Commercial real estate market in Turkey is still attractive
Istanbul – In the modern and central located Maslak and Levent business districts of Istanbul, with high rise office apartment buildings of 50 floors and higher, construction workers are busy. The noise of their drills, grinders and hammers is being heard from far away.
These districts on the European side of the city symbolize the dynamism of the Turkish economy. Here all headquarters of Turkish and foreign banks are located, as well as those of powerful industrial and financial conglomerates such as Sabanci. The Istanbul Stock Exchange is in the same area as well.
Levent and Maslak compete for new skyscraper projects. Levent hosts the tallest completed skyscraper of Turkey, the 54-floor Sapphire, which has a roof height of 238 meters. The construction workers keep on building high rise office towers since demand for class-A office space is bigger than the supply.
In the industrial district Ikitelli warehouses and distribution centers are running close to full capacity again thanks to the continued growth of exports: 14% on an annual basis in 2010 to reach $115.75 billion, according to Mehmet Büyükeksi, the head of the Turkish Exporters’ Assembly. Exports to countries in the area grew even faster: 108% to the United Arab Emirates, 91% to Jordan, 65% to Russia and Azerbaijan, 59% to Lebanon, 57% to Iraq and 49% to Iran.
The first export data for January were promising as well. Turkey’s exports rose 22% in January compared with the same period last year to reach $9.65 billion.
The commercial real estate sector in Turkey suffered from the global financial and economic crisis as well. A decrease in investments and a retreat in the prices of the commercial real estate were seen. But unlike the rich industrialized countries, the decline in demand in Turkey was not caused by the bursting of the housing bubble.
Turkey did not have a housing bubble. “Real estate in Turkey is seldom financed by banks,” says Patrick van Dooyeweert, managing director in Istanbul of Redevco, which manages and develops one of the largest retail portfolios in Europe, currently valued at € 7.4 billion. “Almost everyone pays cash. That is why you often see unfinished private buildings in Turkey. First they buy a piece of land. And every time there is cash they turn it into bricks and concrete. That’s the way they add new floors.”
Demand for mortgages is starting to increase now; at a pace of 29.6% in 2010. But mortgage loans are only one tenth of all loans and the share of the mortgage market is less than 5% of GDP. Because of the traditionally high inflation in Turkey – on average 70% till 2002 – Turkish consumers were always wary to take long-term loans. Even now the Consumers Association warns of the financial risks of mortgages. Their advice: choose mortgages with no more than a five-year repayment term and at a fixed rate during the term.
Istanbul is the economic capital of Turkey. What happens here is a barometer for the rest of the country. The city employs approximately 20% of Turkey’s industrial labor and contributes 38% of Turkey’s industrial workspace. The city generates 55% of Turkey’s trade and generates 21% of Turkey’s gross national product. Istanbul contributes 40% of all taxes collected in Turkey
In 2009 the Turkish economy experienced a contraction of 4.7%. This was the worst economic performance since the 1940s and led to a considerable downward pressure on the real estate market.
“Rental prices decreased in the office market and A-class office space increased,” says Isik Gökkaya, president of GYODER, the Turkish Association of Real Estate Investor Companies. “But the crisis was felt most in the retail sector. After the rapid growth seen in 2007 and 2008, the year 2009 was a period of digestion for shopping malls and the retail sector. Investments for shopping malls reduced and opening dates were postponed. Rapid decline in industrial production and exports due to the crisis reduced the demand for logistics areas and stopped many projects. Rents of logistics spaces dropped and vacancy rates increased.”
Rental income from shopping centers decreased in some cases with more than 20%. Not everywhere though. VastNed Offices/Industrial N.V., a publicly owned real estate fund that invests in offices, semi-industrial properties and logistics centers, bought seven stores since 2007 in two of the most prestigious shopping avenues of Istanbul. “Our revenues were not under pressure,” says director of investor relations Arnaud du Pont. “The occupancy rate is good. And for the latest acquisition, we had a net return of 7%.”
The spectacular recovery of the Turkish economy in 2010 surprised analysts. In contrast to Europe, Turkey became one of the most robust economies in the world with a growth of 7.85%. This year, growth is expected to be 4.8%. Inflation is expected to continue its downward trend; from 8.5% in 2010 to a historical low of 5.7% this year.
“Turkish consumers have pulled themselves out of the crisis,” says Patrick van Dooyeweert of Redevco. Their willingness to buy was an important pillar for the robust growth in 2010. “Turks are opportunistic in a positive way. They don’t like their money to burn in their pockets, but want to spend it quickly. When I compare the data of sales and visitors in our shopping centers now and compare them to one year ago, there is a growth of 20% to 25%.”
Investors in the commercial real estate market all say they have confidence in the stability and growth potential of the Turkish economy “because the fundamentals are good.” Turkey has a young population, a large market of 72 million consumers – of which 69% live in cities – and a growing middle class that increasingly has more money to spend.
Many foreign real estate funds invest in Turkey for those reasons.
Corio, one of the largest listed property investment companies with a focus on retail in Europe with a portfolio of € 7.0 billion, invested for the first time in 2005 when it bought 47% of the shares in Akmerkez, one of the most popular shopping malls in Istanbul. Redevco made a flying start in 2007 with six projects. They started construction of shopping centers and office buildings in Istanbul, Ankara, Edirne, Manisa and Erzurum with a total investment of € 1 billion. The Gordion Shopping Center in an A-class district of Ankara was one of the two new shopping malls Redevco opened in 2009.
Last year 25 new shopping centers opened across Turkey, according to the Turkish Association of Real Estate Investor Companies GYODER. The growth of shopping centers will continue and will add a lot of new jobs. The retail sector will take the lead. This year 150,000 new jobs will be added by shopping malls.
President Gökkaya of GYODER however sees an “oversupply of shopping centers as the major challenge for the industry over the next five years.” As regards to the office sector he predicts a shortage of supply as the main problem. He says that there will be an “enormous demand for office space in class-A, since Istanbul is becoming a financial center too.”
Foreign direct investment (FDI) flows are slowly recovering again. In the real estate sector we notice this trend as well. Turkish inward foreign direct investment had a steep fall from $22 billion in 2007 to $8.4 billion in 2009. It picked up some traction in 2010 when $8.89 billion was invested. In the real estate sector the recovery is stronger. It increased from $1.78 billion in 2009 to $2.49 billion in 2010.
Gökkaya mentions renewed interest of foreign investors too and refers to “Emerging Trends in Real Estate Europe 2011”, a report prepared by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI). Among other things the report identifies Istanbul as the best investment feasible city in 2011.