Turkey's population and income growth fuelling real estate sector growth and attracting international interest

From residential to retail property, the Turkish real estate market has flourished in the last few years. Buoyed by economic and demographic growth, rising incomes, market liberalisation and a major urban renewal programme, the sector has also been attracting strong international interest which has spread beyond traditional buyers in Europe and the Gulf, and beyond the traditional locations of the Aegean and Mediterranean coasts and Istanbul. There is optimism in the sector, too, that despite the recent economic slowdown, this robust growth will continue in 2015 and beyond.

In Numbers

Indeed, the Turkish economy has seen substantial expansion in recent years, with a rapid recovery from the global financial crisis. For 2013, GDP grew 4%, with a mean annual GDP growth rate over the 2003-13 period of 5%, according to TurkStat, the official statistics agency, though the IMF forecasts growth of 3.1% in 2015 and 3.6% in 2016, in part due to the weakness of the Turkish lira and a slow shift in foreign capital out of the country ahead of an expected rise in global interest rates. This has given Turks a lot more disposable income than they had in the past – per capita GDP has risen from $4565 in 2003 to $10,404 in 2014.

At the same time, the country has undergone significant demographic changes. TurkStat figures put the total population at 77.7m at the end of 2014, with an annual growth rate of 1.6%, up from 1.37% in 2013. Around half of all citizens are under the age of 30. Significant here, too, are changes in the size of households. With the growth of the middle class – which is expected to expand from around 27% of the population in 2010 to 45% by 2020 – has come a rise in demand for home ownership, along with a rise in the number of nuclear families, breaking way from traditional, extended family structures. This is particularly prevalent in urban centres, such as Istanbul, Ankara, Antalya and Izmir. A 2012 survey by TurkStat showed 19.8m households in the country, with an average size of 3.7 members – although the spread across country was wide, from 7.9 in Şırnak to 2.8 in Çanakkale. In addition, the rate of urbanisation has meant that today, 71% of the population lives in urban areas, with the north-west in particular a major population centre. Economic growth and demographic changes have provided some fundamental growth drivers for Turkey. Economic growth has also increased demand for office, commercial and industrial real estate, with this further heightened by the rise in foreign investment. Istanbul’s geostrategic location has boosted its standing as a regional and international headquarters. In April 2015, for example, the UN Development Programme opened the Istanbul Regional Hub to support its projects in Europe and the Commonwealth of Independent States.


Foreign purchases of real estate were boosted by a change in the law in 2012 that expanded the number of nationalities permitted to buy from 89 to 183. Previously, only nationals of countries that had reciprocal arrangements with Turkey were allowed to own property. The Real Estate Reciprocity Law was amended to include countries that do not have such arrangements. This meant citizens of Middle Eastern and former Soviet states became eligible, along with China and many Asian nations. Some limits do, however, remain. Foreign citizens cannot own more than 30 ha each, countrywide, for example.

Global Flows

Recent economic developments have had mixed results for Turkey’s real estate sector. A general retreat of foreign capital from emerging markets has impacted FDI: according to central bank figures, total FDI inflows declined from $16.1bn in 2011 to $12.4bn in 2013, though these were up slightly in 2014 to $12.5bn. Yet, the central bank data show that FDI specifically into real estate has been rising steadily over the same period: net real estate FDI was $2.01bn in 2011, $2.64bn in 2012, $3bn in 2013 and $4.32bn in 2014 – an average annual rise of 29.5%. Moves towards tapering of the quantitative easing programme by the US Federal Reserve in 2013 and 2014, along with measures to restrict the current account deficit – a long-term bugbear of the Turkish economy – have also recently depressed consumer spending, while political turbulence has also dented consumer confidence.

The underlying trend in Turkey remains that of significantly higher rates of growth than in neighbouring Europe though, coupled with much greater political and economic stability than in the Middle East and Central Asia – despite recent turbulence.

Overall then, in spite of the deceleration of economic activity generally, the real estate sector has continued expanding. According to TurkStat, the number of construction permits issued in 2014 passed the 1m mark, up 21.2% from roughly 837,000 in 2013 and covering a floor area of nearly 218m sq metres, up 24.3% on 2013. Occupancy permit issuance also rose – 6.2% by number of units and 9.4% by floor area, reaching around 767,000 and 151m sq metres, respectively.

House sales, meanwhile, held steady, with the 2014 figure of 1.17m units just surpassing that of 2013. With economic growth and stability has also come an increase in housing loans. Total housing loans were around TL110bn (€38.73bn) as of September 2014, up from TL20bn (€7bn) in the first quarter of 2007. The surprise interest rate hike at the start of 2014 may have slowed the rate of expansion somewhat, but with pressure on the central bank to cut rates in the run-up to parliamentary elections in early June 2015, the historic trend is still clearly upwards.


Adding to the demand growth caused by the above economic and social factors is a major programme of urban renewal now under way in Istanbul that is transforming neighbourhoods across the city. The motivation for the programme is safety: Istanbul lies close to a major fault line, with poor building standards responsible for much of the damage inflicted by the 1999 Marmara earthquake, which hit nearby Izmit and Adapazarı, among other locations. Given the sheer quantity of substandard housing, the programme is a giant one, set to roll out over a 20-year period and cost some $400bn. Of Turkey’s total of around 18.5m housing units, the programme aims to regenerate some 6.5m of them.

Spearheaded by the Housing Development Administration of Turkey (TOK İ), the programme is not without its critics – the protests in Istanbul that began in May 2013 were motivated in part by perceived gentrification and lack of consultation in the execution of the programme. Nonetheless, regeneration is moving forward and has seen major residential developments in areas such as Tarlaba şı and Sarıgazi, among others.

Underscoring the programme is the 2012 Regeneration of Regions Under Disaster Risk Law. This states that if two-thirds of the tenants of a building agree, their at-risk building may be demolished, with tax incentives to sell up – value-added tax (VAT) is cut from 19% to 1%, while apartments sold under the scheme are excluded from stamp duty and title deed tax. According to the Ministry of Environment and Urbanisation, around 100,000 housing units had applied for the incentives during 2013, and 79,000 in 2014. The usual arrangement is for the old building to be demolished and replaced by a private developer, via a unit-sharing agreement with the owners and tenants. New units are built for those tenants wishing to stay, with extra units going to the developer. Since the programme began, much private investment has gone into urban regeneration, rather than greenfield development, a move also incentivised by changes to VAT on all greenfield units. Previously, those under 150 sq metres had paid just 1%, but under the new rules, if the value of the unit is between TL500 and 1000 (€176-352) per sq metre, the VAT is 8%, rising to 18% for those valued higher.

Recent years have also seen the house price index climb steadily. The central bank’s index for Turkey as a whole rose in the 2010-14 period to 172.2 points, giving a compound annual growth rate of 12.2% – healthy growth and an important indicator that today’s residential market is far from just an Istanbul concern.


Once again, Istanbul is the focus for the office market, with its increasing importance globally serving to boost demand from international companies for prime office space, while economic growth domestically has also led to demand for better accommodation and upgrades to existing establishments. This high demand has helped keep rental rates stable, as more high-quality office space has come on-line. After peaking at about €40 per sq metre in 2008 – when supply was tight – prime rent levels for office have stabilised at around €35 per sq metre, according to research by Jones Lang LaSalle (JLL). Rental prices at the high end are often set in euros or dollars, a practice which, given the depreciation of the lira in 2013-15, has put significant pressure on some tenants. Many landlords have come to arrangements with tenants to fix a nominal exchange rate that is lower than the real one in order to maintain occupancy levels. A similar practice is common in the retail segment as well.

Prime yields have been stable in recent years, with peaks of around 8% in 2009-10 declining to a level of around 7% since the fourth quarter of 2011.

As the transport infrastructure of the city has developed in recent years – 2013 saw the first metro trains pass under the Bosphorus, and in 2014 Istanbul’s main metro line was extended across the Golden Horn to Aksaray – so too have new commercial and financial centres, spreading demand for office space around the city. While traditionally, the central business district (CBD) around Levent and Maslak on the European side and the commercial and trading district around the airport have seen the most demand for high-quality office space, the Asian-side districts of Umraniye and Kozyata ğı have also developed in recent years.

According to figures from JLL, Istanbul, which accounts for around 80% of the country’s high-quality modern office stock, had a total of 4.1m sq metres of grade-A office supply as of 2014, up 680,000 sq metres from 2013. Around 380,000 sq metres of this new supply was in the CBD, but despite this, rental rates remained stable during 2014 at around €35 per sq metre per month, unchanged from end-2012. The vacancy rate in the CBD was 16.5% in 2014, according to JLL, and the district accounted for the majority of new take-up, at 59%. Istanbul’s total grade-A office supply is forecast to reach 6.5m sq metres by the end of 2017.


The last few years have seen increased interest in the Turkish retail market from international chains, particularly in the non-food, higher-end segment. As more shopping centres have opened, demand for space in prime malls has risen. In recent years Brooks Brothers, Galeries Lafayette and Industrie Denim in retail and Hard Rock Café, Tom’s Kitchen and Jamie’s Italian in restaurants have all come in, amongst others, targeting higher-end malls. In the food retail end, however, recent times have been more marked by departures, as Real and Dia exited, while Tesco’s Kipa sought a new formula and Carrefour handed over management to locals (see Retail chapter). One major challenge over the past few years has been the depreciation of the lira, which led many mall owners and managers to offer discounted exchange rates for rents, which are usually set in dollars or euros. This was done in an effort to prevent stores from leaving, as empty shops can have a magnified negative effect on those that remain.

Nonetheless, for prime retail in shopping centres, average rents still increased during the year, according to the most recent data from JLL. At the end of 2014, average rents were €90 per sq metre per month, up from €85 per sq metre the previous year.

Shopping centres have evolved, often forming part of mixed-use complexes, offering office and residential space, with Istanbul’s Zorlu Centre cited as a strong example. Offering luxury apartments as well as offices and retail, this has been the destination for many of the high-end international brands coming in. In the pipeline here too is the Emaar Square project, a mixed-use development in Çamlıca incorporating residences, a mall, a hotel, offices and entertainment venues.

Total gross leasable area (GLA) for shopping centres in Turkey stood at 10m sq metres at end-2014, up 5.5% on the previous year, according to JLL. Nationally, the number of malls is forecast to increase from 344 in 2014 to 415 in 2017, with total GLA rising to 12.5m sq metres in the latter year. An additional five malls of over 50,000 sq metres are due to be completed by the end of 2015, including the 52,000-sq-metre Forum Diyarbakır and the 71,100-sq-metre Podium in Ankara.

Turkey’s average retail density increased from 126 sq metres per 1000 inhabitants in 2013 to 129 sq metres in 2014, although this is still well below the European average of 198 sq metres, suggesting there is significant room for expansion going forward. Ankara had the highest retail density at the end of 2014, with 270 sq metres per 1000 inhabitants, against Istanbul’s 268, although the latter is forecast to overtake the former by end-2017 with 317 versus 296 sq metres.

In terms of high street retail, prime space has long been limited in Turkey, and even within Istanbul. In the city, Ba ğdat Caddesi on the Asian side and Istiklal Caddesi on the European are the main shopping areas, with Ni şantaşı a recent focus for food and beverages. Gaziosmanpa şa Boulevard is also a prime destination in Ankara. Prime rents for Ba ğdat and Istiklal were around €240 per sq metre per month at end-2014, up from €225 per sq metre one year earlier.

With the development of e-commerce, a further segment that is expected to do well is logistics real estate. Again, Istanbul is the centre for this, with rentals for prime logistics space near communications and transport corridors picking up from $6.50 per sq metre per month in 2010 to $7 in 2014. Total logistics supply is forecast to reach 8.5m sq metres of GLA by end-2017, and another 2.6m sq metres is planned.


With strong fundamentalsin terms of population and income growth, the market looks set to maintain its expansion in the years ahead. The move out from Istanbul in terms of higher-grade residential, office and retail space is primed to continue, and Turkey’s growth as a tourism destination will likely spread demand to the coastal regions in particular. However, the broader economic slowdown, combined with attempts to control credit growth and consumer spending, may have an impact on local demand. While all of these factors are likely to affect the market going forward, in the medium to long term the fundamentals will likely reassert themselves, and real estate is expected to remain one of the most appealing sectors for international investors.

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The Report: Turkey 2015

Construction & Real Estate chapter from The Report: Turkey 2015

The Report: Turkey 2015

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