investors still see considerable opportunity in Turkey’s cultural capital. Istanbul is the only place to find most of the luxury brands – Chanel, Gucci and Louis Vuitton, among others – that have entered the market in recent years. In contrast to the focus on the office market that is found on the Asian side of the city, four of the five biggest retail projects in the pipeline for completion in 2013 are located on the European side.
HOTELS: Steady growth in arrivals, government support and a dearth of top properties have made Turkey a hot spot for hotel investment. Given the general consensus that Istanbul is still under-hotelled, foreign chains are expanding their offerings.
Marriott is expected open the Istanbul Bosphorus Hotel in September 2012, bringing its portfolio in the city to six facilities. The Rezidor group has two Radisson Blu properties under development, including a 305-room hotel in the Şişli district, as well as two properties in the greater Istanbul area that are already open. Meanwhile, Hilton’s pipeline contains four hotels across all of its brands.
According to Tuğrul Temel, the development manager at Hilton Worldwide in Turkey, the government’s support for tourism development includes tax breaks and other incentives that make investment in hotels an attractive option. “Other players in the real estate sector may be dealing with one restriction or another, but in the hotel sector, we expect to open 2000 hotel rooms over the next two years,” Temel told OBG. “When you combine that with the other brands, it shows that the hotel market is growing very well compared with other real estate sectors.”
Many sector experts note that there is considerable unmet demand for branded hotels in the three- to four-star range. This is especially true for regional cities, which are seeing an increase in business travellers who cannot afford five-star accommodations. As Temel told OBG, “In Anatolian cities, mid-class hotels are a natural choice: the revenues are lower, because of the room rates, but they are still highly profitable.”
OUTLOOK: PwC’s 2012 designation of Istanbul as the top European market, and the concurrent optimism about Turkish real estate as a whole is well supported by fundamentals. The country combines strong demographic and economic growth with a government dedicated to development.
Nonetheless, developers both inside and out of Turkey warn against excess optimism about the market. Much depends on regulatory decisions expected in 2012 – the disaster law, the foreign investment law – as well as the shifting tides of the Istanbul Finance Centre and other government-sponsored development programmes. The ultimate example of Turkey’s potential, as well its potential hubris, is Erdoğan’s proposed “crazy project”, which would split Istanbul by building a second Bosphorus. The project is only in the very early planning stages, and could take 30 years to complete, but industry figures were sceptical that the project was either necessary or feasible. Still, government figures declare that they are pushing through with the project, pointing to Istanbul’s growing population and the congestion of the current Bosphorus. Istanbul, and Turkey as a whole, has room to grow, no matter how “crazy” its plans get.
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