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Turkey 2012 | REAL ESTATE & CONSTRUCTION | REVIEW: REAL ESTATE

Optimism in the commercial real estate sector and new legislation easing restrictions on foreign property ownership are set to keep investors on a cautious but steadily growing path.

Growth in the Turkish real estate market is fueled by advantageous demographics, a thriving middle class, and urbanization that is expected to continue in the medium and long term. However, the immediate future has posed a few challenges. Weaker global economic conditions, namely in the crisis-hit eurozone, as well as financial market uncertainties surrounding the strength of the lira and a growing current account, have slowed Turkey's economic performance from 8.6% in 2010 to a more humble 3%-4% in 2012. In an effort to combat consumer price inflation, the Central Bank has continued to craft monetary policies to stabilize the lira and rein in growth in the number of home loans to about 10%, according to economist Emre Deliveli. Although the housing price index indicates nominal prices have risen by 23% since 2010, average inflation of 17% means that real gains have been less impressive. With new units being built in cities across the country, supply figures could suppress prices even further, unless foreign buyers mop up the excess.

The year 2011 saw new opportunities emerge in real estate investment trusts (REITs) on the Istanbul Stock Exchange. The REIT index swung widely in 2011 as exemplar firms such as Emlak Konut GYO, the largest Turkish REIT, saw share prices drop after the government announced plans to extend a VAT of 17% to properties under 150 sqm. On the other hand, new projects, such as Nurol GYO's planned redevelopment of the Medya Towers site and the flagship Varyap Meridian mixed-use project in Ataşehir, have kept interest in the developers strong.

RESIDENTIAL

Although up year on year from 1Q2011, the opening months of 2012 showed a precipitous 19% drop in residential unit sales in every region of the country. Banks have also been lending less in both the total number of loans issued and the aggregate sum as a result of higher reserve ratio requirements, according to reports from the Association of Real Estate Investment Companies (GYODER). In 2011, Turkey issued building permits for 642,987 housing units and developers sold 419,000 homes. While sales decelerate, prices have increased 12.6% over 2011 as a national average, partly due to sellers holding out and the extension of VAT taxes for the medium term. Despite the relative stagnation, other factors could also shake up the market.

Approximately 50% of Turkey's housing stock will eventually have to be rebuilt to meet strict new earthquake safety codes. In response, the Turkish Housing and Development Administration (TOKİ) has been forging partnerships with private sector developers, such as Ağaoğlu, to provide clusters of quake-resistant homes to low-income families across the country after the disproportionate damage caused by the 2011 Van earthquake. “TOKİ was successful in reaching its objective to build 500,000 new housing units and social facilities by 2011," says TOKİ President Ahmet Haluk Karabel. “Prime Minister Erdoğan asked TOKİ to construct another 500,000 houses by 2023." With TOKİ leading the way, these regulations will incentivize private construction companies and developers to replace or refurbish older buildings, stimulating further growth and picking up what's left by the limited number of mortgages.

FOREIGN OWNERSHIP

In May 2012, the Turkish parliament passed a bill easing restrictions on property purchases by foreigners, a change that should slightly boost demand for high-end homes. Wealthy buyers from Iran, the Persian Gulf, Central Asia, Russia, and the Caucasus are expected to invest heavily in luxury properties in Istanbul and on the Aegean coast. GYODER estimates the move could draw nearly $5 billion into the real estate market every year.

“We don't expect these [investments] to reach a point where they will disrupt the overall balance," says Erdoğan Bayraktar, Minister for Environment and Urbanization, who played a key role in passing the legislation. “We can always make adjustments depending on developments, either liberalizing or restricting real estate ownership practices depending on the situation." Foreigners can now purchase up to 30,000 sqm of land, up from 2,500 sqm, but may not collectively own more than 10% of a town or city.

Formerly plagued by uncertainty, the real estate market in Turkey has been helped by increased transparency according to a survey by Jones Lang LaSalle. International participation and government efforts have elevated Turkey from the opaque bottom tier to a level of low transparency in just eight years, the largest jump of any country in the survey's history.

COMMERCIAL

Although considered the third office market in the CEE region after Moscow and Warsaw, Istanbul's cultural lineage and location make it prime for doing business in the Balkans, Central Asia, the Middle East, and North Africa, bolstering its standing as an increasingly indispensable global hub. Multinational giants such as Sanofi and GlaxoSmithKline have recently moved their regional headquarters from Dubai to Turkey, illustrating a trend that has kept demand for office property and the country's economic capital quite high.

According to CBRE, lease renewals and foreign corporate entrants held demand for office space steady in the first quarter of 2012, but a number of financial sector multinationals remain poised to relocate or expand in Istanbul, which will put new pressure on the supply in the coming year. A lack of available Grade A/B space on the European side has kept vacancy rates at less than 5%, a shortage reflected in the premium rental rates in the desirable of districts of Levent ($35-$45 sqm/month), Esentepe ($30-$40 sqm/month), and Maslak ($18-$30 sqm/month). Yet across the Bosphorus, a new market is starting to emerge. An increase in available top-flight real estate due to expansion around the planned Ataşehir business and residential complex has left significantly more room to fill. In neighborhoods like Kartal, Kozyatağı, Ümraniye, and Göztepe, which orbit the mega-development, vacancy rates range from 10%-15% and rents hover in the competitive $18-$25 sqm/month range. As the Ataşehir project starts to take shape and planned cross-strait transit links such as a third Bosphorus bridge come into operation, discrepancies between supply and demand should narrow across the entire city.

RETAIL

Drawn by rising incomes and a market hungry for new goods, international retail brands aggressively expanded across Turkey in the years leading up to the latest eurozone crisis. In the first quarter of 2012, fears that the country's linchpin export market could face severe economic hardship, coupled with growing tumult in neighboring Syria, have pushed down consumer confidence 2.8 points. Yet, in terms of retail property developments in the pipeline, Turkey currently outranks all of Europe. Likewise, retail sales revenues, when compared to the same period in 2011, have increased 11%. GYODER reports that 2011 saw 1.27 million sqm of leasable retail space become available—the largest increase on record—with another 155,300 sqm opening in the first quarter of 2012. While Istanbul's growing wealth makes it an obvious destination for retailers, a significant portion of this type of expansion has taken place in second- and third-tier cities, some of which are now enjoying their first shopping centers. The remaining amount of non-organized commerce in Anatolia indicates that the sector has plenty of room to grow. This sentiment continues to feed optimism throughout the country.

Rent for retail property offers evidence of changing consumer habits. As more Turks switch from informal bazaars to organized centers, retail growth outside of Ankara and Istanbul should continue apace. On prime locations, the rent level remained stable at $250 sqm/month, according to CBRE, with prime yields holding at 6.5%. Rent levels for premium shopping center space, on the other hand, jumped nearly 40% to $180 sqm/month with prime yields at 8%. As urbanization continues, especially in Istanbul, new satellite city centers will emerge at the expanding periphery, becoming an additional driver for new retail space demand in the medium term.

INDUSTRIAL & LOGISTICS

A reduction in global demand has resulted in a mixed outcome for the Turkish industrial and logistics real estate prospects. While demand for industrial and logistics rentals remains depressed, investments in new buildings rose at end-2011 with construction permits reaching a peak of 1.68 million sqm, according to GYODER. Due to their proximity to Europe and access to deep water ports, Istanbul and neighboring Kocaeli Province have attracted international interest; Tuzla and Gebze, on the Asian side of the Marmara Sea, also proved attractive to manufacturers in 2011 and will continue to do so as demand for residential property in Istanbul forces the rezoning of industrial areas. Although the existing Turkish capital stock remains inadequate when compared to other developed manufacturers, Turkey's location is unrivaled and its affordable and skilled labor force will make it an important industrial and logistics player for the foreseeable future. Logistics companies like Ekol expanded into Europe through an acquisition in 2011 and invested in R&D facilities in early 2012. Despite this, CBRE reports that rent levels remained low but stable at $6-$7 sqm/month in better connected European Istanbul and $5.5-$6.5 sqm/month in Tuzla and Gebze on the Asian side. Yields remain steady at 10.5%. Considering its geostrategic and labor advantages, this segment of the real estate sector has demonstrated promising growth.