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Thu 1 Nov 2007 04:00 AM

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Turkish delight

Turkey's burgeoning real estate market is starting to attract international developers encouraged by changes in legislation.

There's a real estate boom in Turkey," Wolfango Piccoli, analyst for the Eurasia Group says. He is not exaggerating; this year Turkey is expecting US$3.5bn worth of foreign investment in the real estate sector, a steady increase from US$2.9bn last year and US$41.8bn the previous year. But with 50% of the population under 25-30 years old, many of whom are still living at home and a lack of building during the 1990s, the boom that Piccoli talks about is much needed.

In the last few years Turkey has seen an economic boom with an average GDP growth of 7% per year between 2002-2006 compared with just above 1% in 1998-2002, according to this year's country report by Standard & Poor's. (S&P). The analysts currently rate Turkey as ‘BB-/Stable'. A BB rating from S&P means investment there is regarded as predominately speculative, although it is considered the lowest degree of speculation.

The Turkish real estate market has enjoyed a significant growth both in the retail and domestic markets from foreign and local investment.

Economically the country has experienced a huge overhaul with S&P now describing it as "large and well-diversified". The automotive sector and mechanical machinery sectors have successfully grown over the last five years, as have the banking and servicing industries. "Banking has been very successful for foreign investment in the past four to five years and in the near future the energy and industry sectors will be attracting further foreign investment," says Piccoli.

The economic and political successes that Turkey is currently enjoying have not been easy to achieve and are far from over. Following its financial crisis in 2001, Turkey has embarked on a strict programme of macro-economic stabilisation and fiscal consolidation which has been aided by a financial support programme and a standby agreement with the International Monetary Fund (IMF) which S&P says, has "demonstrated a high degree of commitment" and "has made better progress than those of Turkey's peers in pushing the debt trajectory towards a more sustainable level".

But in May and June last year almost US$4bn in portfolio capital abruptly fled the markets which prompted a 25% depreciation in the lira and halted the brakes on the economic growth which fell to just 5% in 2006 from 8% the previous year.

Turkey's economy and political situation still remains vulnerable. "On the macro-economical side the indicators are relatively solid but certainly Turkey remains very vulnerable," says Piccoli. "It has seen significant economic growth but it is still very exposed to the global market because of its huge current deficit. It is also exposed to financial capital coming from abroad as currently 70% of the stock market in Istanbul is owned by foreigners, around US$90m, which can be taken out of the country very quickly," he adds.

More recently the political situation has been increasingly volatile. Last month oil prices surged as tensions increased dramatically between Kurdish and Turkish rebels in northern Iraq.

Despite its position the S&P report notes the "government's commitment to prudent macroeconomic policies", and adds that it "has consistently achieved its ambitious year-end primary surplus target of 6.5% of GNP" which has "bolstered confidence" in the government and helped to achieve an "unprecedented degree of monetary stability". The Turkish real estate market, however, has enjoyed a significant growth both in the retail and domestic markets from foreign and local investment.

According to experts, this growth is set to continue. As well as the huge generation of young adults still living at home, changes in legislation have boosted the market, attracting local and foreign investors. Five years ago the country passed legislation making it possible for non-Turkish residents to buy property.

Following the changes, foreign investment in the real estate market has exceeded US$7.2bn on an estimated 30,000 homes, according to the Turkish government. More recently, the government passed a second significant piece of legislation which has resulted in the country's first ever mortgage market, which allows local investors to buy in the retail market from January 2008.

"The real estate market is currently driven by the retail sector but the mortgage changes should help support the housing construction in the mid-term," says Richard Davies, head of Turkey for Jones Lang LaSalle, a leading real estate investment and advisory firm. Piccoli agrees, "From a domestic point of view the changes in law will certainly help steer further growth in the market but not in the long-term, because interest rates are high. In the long-term if interest rates were to fall, locals would find it easier to buy property."

As well as the change in law for foreign ownership, tourism is also a rising factor for the increase in developments in Istanbul and most notably in the coastal tourist resorts of Bodrum, Marmaris and Fethiye. "Tourism is certainly on the rise and Istanbul is now a trendy destination for many European and Middle Eastern holidaymakers. This is certainly attracting more investment and facilitating foreign operations in the country," says Piccoli.
In this year's Emerging Trends in Real Estate 2007 report by PriceWaterHouseCoopers and the Urban Land Institute, Istanbul is listed as first among 26 other European cities with the highest development outlook. Turkey's growing tourism industry and its effect on the market is also noted.

"Turkey is now ready to further tap its potential as a tourist market, and needs hotels to do this. Golf tourism is big in areas such as Istanbul, Izmir and the Aegean, while high-standard hotels are also needed in ski destinations such as Kartalkaya, Erzurum, Sarikamis and Kastamonu.

"Istanbul is on everyone's list but it is more difficult to get developments realised there. The major demand in large cities is for three and four-star hotels," according to the report.

As well as changes in its country's legislation, the Turkish government is committed to its real estate market, another reason for its growth. Davies says, "The government is wholly allowing foreign-owned companies to invest in real estate which is a key driver for investment into the real estate sector in the country."

It is not only the Mediterranean sun that is encouraging foreign real estate; the low cost of living is also proving to have a positive effect on the buying market, in particular for foreign investors buying second homes. On average house prices are typically 30-50% less than those found in other European countries and the cost of living is between 40-60% less than other European countries.

Within the local market, retail space is experiencing an unprecedented growth. "The Turkish retail real estate market is booming, 26 retail schemes opened last year and another 60 new centres are due for completion over the next two years.

"The main share is in Istanbul and Ankara but regional markets are also gaining in importance with 18 schemes due for completion in cities such as Bursa, Izmir and Antalya," says Davies. Notable retail investment projects include Istinye Park in Istanbul, which opened this year and focuses on the high-end retail market and Forum Istanbul, developed by Multi Turkmall, which will be the largest project in Turkey when it opens next year.

The government may be committed to the boom but so are developers, local and those from the Gulf region. "Middle Eastern investors are also taking on a larger role in Turkey," adds Piccoli. Current interested parties in the region include Emaar, Dubai Properties, Sama Dubai, Arcapita of Bahrain and Merrill Lynch via a local joint venture, Krea.

Emaar Turkey is a joint venture between Dubai-based Emaar Properties and local Turkish jewellery company Atasay Kuyumculuk. Its Toskana Vadisi housing project in the Buyukcekmece district of Istanbul is estimated to be worth US$700m and includes the construction of 555 luxury villas.

At the May launch of its Tuscan Villa Houses in Buyukcekmece, Dr Nader Mohammed, regional managing director of Emaar International said, "Turkey is one of the most promising markets with a strong growth potential, especially driven by the tourism sector." The company's commitment in Turkey is clear as it plans to invest up to US$10bn over the next five years in the country.

Subsidiaries of Dubai Holding have also displayed interest in the Turkish region. Sama Dubai is planning a development in the Business District development, which is due for completion in 2012. It includes 365 residential units, a five-star hotel, 81,000 sq m office space and a retail and entertainment boulevard.

With Middle Eastern property giants such as Emaar developing large-scale projects, and more projects expected to follow, the future of Turkey's real estate sector is undoubtedly bright.

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