Since the black February in 2001, when Turkish Lira devalued against hard currencies by 45% overnight following some aggression by MPs in the Turkish parliament, in truth due to a tired and unsustainable Turkish Lira pegged against USD, Turkish economy and Turkish property market in tandem, have been outperforming expectations and turning things around.
Turkey’s credit note went down the drain in 2001 with the currency crush, which saw foreign company balance sheets wiping half their asset values when reported back to their parent currencies such as USD, Euro, GBP, etc. For at least 5 years thereafter, foreign direct investment was just too cautious to come in. That is till mid 2000’s when foreign investors, corporate and individual, saw things were changing. So, what exactly happened?
It could be argued that the major change has been single party rule since 2002, when current ruling AK Party took power. Since then Turkey had always been riddled with coalition governments, which found it far too difficult to implement lasting fiscal and monetary policies. AK Party managed to do just that. Since 2002, a set of fiscal and monetary policies implemented by well-trained and capable economists have managed to reduce Turkish bank interest rates from around 25% per annum to now around 6% (as of December 2011), inflation that was previously running in excess of 90% per annum now targets 5% for early 2012. Favourable and stable economy has been fostering international trade relations and exports, Turkish exports reached an all time high in 2010, driven by Germany, US, UK and Middle East. Turkish currency is no longer pegged against hard currencies, however, has been rather stable since 2006, which signals strength of economy and a positive investment climate. These are the changes in brief in macro-economic factors. Now, let us have a closer look at property in Turkey from a foreign investment viewpoint.
When analysing the Turkish property market and construction industry, one major point to note is that over 95% of real estate in Turkey output is absorbed by the Turkish domestic market. This is in sharp contrast to what happened in Spain since 2003, that is over-supply due to foreign property buyers which appeared as though there was no end in sight, clearly a fundamentally wrong assumption that turned out to be!
Over 60% of Turkey’s population is currently under the age of 32. In addition, major cities like Istanbul, Antalya, Izmir, Bursa and Ankara drew a huge number of urban migration in the 70’s and 80’s. The population of Istanbul in 1970 count was around 4 million, now the city easily accommodates over 15 million. Similar growth rates apply in other major cities. This coupled with changing lifestyles of Turkish people (that is single occupancy rates on the increase as opposed to extended family structures) and increasing wealth, meant that available housing was simply not adequate and suitable. This led to a huge gap in demand and supply. In addition, during 2007, Turkish government announced its plans for major urbanization projects, that is moving people out of shanty houses formed around major city orbits into structured and sustainable accommodation again on the suburbs of cities but with facilities and proper commuter lines. This led to plenty of incentives being given to large developers and public partnerships to purchase land and build residences. With the availability of housing finance and extended payment terms, masses of Turks are now moving into newly developing towns around major cities. This is a major market in the Turkey property sector that provides around 80% of all new builds in the market. Some of these are currently offered to foreign investors as low entry level properties in Istanbul and other major cities. We will analyse their investment value later on in this article.
Now let us look at coastal Turkey property developments. This is the segment of Turkish property market that most foreign buyers are more familiar with due to the fact that majority are second home buyers in Turkey, that is Turkish holiday home buyers. Foreign ownership in Turkey property first became possible in 2003, when the government lifted the ban on foreign nationals buying property in Turkey. At first, and given that there was already a well known Spanish market absorbing most European purchases, the main incentive for foreign buyers was cost advantage. Turkish properties were as cheap as one third of their Spanish counterparts. Foreign buyers came in search of a cheap place in the sun. The era that led up to 2007 was mainly a cost driven era. Toward the end of 2007, credit squeeze hit global economies. Most real estate markets were heavily hit, however, Turkey was not. The main reason Turkey was saved is simple, Turkish real estate market was a ‘cash’ market and not credit backed. Developers built as they sold and not on promises of future sales orders. This meant that the global slow down caught Turkey with very little surplus stock of real estate except for in a few isolated areas such as Alanya. As a result sharp price offs and heavy reductions to offload excess stock did not take place in Turkey. Prices were maintained and there was no market value loss.
Having said that inability of foreign buyers in the post credit squeeze of 2008 to release equity in their home countries as well as now the Euro Zone crises meant that the mid-market, that is standard holiday homes, holiday apartments and small villas on the coast, slowed down significantly. This is the most severely hit segment of the Turkish property market that applies to foreign buyers. In sharp contrast and possibly surprisingly, high-end property in Turkey became more appealing. This is waterfront homes in Turkey and exclusive homes in Turkey in elite areas such as Kalkan, Kas, citizenship by investment in turkey parts of Bodrum peninsula. If we have a closer look at the reasons behind this trend, then it becomes more apparent. A beachfront villa in Turkey along the Mediterranean and Aegean coasts, can be purchased from GBP 500,000 and with water access. Similar villa in Spain and France costs no less than GBP 2m. In other words, the price gap at the high end is extremely high. And, interestingly, most visitors would argue that the Turkish waterfront is not only more pretty but far less spoilt as well. Sailors in particular are heavily attracted to beach homes in Turkey and seafront Turkey property. So, the high end market is on the up.
How about property investors in Turkey? There is a sharp increase in Istanbul property investments. Being outside the Euro Zone, having stable economic indicators, Istanbul is attracting property investors from all over the globe. Most of these are purchasing low entry level apartments in Istanbul suburbs, however, there are some serious corporate investors too as well as real estate investment funds. So, investors have turned their attentions to Istanbul. Are all Istanbul properties viable? Let’s answer this question.
From our experience, Istanbul property investors are attracted to the following segments:
- Low entry level suburban property in Istanbul, this is apartments in Istanbul built for lower and mid income brackets of the Turkish population. Typical examples are Beylikduzu, Halkali, Buyuk Cekmece areas. There are around 150,000 new units of residences built in Istanbul every year, last 3 years averages. Of these no less than 75% are built in suburban areas. It is estimated that there is an annual demand for 250,000 new residences in Istanbul. Clearly the current supply falls short of this, however, this shortage is on a decreasing trend cumulatively. In addition, government’s aim is to provide affordable accommodation for low and mid income brackets, which are the target markets for these low entry level property in Istanbul. In short and in the foreseeable future, we expect prices of these suburban properties in Istanbul not to exceed affordability barriers for the masses that they are built for. Given a GDP growth target of around 5.5% for the next 3 years in Turkey, we suggest that maximum overall price growth that investors can expect is restricted to this level. These are of course averages and look at completed unit prices. Therefore, we suggest that low entry level investors, who are promised double digit annual growth will be disappointed in this sector. Is it not possible to achieve such high levels of growth? Yes, it is, however, very selectively and only at pre-releaserices, which are discounted to market. Therefore, investors… be careful and be selective.
2. Prime location projects, these are new and off plan apartments in Istanbul prime locations such as Sisli, Levent, Beyoglu, Kadikoy, Mecidiyekoy, etc. Target market of these properties in Istanbul are the wealthy and aspiring populations, which are on a steep increase. Due to limited supply, prices will keep rising in the near future. Having said that entry prices are high, such as USD 5,000 + per square metre as opposed to USD 1,500 for low entry above. We suggest, instead of purchasing multiple units in low entry suburbs, Istanbul property investors should purchase a single unit in prime locations projects.
3. Historic buildings in Istanbul centre and renovations property in Istanbul. We strongly suggest this sector as prime for investment. The growing elite of Istanbul, who do not want to live in luxury high rise residences are more and more attracted to authentic old Istanbul properties in Beyoglu, Galata, Cihangir and similar areas. Currently, owners renovate for personal use, however, as demand increases, we anticipate this as a major growth sector. Success in this sector requires expertise and achieving good value when purchasing.
4. Hotels in Istanbul. According to Turkish tourist board, existing luxury hotel accommodation in Istanbul falls short of meeting increasing demand, particularly in high foot-hold central areas such as Beyoglu, Taksim. Trend is for boutique hotels and in particular self-contained apart – hotel style buildings. Room rates of Euro 150 per night are seen as standard for quality.