Turkey: Part 1, national demand

April 30, 2007 | Affordable Housing, Economics, Finance, Istanbul, Turkey


On 25-26 April, I was a guest speaker at the enormously well-attended (800 registrants) Turkish Real Estate Summit in Istanbul, sponsored by Gyoder, a trade association originally formed of REITs but now a big tent comprising most of the real estate sector: developers, lenders, brokers, investors, and the myriad service providers whose booths are an invariable gauntlet between registration and lecture hall.

Turkey logo


I’d been invited by Gyoder, based on a recommendation given by Onur Oszan, now with Istanbul Capital.  I met Onur several years ago when I did a guest lecture at the now-defunct Fannie Mae International Housing Finance Services week-long symposium on US affordable housing markets, and we’d maintained email contact.


My visit was brief — 2½ days — and geographically limited — I went more or less straight from airport to hotel and back again.  (It also coincided with a period of intense furor as Prime Minister Tayyip Erdogan nominated another Islamic party member, Abdullah Gul, as President.  As the opposition party boycotted the first Presidential ballot, temporarily denying Mr. Gul election, from the English-language Turkish papers you would have thought the country was in the throes of constitutional or possibly military crisis — but then, America is unrecognizable in foreign newspapers too.



Turkish flags are everywhere, especially hanging like banners from apartment windows


Special bonus AHI alerts: Since my visit coincided with the start of a potential Turkish constitutional crisis — pure coincidence — that is now heating up this week, I’ll be posting addenda related to the political situation, if only to remind us how much we take political stability for granted, and how without it housing policy is extremely difficult.


During my visit I had the pleasure of spending two days surrounded by and listening to Turkey’s real estate best and brightest, an impressive fraction of whom had worked or been schooled in the US: among the leadership I encountered were graduates of Rutgers, MIT, UC Berkeley, USC, and Iowa State. 



Saluting our Turkish graduates!


So I was cocooned with the equivalent of Turkey’s Wall Street — Istanbul’s area code, like Manhattan’s, is 212. 



The Bosphorus Straits, controlling Russia’s access to the Mediterranean


Even with that observational bias, I gained some impression of the country, including the following:


  1. Turkey’s real estate market is in the midst of an arriving boom, driven by improved fiscal stability, general geopolitical confidence, and its new mortgage law.  More on this below.
  2. Turkish affordable housing policy lags far behind the country’s need.  Right now it is focused almost exclusively on new construction of for-sale homes, an intervention that’s understandable but very limited. 
  3. Turkey has a three-year window to create a more robust, diversified, and effective affordable housing policy.  In 2010, Istanbul will be the European Capital of Culture, and that is stimulating a renewed focus on urban beautification and regeneration. 
  4. Even though its political root stock is English, Turkey looks to America for business ideas.  I met a slew of folks who had been schooled, or worked, in the US, at Rutgers, UC Berkeley, MIT and elsewhere.  As Yavuz Cavesi, chairman of TEB and moderator of my panel, commented after hearing my presentation, “there’s no need to rediscover America; when you experiment you make mistakes, but we should make new ones.”



Cargo traffic flows continuously through the Bosphorus


Even granting that this was a seminar for the entire real estate sector — including tourism, shopping centers (Turkey’s infatuated with them, they’re all over the place), hotel and retail — it says something about the state of housing policy that my panel, on the second day, was divided equally between two speakers on “acquisition of real estate by foreigners” (the speakers were for it) and “affordable housing” (the speakers were for that too).



“Here’s how you make the pie higher.”


Background on Turkey’s housing situation.  When Nancy and I vacationed in Turkey more than a decade ago, the country was afflicted with perpetual hyperinflation, averaging nearly 100% annually, a rate so extreme vendors would change their Turkish lira into dollars overnight, so to reduce the erosion.  Such thinking and a runaway currency severely ramped real estate investment, particularly homes.  As reported last year (August, 2006) in Foreign Direct Investment Magazine:


Long-term housing loans are new to the Turkish banking system, introduced for the first time in 2003, and coincide with falling inflation. Plagued by high inflation for three decades, Turkey could not previously handle long-term consumer credits.


Since then there’s been a radical currency reform, with the old lira replaced in 2005 by the new Turkish lira (YTL) and (presumably) a massive dose of fiscal discipline.  YTL are currently 1.35 to $1 and inflation’s in the 8-10% range. 



Just knock six zeroes off … if you have six zeroes to knock off!


Fear of hyperinflation still overhangs the Turkish property economy:


Only German Aareal Bank and Eurohypo, specialising in real estate finance, have opened offices in Turkey and are providing long-term loans for the development of commercial properties.

Senay Azak-Matt, general manager of Aareal Bank Turkey, the first European bank providing long-term (at least seven-year) loans for Turkish commercial real estate investments, says the turbulence in Turkey’s real estate market has not affected business. “We make certain that borrowers earn foreign currency to be able to repay their loans in hard cash. Thus our bank carries no foreign exchange risk,” she says.


Not only is there no foreign exchange risk, there’s very little collateral risk, if the lending is against the borrower’s income stream rather than the property’s.  That isn’t really real-estate lending.


Hotels that borrow from the bank must remain open all year round and have foreign customers. All owners of Turkish commercial property (shopping centres, office buildings) rent out offices and shops in foreign currency to minimise hard currency risks – a carry-over from a financial crisis in 1994.


Still, fear of a return to the bad old days seems to be waning.  Macroeconomic reform has brought huge dividends; the economy is headed the right way, Istanbul (at least) is undergoing rapid growth and new construction of both offices and homes.  Like most developing nations, Turkey is urbanizing rapidly, as reported back in 1999 by the BBC Web site:


Thirty years ago, three quarters of the population lived in the countryside and a minority lived in major cities. Now, the opposite is true.


Since then, urbanization has continued unabated, as people flock to the cities for employment.  Thus there is a huge demand for housing, most of which is expressed through informal settlements.



Informal settlement in Istanbul, known as gecekondu


It also creates a huge need for new construction, as acknowledged by many of the panelists. 


Even as demand remains strong, supply has been boom-and-stall.


UPDATE: At week’s end (29 April 07), the generals issued a stern warning.


We will display our attitude if need be

The questioning of secularity has been the main outcome of the presidential elections in latter days. The Turkish Armed Forces have been apprehensively observing this situation. It must not be forgotten that the Turkish Armed Forces is a party in these discussions and is a strict defender of secularism. In addition to this, the TAF is opposed to the negative discussions taking place, and will openly display its attitude if the occasion arises. There should be no doubt in anybody’s mind in this regard.



As many as a million people may have marched


Today the crisis seems to be deepening:


ANKARA, Turkey (CNN) — Turkish Prime Minister Recep Tayyip Erdogan will address the country on Monday amid a deepening crisis prompted by a clash between secularists and Islamists over the country’s political future.


The move comes after Erdogan’s foreign minister, Abdullah Gul, insisted he would not withdraw his candidacy for the Turkish presidency despite opposition from lawmakers, military chiefs, business leaders and a massive anti-government demonstration in Istanbul on Sunday.


Gul’s nomination has raised concerns among Turkey’s secular establishment over growing Islamist influence within Erdogan’s government.


Protesters fear that Gul would use the presidency — a post with veto power over legislation — to assist his ally, Prime Minister Recep Tayyip Erdogan, in chipping away at the separation of state and religion.


People and markets, especially money, move faster than governments:


The Turkish stock market plunged 8 percent in early trading on Monday, The Associated Press reported, and the lira slid against foreign currencies in a reaction to the political tensions.


Personally, I predict Turkey will get through this — the last generals’ coup was in 1980 — but then, I’m an optimist.  Stay tuned.


[Continued tomorrow in Part 2.]