Large players mean yield compression in Turkish real estate

Large players mean yield compression in Turkish real estate

Turkey has so been able to ride out the sub-prime crisis. True, some of the US banks pursuing deals here have had to withdraw and true too that some of the buzz has gone from the market. But yields had compressed dramatically in the two years to autumn 2007, with many professionals arguing that the market had become overheated.

Part of the reason for Turkey’s relative impunity is the embryonic state of its mortgage market. Despite many promises, as of mid-February 2008, the government had still not enacted a new law formalising mortgages: current housing loans are basically medium-term consumer credit.

But another reason is the underlying demographics of Turkey. The country has a population of 71 million, according to the new series released by the Turkish Statistics Institute, rising by around 1.5% per year and expected to reach 90 million by 2026. It has one of the most vigorous economies in Europe and the OECD, with GDP growth forecast to grow 4.5-5% per year through the next decade. And it is a magnet for foreign investment. This has been running at around $20 billion per year in 2006 and 2007, and, with major privatisations on the agenda, the prospects for 2008 are good.

This investment has been buoyed by high interest rates, falling inflation and political stability after last year’s general and presidential elections. It has led to a shortage of good quality office accommodation in the Levent-Maslak business axis of Istanbul, while the demographics of population growth, internal migration to the cities and falling family sizes are driving demand for housing.

The last 15 months have seen some particularly large ticket deals. 2006 had ended with the sale of the Cevahir shopping mall in Istanbul, whose 3.8 million square feet of gross leasable area make it the largest in Europe and the fourth largest in the world, according to Forbes. Then, two prime sites in Istanbul sold at striking prices:

• Sama Dubai Istanbul Real Estate, a unit of Dubai Holding, won an auction for a 46,241 square meter site in Levent owned by the Istanbul Transportation Authority (İETT) with a bid of YTL 980 million ($706 million).
• The Zorlu Group bought a plot of land in Istanbul owned by the State Highways Authority for $800 million

In the past year, the action has been mainly institutional. Those entering the market include international real estate developers such as Corio, Multi Corporation, and Redevco (all from the Netherlands), Primamerica (US) and Merrill Lynch (via local Krea). Active too are a range of Gulf investors, including Arcapita of Bahrain and Emaar of Dubai.

All this has led to price rises and yield compressions. Investments in shopping centres have been continuing throughout the country, causing questions as to whether some markets have sufficient shoppers to justify the recent mushrooming. DTZ Pamir & Soyuer doubt this, pointing out that as of end-October 2007, the average GLA per 1,000 inhabitants is 68 sq m for the 29 provinces having retail centres and a similar level in Istanbul, well behind the European average of 205 sq m.

CB Richard Ellis reports the following transactions in retail:

• Corio’s acquisition of the Bursa Shopping Centre (70,000m²) from Maya Holding at a reported yield of around 8.0%;
• Apollo Real Estate has agreed terms for the acquisition of the Merter Carrefour for €700mn to reflect a 7.0% yield;
• The Tahincioglu group has agreed terms for the sale of the Palladium in Kozyatagi;
• Prestige Mall was acquired by Queen Group of Ireland for $55 mn.
• Istiniye Park opened for trade in September, 2007, and is considered to be a possible candidate for floatation on the Istanbul Sock Exchange (IMKB).

Several other developments are in the pipeline, either at design or construction stage. Attractive investment opportunities can still be identified in the sector.
In office, by contrast, the problem is one of supply. Can Elgiz, whose Giz Insaat has built a number of the more prominent office centres in Istanbul, says the problem is identifying new sites. He argues that he can sell off plan, both to potential users and those who see investment in office space as highly profitable.

There are currently few vacancies in the Levent area and rental levels have reached $30/m²/month for shell and core accommodation. Further north in Maslak – shortly to be served by Istanbul’s metro - rental levels are up to $18/m²/month with vacancy rates below 10%. On the Asian side of the city, vacancy rates are slowly decreasing following previously high levels of about 20%, according to CB Richard Ellis.

A recent institutional transaction involved Is Bank Real Estate Investment Trust selling its 50.0% interest in the Kanyon office tower for $67.5mn, equivalent to $4,000/m². Other areas to attract interest include logistics and industrial premises.

The residential market too has been particularly active, driven by demographics and the rise of a Turkish middle class. TOKI, the Prime Minister’s Mass Housing Fund, has been spearheading a wide range of developments. In the past five years, it has helped deliver around 500,000 units of affordable housing, often working together with private sector developers. TOKI works throughout Turkey, but a key area for its interest is Bahcesehir west of Istanbul, site of one of Turkey’s most successful new towns. Here, private sector developers such as Eston, work alongside and sometimes together with TOKI, while areas such as Maslak are being transformed by Emrullah Turanli’s ubiquitous Tasyapi. This has the striking 1,790-unit Mashattan project in Maslak and is also developing the dense Mecidiyekoy Tower project on land belonging to newspaper magnate, Aydin Dogan, as well as another 25 projects in different parts of Istanbul.

The winter has seen a slight slowing in home sales, but, with the renewed economic growth expected in 2008 and the launch of a proper mortgage market, developers say they look to a recovery this year.

Outside Istanbul, the emphasis is mainly on retail and housing, while along the coast in Antalya, Marmaris, Bodrum and Didim foreign interest remains as high as ever. But the headlines are less likely to be about this than about a further increase in number and diversity of international investor players and the sizeable deals they make with developers of prime location property in Istanbul or Ankara.

An article for Ankara, the Professionals’ Reference, 2008, by the Ankara Business Centre, contributed by David Tonge, Managing Director of IBS Research & Consultancy (www.ibsresearch.com), and Senior Adviser and Representative for Turkey for the London and Oxford Group, a London-based investment bank (www.londonandoxford.com)