Geopolitical turmoil has so far failed to destabilise a real estate sector that presents significant investment potential
It is currently a country mired in internal and external conflict and upheaval. Fighting a war on two fronts against both Islamic State and Kurdish militants, Turkey has in recent months been battered by terrorist attacks, resulting in the death of hundreds of its civilians. More than 2.5 million refugees have fled to Turkey since the start of the Syrian conflict. On top of that, a perceived lack of action by President Recep Tayyip Erdoğan against Islamic State combined with an increasingly authoritarian demeanour has left the country looking isolated.
It is perhaps therefore surprising that Turkey sitting on top of Knight Frank’s Global House Price Index, which measures residential property price increases, for the fourth quarter in a row. National house prices have almost doubled over the past five years and rocketed by 18 percent in 2015, massively outstripping the global average of about 3 percent. In Q1 of 2016, that growth waned slightly, but at 15 percent, was still comfortably ahead of nearest challengers Sweden and New Zealand.
Explaining this slight dip, Kate Everett-Allen of Knight Frank’s international residential research department says: “Security concerns, Russian sanctions (following the downing of a Russian fighter jet by the Turkish military in November 2015) and mounting pressures on the lira are curtailing investment despite high demand and low supply characterising the wider property market.”
Adding to the challenges was July’s attempted coup, which although was deemed a failure, served to rekindle political concerns enough to see a concomitant negative impact on the markets. In spite of this, Colliers reports that while the economy has slightly disappointed expectations so far this year, growth is still creeping gently northwards. Year-end annual growth expected to be in the region of 3.5 percent.
Understanding this is easy part. The harder part is explaining why a country with so many apparent problems has been at the top of the league in terms of house-price increases for more than a year.
According to Tuğra Gönden, managing partner at Cushman & Wakefield’s Istanbul office, it is precisely the
maelstrom sweeping through the region that is making property in Turkey a sought-after investment avenue. “Investment in residential units has always been popular with individual investors as it serves as a social security and pension scheme in a way,” he explains. “Especially in times of volatility, it is seen as a safe haven as the title deed registry and ownership regulations in Turkey are very well developed.”
Meanwhile, the troubles in nearby Iraq and Syria are supercharging demand for property in what is seen as the region’s closest safe haven, explains Gönden. “Terrorism and troubles in neighbouring countries aren’t really having a negative effect in Turkey. On the contrary, buyers from neighbouring countries have been on the top of the foreign buyers’ list.”
In the first quarter of 2016, Iraqi buyers accounted for 19 percent of house sales to foreigners in Turkey, more than double any other nationality, according to KPMG research. In line with the Turkish housing market’s seemingly counter-intuitive theme, where being next to a war-zone is an advantage, the country’s position in an earthquake zone and a lack of quality in housing stock also play their parts in inhibiting supply of sought-after, quality housing and therefore driving up prices.
“The majority of residential supply will be of poor quality and won’t meet most recent earthquake codes, and Turkey consistently scores lowest in the OECD Better Life Index in terms of housing,” says Gönden.
Meanwhile, recent legislative manoeuvres by the Turkish government to make it easier for foreign buyers to purchase homes in Turkey have also helped propel the market, according to Julian Walker, director at Spot Blue International Property, which specialises in selling Turkish property to foreign buyers. “International demand in Turkey has been consistently strong since the removal of the country’s reciprocity law in May 2012. This change, which allowed most foreign nationalities to own property freely there, in particular has attracted increasing numbers of investors from the Gulf states,” he adds. “Today, Turkey’s foreign market is predominantly composed of investors from Iraq, Kuwait, Saudi Arabia, the United Arab Emirates and Afghanistan.”
The European Union’s cool attitude to welcoming Turkey into its fold has worked in the country’s favour in these turbulent times, suggests Walker. “Encouragingly, [Gulf state] nations are less affected by the upheaval in the EU and should continue to support Turkey, which being a largely Islamic culture and nation, they regard as a safe haven and bridge between the East and West.”
The Turkish government is doing all it can to carefully nurture this fruitful property growth spurt and encourage investment from outwith its borders. Aside from removing restrictions to foreign buyers, it is keen to offer tax breaks and better terms for immigrant workers. In June 2016, Deputy Prime Minister Nurettin Canikli unveiled draft laws to improve investment conditions, which included reduced tax rates for foreign firms setting up and purchasing real estate. Canikli also announced plans for a series of regulations that would improve employment conditions and opportunities for foreigners.
“At the same time, Economy Minister Nihat Zeybekci announced that the Turkish cabinet was set to offer citizenship to foreigners who buy a number of properties in Turkey,” adds Walker.
Fiscal flexibility also plays its part. “Foreign investors favour Turkey’s flexibility with currency,” he adds. “While the Turkish lira remains the currency used for everyday transactions, real estate in Turkey is often also sold in euros, dollars and sometimes sterling, giving an international buyer options and presenting opportunities to minimise exposure to currency rates.”
While the rising prices are, naturally, giving rental yields a bit of a knock, they are still healthy in European terms. “Turkey, or more specifically Istanbul’s, relatively low property prices, albeit in an ascending market, help to maintain healthy rental yields,” explains Walker. He highlights a May 2016 survey carried out by London-based financial technology company World First UK, which revealed that Turkey offers the fifth-highest rental yield of all European countries. “With an average yield of 6.1 percent, it is not far behind the Netherlands in first place with 6.6 percent.”
In Istanbul, the most profitable yields can be found in smaller apartments, according to residential property analysts Global Property Guide. In the salubrious and expensive Besiktas district, a 120-square-metre apartment tends to cost about USD4,140 per square metre, offering a rental yield of 3.3 percent, while a 60-square-metre apartment costs just USD2,800 per square metre, netting a rental yield of 5.5 percent. The best rental returns in Istanbul are however found in the bustling Beyoglu district, famed for its art scene and nightlife. Yields here rise to 6.2 percent for a 50 square meter unit.
Istanbul is unsurprisingly a major focus for new development. According to KPMG research, 35 percent of all foreign house purchases this year have been made in Istanbul. The city is Turkey’s “economic heart”, says Gönden, as well as being the most developed market and “ever growing in large part due to domestic migration.”
After Istanbul, Antalya (the city and province) is the second hottest spot for international investment, followed by the Bursa province, notes Walker. As far as the nature of the stock goes, condominiums and gated communities are significant. “The vast majority of residential projects will be in condominium-style ownership structures,” says Gönden. “Developers will typically agree on a revenue share of physical unit share deal with the land owner and sell offplan to finance their project. Large-scale projects will often be gated-community-type schemes of sometimes up to 5,000 units or more, especially when they’re less central.”
Walker paints a similar picture, although suggests that developers from nearby countries might become increasingly involved in Turkish real estate. “Development in Istanbul and the coastal resorts is predominantly done by Turkish builders. However we are seeing Gulf developers, from for example Qatar or the UAE, taking on projects in Istanbul. These are typically gated residential communities in the Istanbul suburbs.”
The Turkish construction sector grew its turnover by 4.5 percent in the last quarter of 2015 compared to the previous quarter. Year-on-year, this growth rises to 10 percent for the same quarter, but this eagerness of developers to dive in and make the most of the boom poses the risk of a bubble, according to some. Unusually, however, it is not unwise borrowing by homebuyers that might be inflating this bubble. Borrowing by Turkish developers constitutes almost a fifth of the country’s corporate loans. As Istanbul-based banking analyst Ercan Uysal of research company Integras puts it, “Mortgages are not the problem. Developer leverage is.”
Gönden cautions that the situation must be closely monitored. “Current supply is poor and demand remains strong and seems sustainable for the long term,” he says. “However, increases in price-to-rent multipliers (of up to 18x) and price-versus-median income (up to 8.6x) need to be watched carefully.”
Turkey is unique in that total mortgages only reach 6 percent of GDP — much less than other countries, where this figure can reach 60 percent. Because of this low ratio, the Turkish economy is pretty well insulated from the vagaries of the property market. “Such a ‘bubble’, should it occur and burst, would not have anywhere near the impact seen in other markets during the crisis in 2008,” claims Gönden. For a country in the midst of so much upheaval and conflict within its borders and on its doorstep, Turkey harbours more than a little hope.
Developer: Erkan Insaat
Size range: 66 to 290 sqm
Number of units: 446 apartments in 20, 22 and 24 storied blocks
Price range: USD187,000 to USD1.1 million
Completion date: Q1 2017
X-Factor: Balconies for all apartments and special gardens for common use. Amenities include indoor and outdoor swimming pools, playgrounds, a gym, a sauna, a steam bath and multiple cafes and restaurants. Car park for 750 cars.
Apartments near Taksim Square
Size (Avg): 200 sqm
Number of units: 122
Price range: USD640,000 to USD1,329,600
Completion date: Summer 2017
X-Factor: Located just 5 minutes from Taksim Square in one of Istanbul’s most popular and cosmopolitan areas. Residents can enjoy pilates classes, saunas, steam rooms, an indoor pool and fitness centre, as well as concierge services and meeting rooms.
Developer: KAT/Kuzu Group
Size range: 89 – 399 sqm
Number of units: 631
Price range: USD 660,000 – USD4million
Completion date: July 2017
X-Factor: The only premium real estate development in the city to be based right on the coast, with uninterrupted and spectacular views of the Marmara Sea. Each unit has its own private terrace.
4 bedroom villas
Size (Avg): 462 sqm
Number of units: 12
Price range: USD617,000
Completion date: Available now
X-Factor: These 12 villas are installed with very latest technology such as a noise-free gear drive pump system, which works using renewable sources and provides 85% of the energy required for each home.
Size: 1610 m²
Number of units: 1
Price range: USD4.579.163
Completion date: Available now
X-Factor: This sea-view detached villa is close to the beach and with easy access to the many social amenities like local markets, cafes, restaurants, parks, public bazaar and public transportation.
Developer: Aksoy Holding
Size (Avg): 580 sqm
Number of units: 75
Price range: TBC
Completion date: Summer 2017
X-Factor: In addition to a 150 yacht marina and a boutique hotel, Epique Island will also be home to 75 luxury villas, built in three different concepts. Each has a swimming pool, pool-side cabana, sun terraces and private beach access.
The full version of this article appeared in Property Report magazine, issue 137.