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Turkey 2011 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE

With the economic slowdown behind it, Turkey's real estate market is looking to ride the country's upward growth trend and beat back stagnating prices.

The strong growth that the Turkish economy witnessed over 2010 finally began to feed back into the real estate market, which had been in the doldrums since the start of the global financial crisis in 2008. Despite avoiding most of the major losses that plagued markets in the US and Europe, the Turkish property market saw only a cooling off of interest. As Kerim Cin, Managing Partner at Colliers International-Turkey, put it to TBY, “Both 2008 and 2009 were recession years. Real estate was generally very slow in all sectors."

However, annualized national GDP growth figures of 5.5% in 3Q 2010, and 24.9% growth in the construction sector over the same period indicate that the real estate market is back on track. Demand for sales and leasing has shown renewed interest, with the retail and office segments responding well to Turkey's resilient economy.

In order to help support the real estate market over the crisis, the government temporarily dropped the 18% VAT on the sale of land and buildings over 150 square meters in size from 18% to 1%, though this tax concession ended in mid-2009. The VAT on commercial property transactions was also reduced from 18% to 8% over this period. The VAT on buildings smaller than 150 square meters remains at 1%.

Over 2010, the Istanbul Stock Exchange (ISE) saw the number of real estate investment trusts (REITs) increase to 21, with November 2010 witnessing the IPO of the largest REIT ever seen on the Turkish market; Emlak Konut REIT, with a net asset value (NAV) of TL5.8 billion. The overall NAV of the REIT sector on the ISE is estimated at TL12.9 billion as of end-2010, with Emlak Konut REIT representing nearly half of this value.

FOREIGN INVESTMENT

Foreign investor interest in the Turkish market has also been growing as legislative changes have clarified the laws on investment for foreigners. According to the Undersecretariat of the Treasury, FDI in the real estate sector rose from just $3 million in 2004 to $641 million in 2008, before declining to $560 million in 2009, and then falling to $298 million in 2010. Despite this, the real estate sector's FDI share rose to 8.7% in 2009 from 4.5% in 2008. Sales to foreign citizens also saw a similar fluctuation, from $2.9 billion in 2008 to $1.8 billion in 2009.

In 2008, Title Deed Law No. 5782 was passed ,permitting foreign persons and entities to acquire real estate in Turkey, replacing the inconsistent laws of the past. Foreign nationals are also now eligible to participate in Turkey's new mortgage system, seen as key to stimulating house ownership. Foreigners are still subject to a reciprocity principle for ownership, meaning that only countries allowing Turkish nationals to purchase property are eligible, and are broadly restricted to owning up to 25,000 square meters of land within designated urban areas—extra land ownership requires the permission of the Council of State. Equally, land that is subject to defense and environmental considerations is also exempt from purchase. The final restriction is that foreigners are not allowed to own more than 10% of zoned land within a province.

RESIDENTIAL

The residential market has seen a slowing over the past few years, as excess supply is slowly being mopped up by the market. The number of apartment construction licenses was slowly on the mend over 2010, recording 132,520 in 1Q 2010, 185,631 in 2Q 2010, and 157,820 in 3Q 2010, up substantially on an annualized quarterly basis over 2009 according to TurkStat. Housing loans have also seen a substantial rise following the introduction of mortgages to the Turkish market, with the total figure growing from TL42.6 billion at end-2009 to TL55.2 billion by end-2010. Rates for home loans have responded well to Turkey's declining interest rate environment, and the monthly average was recorded at 0.90% for 4Q 2010, or 11.35% at a compounded annualized rate, according to the State Planning Organization. The lower rates have encouraged Turkish homebuyers to take out loans with longer maturities, with 6-10 year loans now making up 52.1% of all home loans in 2010 as compared to 48.4% in 2009.

The number of house sales in 2010 has remained below the same figure for 2009, much a reflection of the ending of VAT concessions on home purchases in mid-2009. Home sales peaked in 2Q 2009 shortly before the end of the VAT concession at 194,743 units, while the same figure for 3Q 2010 was just 90,270 units according to TurkStat. Istanbul typically represents around a fifth of all home sales, though other areas of the country such as Ankara, Izmir, and the Mediterranean and Aegean coasts are also prime markets for transactions. Owing to Turkey's favorable demographics, the long-term health of the residential market, especially in the lower to middle income segments, is considered strong, with more speculative luxury developments very much dependent on fluctuations in the economic cycle.

OFFICE

The A grade office market is primarily concentrated in the Istanbul region, much a reflection of that city's status as the country's economic capital. Istanbul is considered the third-largest office market in the CEE region, after Moscow and Warsaw. Over the crisis period, vacancy rates for such space increased significantly, especially in less popular areas such as on the Asian side of the city. CB Richard Ellis research estimated that the Asian side had a vacancy rate of 15%, with asking monthly leasing prices in key locations such as Kozyatağı averaging $18-$25 per square meter, while those in Ümraniye and Kavacık came in at $19-$23 per square meter. According to the Association of Real Estate Investment Companies (GYODER), the average vacancy rate in CBD Class A locations, covering mostly the European side of Istanbul, was 11.5% in 3Q 2010, down on the 12.3% recorded a year earlier for the same quarter. Average CBD rents were $27.2 per square meter in 3Q 2010, up slightly on the $26.4 figure seen a year earlier. The market has shown the early signs of growth, and it is expected that vacancy rates will decline, putting pressure on leasing rates as the construction of new office space has slowed over the past three years.

RETAIL

The one bright star of the Turkish property market has been that of retail, with 25 new shopping centers covering 741,500 square meters opened over 2010, bringing the total countrywide to 238, covering some 5.96 million square meters, according to GYODER. Istanbul dominates Turkey's retail supply, with 80 shopping centers covering a total leasable area of 2.3 million square meters as of 2Q 2010. The same study from Colliers International in 2010 also estimated that organized retail accounted for 38% of Turkey's retail sector, well below the 80% plus figures seen in European markets, indicating the potential for further growth. Jones Lang LaSalle estimated in 2010 that Turkey has 90 square meters of retail space per 1,000 inhabitants, well down on the 210 square meters for Europe on average. Although Istanbul has been at the center of retail space investment, other smaller provincial cities across Turkey, especially in Anatolia, are likely to represent better investment and expansion opportunities going forward. Feroze Bundhun, Managing Director at CB Richard Ellis in Istanbul, told TBY that in terms of retail space development, “…there is still a long way to go".

INDUSTRIAL & LOGISTICS

The biggest loser over the crisis period was the industrial and logistics segment, with GYODER estimating that leasing rates fell 20% between 2008 and 2010. The Istanbul-Izmit market has been the main player in Turkey, with areas such as Gebze and Hadımköy showing signs of strength in a slowing market. CB Richard Ellis estimated leasing rates of $6-$8 per square meter for the Hadımköy region on the European side of Istanbul, and $5.5-$6.5 for Gebze on the Asian side at end-2010. GYODER sees that high land prices and poor yields have put pressure on investments in this sector, with land owners preferring to transform industrial-zoned lands into residential or retail purposes to improve their returns, especially those located in areas close to the main urban areas.