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Sun 25 Sep 2016 02:52 PM

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Istanbul vies for lucrative crown of international financial centre

Its growth over the past decade has been enviable but is it enough to make Istanbul an international financial centre? The billionaire construction magnate responsible for building the dream, Ali Agaoglu, has no doubt.

Istanbul vies for lucrative crown of international financial centre

It is already a capital of history and culture. Now Turkey is vying for the lucrative crown of international financial centre.

Its multi-billion dollar plan for Istanbul International Financial Centre (IFC) is intended to support the country’s drive to become one of the 10 largest economies in the world, attracting top-tier international financial institutions and investors. 

The man charged with bringing the IFC to life, Ali Agaoglu, is himself one of Turkey’s richest, with an estimated fortune of $1.75bn.

“Today Turkey is the 17th largest economy in the world but when it comes to finance [systems] we are ranked [closer to] 70th, that’s why the government has a vision and a strategic plan to build a financial centre and to convert Istanbul to a financial centre to attract more foreign direct investment and financial institutions to Turkey,” the construction magnate tells Arabian Business.

Turkey’s central bank, its main capital market (Borsa Istanbul), the banking regulator and three state banks — Akbank, Vakif Bank and Ziraat Bank — will act as pillars for the development. Agaoglu says financial institutions from the world over will be enticed to join them.

“Primarily, we are expecting the Gulf banks to access this development with some Islamic finance instruments but also, as a candidate to the EU [European Union], Turkey has very close ties to Europe so European banks will take place in this development also,” he says.

“We are also restoring our good relations with Russia again and Russian banks want to position themselves in Turkey and we are expecting them to expand their positions through this development. So, in other words, it will be a combination of a whole banking system in a single development; that’s what we’re expecting.”

While the project — due to welcome its first tenants in the first quarter of 2019 — is ambitious, Turkey has many of the credentials required to meet its goal: it is already one of the top 20 largest economies in the world, with a gross domestic product (GDP) of $800bn, according to the World Bank; its population of 78 million has a median age of 31; and it is uniquely located between Europe and the Middle East.

The past decade has shown Turkey is not to be underestimated. Per capita income has nearly tripled and is now more than $10,500, while a remarkable 6.5 million jobs have been created since the global financial crisis, according to the World Bank, which has commended the country as “a source of inspiration” for other emerging markets.

However, the pace of growth has slipped in more recent years. Last year saw a healthy 4 percent growth rate in the face of tough external factors but the International Monetary Fund is forecasting 3.2 percent in 2016 and 3.7 percent in 2017, partly due to a slowdown in export demand from partners such as Russia and the Middle East as well as political uncertainty and security concerns at home.

Turkey’s current account deficit also is a concern. A widening in the core current account deficit is being masked by savings from lower energy imports, and the IMF warns Turkey’s high current account deficit could hamper growth in the medium term.

The Istanbul International Financial Centre project will include 45 million sq ft of office, residential, retail, hotel and park space.

Structural reforms also will be needed before Istanbul can attract the level of FDI it is seeking. Agaoglu says the government is considering incentives and attractive regulatory changes, without expanding on detail.

Such improvements will need to compete with those in other geographically close cities such as Dubai and Doha, which already have fully fledged international financial centres.

But Agaoglu insists that rather than compete, IFC and Dubai International Financial Centre (DIFC) will complement each other. He says discussions were held last year between the two financial centres to discuss potential collaboration, but nothing has been agreed yet.

“The financial system is shifting from West to East so we are definitely not seeing Dubai as a competitor but we are complementing each other … We are expecting two complementary financial centres, where you can during the day talk to the Far East and in the evening you can talk to the US; you can talk to the whole financial system,” Agaoglu says.

“These two centres will get a bigger portion from the total system, so that is why we are definitely not seeing DIFC as a competitor but a complementary instrument for us.

“Last year we visited DIFC’s top executives and we exchanged ideas on where we can add value to them, where they can add value to our developments. Of course we will define the terms in a solid form in the next steps, but one thing we are very clearly aware of is these two centres, in a synchronised way, will cover a larger territory, so we will attract more financial activity to the eastern part of the world.”

DIFC did not respond to requests for comment.

There are other substantial factors that could dilute Turkey’s investment attractiveness. The country has had four elections in the past two years — a fact Agaoglu argues demonstrates its commitment to democracy, although it undeniably impacts investor sentiment — while President Recep Tayyip Erdogan’s increasingly tough hand, including arresting 16 businessmen and thousands accused of links to US-based cleric Fethullah Gulen earlier this month, and a crackdown on the media, is unnerving foreign investors. 

Insecurity flowing over from Syria and the country’s continued conflict with the Kurds in the south, as well as corruption allegations are impacting the economy.

On July 15, several hundred members of a faction of the Turkish Armed Forces attempted to oust President Erdogan in a coup d’état that led to the deaths of 300 people. Incensed, Erdogan responded by arresting scores of people and clearing out public staff  accused of involvement in or support of the coup.

The event was somewhat of a culmination of several years of political uncertainty since Erdogan assumed the presidential role in 2014, after 11 years as prime minister. Under Erdogan’s leadership, Turkey has skyrocketed economically but continues to endure conflict with the Kurdish population in the south and has suffered several terrorist attacks, including at Ataturk International Airport in June.

Turkey’s GDP grew by 3.1 percent in the second quarter of this year, according to the Turkish Statistics Institute.

But Agaoglu insists Turkey is not alone.

“The uncertainty is not only in Turkey, it’s across the whole globe,” he says. “We’ve had events in Paris, Brussels, everywhere in the world.”

He suggests the failed coup attempt only proved the Turkish public’s “commitment to a democratic and secular system”.

“It was a kind of proof for us to show our unity to the whole world,” he says. “And with the strong state institutions and everything I think we will be handling all these matters and we will be going forward.

“[Even though] we are talking about recessions and slowdown in the global economy and all this uncertainty, Turkey is still growing at like 5 percent on average every year for 50 years. So this is also proof of how strong we are and how deep our potential is in terms of the economy and democracy.”

Agaoglu, an ally of Erdogan, says the attempted coup was linked to a corruption scandal that saw 52 people including Agaoglu — all associated with Erdogan’s ruling Justice and Development Party (AKP) — arrested on December 17, 2013. During the investigation police confiscated $17.5m in cash allegedly used for bribery and several government ministers were forced to resign.

Agaoglu  likens the corruption accusations as a coup attempt and says the events of July 15 shone light on the earlier matter.

When asked how concerned he is about corruption in Turkey and the allegation that he is involved, Agaoglu says: “This is a very important question and thanks for asking this.

“Looking back from July 15 now we understand what happened three years ago was an attack on the perception of Turkey. Now we are reading what happened in a consolidated picture and definitely it was a game against the perception of Erdogan and Turkey. That’s how we are reading this.

“This is an explanation I really wanted to make.”

Similar to his response to the coup, following the corruption scandal, which threatened to engulf his son Bilal, Erdogan dismissed thousands of police officers, prosecutors and judges, while the government tightened its grip on the media and judiciary.

Agaoglu says Turkey is attempting to bring the Gulf’s financial prowess and Europe’s technological know-how together in one location.

“President Erdogan is a solid and strong leader, definitely,” Agaoglu says.

Himself a beneficiary of Turkey’s economic might and government contracts, Agaoglu admits that Erdogan detractors are those who have not fared as well as he has during the country’s growth period.

“Erdogan has contributed a lot to the growth in our economy since they became a single party government, but of course… when you’re growing this fast there can be some people who are not very positively affected by the growth and would prefer to slow it down a little bit with some [attacks on Turkey’s] perception,” he says.

“But, definitely, the public itself wants Turkey to develop.

“Erdogan’s [AKP] are governing the country with [a majority].”

The businessman expects the attempted coup to be the end of Turkey’s political conflict, stabilising the path for the economy to resurge.

“We have had some uncertainties and local politics was dominating the last two-three years, but after the coup attempt now everything is clear ... [and] there is a unity among everyone. So that is why I am expecting a second jump [in economy] by 2017 in terms of all aspects,” he says.

“It is a result of stability and strong single-party government [and] unity with the opposition. It is the national unity of the Turkish public. It is not only the government but also the main opposition and other opposition parties — we are standing all together and definitely this will have a result of a bigger [economic] jump in 2017.

“Now all the investors are more motivated. We had four elections in the last two years, there is no other country that can grow with four elections in two years. It means there is a demand, there is a dynamism coming from inside and outside. But with a united politics… we should expect higher growth and higher prosperity by 2017.”

Agaoglu Group is set to benefit from the stronger economy, too. Agaoglu forecasts revenues across the group to amount to $500-670m this year, compared to $400m last year.

“In 2017 we will target double [2016 revenue], but either way it will be much better,” he says.

Some observers have warned that Erdogan’s mass purge of staff — which has affected about 80,000 workers — could cripple state institutions.

Having already completed 35,000 residences, the group recently diversified into energy, cement and tourism — sectors that Agaoglu says will be able to take advantage of the company’s already dominant position in the real estate industry.

He is investing in 200 megawatts (MW) of renewables and building cement factories with a combined capacity of 2 million tonnes.

Agaoglu expects the new sectors to boost the company’s revenues by 30 percent and has plans to invest $3bn across all of his interests over the next three years.

But with one of the biggest land banks in the country (if not the biggest for a private investor), real estate will remain the crux of Agaoglu Group and the company has multiple new development projects planned in both residential and commercial.

Turkey’s construction industry is one of the largest in the world and is at the heart of the economy. The sector was worth $27.1bn in 2014, according to government statistics, representing 4.6 percent of GDP. About 10 percent of the working population is directly and indirectly employed in the sector, according to European International Contractors.

Under the government’s urban regeneration plan, some 10 million homes could be demolished and rebuilt, feeding the industry an almost never-ending supply of work. Rising income levels (the government increased the minimum wage by 30 percent from January) and lower interest rates (they were cut by 2 percentage points between March and July) are also fuelling demand for more and better housing.

“We can directly see the effect on the demand side,” Agaoglu says. “Only in August, our sales reached close to $170m.”

He has boasted that he will break sales records with his second large development currently under construction, Agaoglu Central Park.

Eighty percent of the project’s total area of 73,600 sq m will be green space, with the 1,155 residences resembling New York architecture. It has been nominated for the distinguished US Green Building Council’s Leadership in Energy and Environmental Design (LEED) gold certificate, as has IFC.

“[Achieving LEED] is not a criteria for us, it is a must because the environment is not something that belongs to us but our sons and daughters, our grandsons and granddaughters,” Agaoglu says. “So the LEED certifications are a must do for us and we will try to improve this even more in our new developments.”

With 30,000 property units already attributed to him, Agaoglu has undeniably been successful. But each of those projects has mostly targeted domestic investors and users.

The IFC demands foreign involvement. Relying on both domestic and international factors running in his favour for a sustained period, that will be no easy task.

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Fentoni 3 years ago

Good luck! The primary concern for international financial centers is stability and the recent political turmoil in Turkey has set them back decades in this regard.