Properties in Turkey considered as main investment, a critical analysis of the Turkish real estate market
Since Black February 2001, when the Turkish lira devalued against hard currencies by 45% overnight following an attack by parliamentarians in the Turkish parliament, actually due to a tired and unsustainable Turkish lira pegged to the US dollar, the Turkish economy and the Turkish real estate market in tandem. , have been exceeding expectations and turning things around.
Turkey’s credit note went down the drain in 2001 with the currency crash, which caused foreign companies’ balance sheets to wipe out half their asset values when reported to their parent currencies, such as USD, Euro , GBP, etc. For at least 5 years afterward, foreign direct investment was too cautious to enter. That was until the mid-2000s when foreign investors, corporate and individual, saw that things were changing. So what exactly happened?
It could be argued that the main change has been one-party rule since 2002, when the current ruling AK party took power. Since then, Turkey has always been plagued by coalition governments, which found it 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 succeeded in reducing Turkish banks’ interest rates from around 25% per year to around 6% per year (as of December 2011), inflation that previously operating in excess of 90% per year now targeting 5% by early 2012. Favorable and stable economy has fostered international trade relations and exports, Turkish exports reached an all-time high in 2010, driven by Germany , US, UK and Middle East. The Turkish currency is no longer tied to hard currencies, however it has been fairly stable since 2006, indicating a strong economy and a positive investment climate. These are the summary changes in macroeconomic factors. Now, let’s take a closer look at property in Turkey from the point of view of foreign investment.
When analyzing the real estate market and the construction industry in Turkey, an important point to keep in mind is that more than 95% of real estate production in Turkey is absorbed by the Turkish domestic market. This is in stark contrast to what has happened in Spain since 2003, which is oversupply due to foreign property buyers who seemed to have no end in sight – clearly a fundamentally wrong assumption which it turned out to be!
Over 60% of Turkey’s population is currently under 32 years of age. Also, major cities like Istanbul, Antalya, Izmir, Bursa and Ankara attracted a lot of urban migration in the 1970s and 1980s. Istanbul’s population in 1970 was around 4 million, now the city easily accommodates more than 15 million. Similar growth rates apply in other major cities. This, coupled with the changing lifestyles of the Turks (i.e. rising individual occupancy rates compared to extended family structures) and increasing wealth, meant that available housing was simply not adequate or adequate. This led to a huge gap in demand and supply. In addition, during 2007, the Turkish government announced its plans for major urbanization projects, which consist of moving people from the shanties formed around the main orbits of the cities to structured and sustainable accommodation again in the suburbs of the cities but with adequate facilities and commuter lines. This led to many incentives being given to large developers and public associations to purchase land and build residences. With the availability of housing finance and extended payment terms, masses of Turks are now moving to developing towns around major cities. This is an important market in Turkey’s real estate sector providing around 80% of all new construction on the market. Some of these are currently being offered to foreign investors as low entry level properties in Istanbul and other major cities. We will discuss its investment value later in this article.
Now let’s take a look at Turkey’s coastal real estate developments. This is the segment of the Turkish real estate market that most foreign buyers are most familiar with due to the fact that the majority are second home buyers in Turkey, i.e. holiday home buyers in Turkey. Foreign ownership in Turkey first became possible in 2003, when the government lifted the ban on foreigners buying property in Turkey. At first, and given that there was already a well-known Spanish market that absorbed most of the European purchases, the main incentive for foreign buyers was the cost advantage. Turkish properties were as cheap as a third of their Spanish counterparts. Foreign buyers came looking for a cheap place in the sun. The era leading up to 2007 was primarily a cost-driven era. Towards the end of 2007, the credit crunch affected world economies. Most property markets were hit hard, however Turkey was not. The main reason Turkey was spared is simple, the Turkish real estate market was a “cash” market and not backed by credit. Developers built as they sold, not with promises of future sales orders. This meant that the global slowdown trapped Turkey with very little surplus real estate, except in a few isolated areas like Alanya. As a result, there were no sharp price cuts or sharp reductions to get rid of excess stocks in Turkey. Prices were maintained and there was no loss of market value.
That being said, the inability of foreign buyers in the 2008 post-credit crisis to free up capital in their home countries, as well as now the eurozone crisis, meant that the middle market, i.e. standard holiday homes, holiday apartments and small villas on the coast, slowed down significantly. This is the most affected segment of the Turkish real estate market that applies to foreign buyers. In stark contrast and possibly surprisingly, high-end real estate in Turkey became more attractive. These are waterfront houses in Turkey and exclusive houses in Turkey in elite areas like Kalkan, Kas, parts of the Bodrum peninsula. If we take a closer look at the reasons behind this trend, then it becomes more apparent. A waterfront villa in Turkey along the Mediterranean and Aegean coasts, can be purchased from GBP 500,000 and with access to water. A similar villa in Spain and France costs no less than £2 million. 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 prettier but also much less run-down. Sailors in particular are strongly drawn to Turkey beach houses and Turkey waterfront properties. So the high-end market is on the rise.
What about real estate investors in Turkey? There is a sharp increase in Istanbul real estate investments. Being outside the Eurozone and having stable economic indicators, Istanbul attracts real estate investors from all over the world. Most of these are buying low-end apartments in the suburbs of Istanbul, however there are also some serious corporate investors as well as real estate investment funds. So, investors have turned their attention to Istanbul. Are all Istanbul properties viable? Let’s answer this question.
Based on our experience, Istanbul real estate investors are attracted to the following segments:
- Low entry level suburban property in Istanbul, these are Istanbul apartments built for the low and middle income segments of the Turkish population. Typical examples are the areas of Beylikduzu, Halkali, Buyuk Cekmece. There are around 150,000 new residential units built in Istanbul every year, averages for the last 3 years. 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, however, this shortage has a cumulative decreasing trend. Furthermore, the government’s goal is to provide affordable accommodation for low and middle income groups, which are the target markets for these low entry level properties in Istanbul. In summary and for the foreseeable future, we hope that the prices of these suburban properties in Istanbul will not exceed the affordability barriers for the masses for which they are built. Given a GDP growth target of around 5.5% for the next 3 years in Turkey, we suggest that the maximum overall price growth investors can expect is capped at this level. These are of course averages and look at full unit prices. Therefore, we suggest that low-entry investors, who are promised double-digit annual growth, will be disappointed in this sector. Is it not possible to reach such high levels of growth? Yes, however, it is very selective and only at pre-launch prices, which are discounted from the market. Therefore, investors… be careful and be selective.
- Prime location projects, these are new and off-plan apartments in prime locations of Istanbul such as Sisli, Levent, Beyoglu, Kadikoy, Mecidiyekoy, etc. The target market for these properties in Istanbul is the wealthy and aspirational populations, which are on a strong rise. Due to limited supply, prices will continue to increase in the near future. Having said that, the entry prices are high, like USD 5,000+ per square meter compared to USD 1,500 for the previous low entry. We suggest that instead of purchasing multiple units in low-entry suburbs, Istanbul real estate investors should purchase single units in prime location projects.
- Historical buildings in the center of Istanbul and renovations property in Istanbul. We highly recommend this sector as a prime for investment. Istanbul’s growing elite, who do not want to live in luxurious high-rise residences, are increasingly drawn to authentic old Istanbul properties in Beyoglu, Galata, Cihangir and similar areas. Owners currently renovating for personal use; however, as demand increases, we anticipate this to be a high growth sector. Success in this sector requires experience and achieving good value when buying.
- Hotels in Istanbul. According to Turkey’s tourism board, existing luxury hotel accommodation in Istanbul is not enough to meet the growing demand, particularly in high-occupancy central areas such as Beyoglu, Taksim. The trend is for boutique hotels and, in particular, self-contained, aparthotel-style buildings. Room rates of 150 euros per night are considered a quality standard.
In summary, yes, Turkey’s real estate market is growing and it is rewarding for investors as the country as a whole is on an uptrend that far exceeds the European averages. Being outside the Euro Zone and the growing wealthy population are clear advantages. Foreign investors should be very selective and not get carried away by the hype surrounding the market, as not all real estate in Turkey is a good investment.