Stepping out of a taxi into Istanbul’s bustling Taksim Square, the driver hands over a note worth one million lira. Don’t get excited. A couple of these might get you a coffee in one of the city’s traditional backstreet coffee shops – but not in one of its trendy chichi cafés.
While the note might not ruffle high flying investors used to dealing in telephone number balances, they would be wise to take heed of what it represents. The note, an old-lira throwback to the days before Turkey’s currency was viciously devalued, is worth less than its cousin, the 10 new lira note. And it is one of the few reminders on an otherwise polished high street of the devastating blow dealt by the 2001 economic crisis.
Having weathered an earthquake in 1999, it was the tectonic shift in its financial markets two years later that finally tipped the country into its worst economic crisis for 20 years. Faced with a rapidly retracting economy, the national psyche took a big hit.
Aftershocks hit property market
The aftershocks deeply unnerved the country’s fledgling real estate market. Property investment was either postponed or cancelled as major firms cut costs and jobs.
It was concerns over the government’s ability to implement constitutional and economic reforms to join the EU, plus a corruptionscandal, that precipitated a depreciation of the Turkish lira, and a steep rise in interest rates.
Four years on, unemployment, which jumped from 6.3% to 10.4% almost overnight, continues to languish at that level. Vacancy rates in Istanbul remain at 20% – around 290,000m2 of space – and rental levels at $180 per m2 for best accommodation still trade at a 6% discount to 2000. These have been further sapped by the addition of the Kozyatai and Bostanci office developments on the Asian side of the city. As a result, investors still view Istanbul as a risk, and yields remain high, although untested by any recent transactions, at just over 16%.
Yet to write off Turkey would be a mistake. Recovery is on its way on the back of theIMF- imposed recovery programme following the crisis. Shopping centres remain high on European investors’ hit lists. A quick walk down Istanbul’s lively Iskital Street – the city’s swankiest high street – is enough to confirm OECD’s economic growth figure of 5% pa. Inflation has fallen dramatically, and despite uncertainty among EU leaders over accession talks with the country, the economy is still receiving a major boost from the country’s on/off marriage with the union.
Feroze Bundhun, managing director of CBRE’s operations in Turkey, believes that, regardless of the outcome of the talks, the positive effects are already being felt. “If, over the next months, Turkey is still negotiating, it will be great, but there has already been a lot of positive activity, and provided that continues, Turkey will benefit regardless.”
Indeed, sitting in his thoroughly modern, air-conditioned offices in one of Istanbul’s newer corporate developments, it is easy to believe that property’s vital statistics are already rallying. CBRE research shows rental growth of 7.1% this year, putting the Istanbul market on the same footing as Moscow, Oslo and Manchester.
For example, the year-old Tekfen tower in Levent, Istanbul’s swishiest business district, on the European side, is now fully let to blue chip clients including Mitsubshi, Pepsi and British Airways. The tower boasts rental levels of $18 per m2 per month – almost twice the city’s average – and tenants on long leases. Bundhun, who let the building, says he has received offers to buy it “at ridiculous money”.
Steps to ward off repeat crisis
International banks also appear satisfied that the government has sufficiently insulated the country’s economy against a repetition of the 1999 crisis, launching one of the biggest ever waves of mergers and acquisitions among their Turkish counterparts.
In April, Fortis agreed to buy Disbank for $1.2bn. Four months later, General Electric paid $1.8bn for a 25.5% stake in Garanti bank – the country’s third-largest private bank. Other transactions include Unicredito of Italy and Koç holdings, which will pay a total $1bn for a controlling stake of Yapi Kredi Bank, and BNP Paribas, which paid $216m to buy a 50% stake in Turk Ekonomi Bank.
Although these are not strictly property investment deals, they bring interesting real estate opportunities to the fore. The government is now selling off the banks’ non-performing loans, worth $1bn. These could flood onto the market, says Firuz Soyuer at Istanbul-based DTZ Pamir & Soyuer. “In the non-performing loans, no-one knows the quality of the assets, but probably around 12% of the portfolio is interesting,” he says. These represent around a fifth of the total value of the government’s sales, and will probably go to local players, he adds.
But with recovery in the occupier market still shaky, will there be sufficient interest in these assets? Soyuer believes that those willing to take the leap will reap the benefits. “Tenants have recovered. There has not been a major boost and the service sector is still quiet, but demand is stable,” he says. “Last year was the start of the recovery. This year it will increase.”
This is something not lost on Deutsche Bank. Dmitri Raptis, vice-president at Deutsche Bank Real Estate’s Opportunities Group, believes that, if the financial reforms under way continue, leveraged investors could get a toehold in a real estate market that is being bolstered by increased political stability and one of the highest rates of population increase in the region. This could see yields compressed another couple of points.
Raptis expects to complete preparations for the launch of a $1.8bn opportunity fund in the next two to three months that will, among other things, consider investment in Turkey. He says the fund will look for returns above the magic 20% to mitigate the risks associated with the country. “There is not a great degree of existing quality stock, so we are mostly looking at development, mainly in the residential market, but also retail and leisure.”
Offices could provide the best investment opportunities but still remain off even DB Real Estate’s radar. “There is the supply, but the vacancy rate outside the central business district is quite high,” says Raptis. He says he is negotiating on a couple of residential development deals in the city, and is prepared to take the development risk. He remains vague about DB Real Estate’s commitment to the region, saying it does not have a particular target or allocation for Turkey. However, he hints that it will be less than $400m.
That same degree of caution is not being applied to the retail market. Two major deals in recent months show not only the level of international interest but also the lengths some companies are prepared to go to get exposure to the country’s fast-growing economy.
In the first, Dutch fund Corio, unable to acquire direct property, paid $192m for a 46.9% majority share in Akmerkez GYO, a local fund that owns a 180,000m2 mixed-use development in the Beskitas area. The scheme has two office towers and one residential tower, but the jewel in the crown was no doubt the triangular Akmerkez shopping centre, which boasts international retailers such as Marks & Spencer, Diesel, Mango and Zara. Even at the height of the recession, it boasted 97.7% occupancy. The net initial yield was 9.8%.
In the second, German open-ended fund CGI paid $98m to forward fund Dutch developer AM Development’s first Turkish retail project, Forum Bornova in Izmir.
CBRE says more deals are in the pipeline, and says that it has advised a French consortium on the sale-and-leaseback of six Carrefour shopping centres. Terms have recently been agreed for $300m, representing an initial yield of between 10% and 13% across the portfolio.
These acquisitions have undoubtedly forced a degree of yield compression. DTZ’s Soyuer points to the sale of Hilton to Aydin Dognan — who he describes as Turkey’s Rupert Murdoch. The $225m paid represents an initial yield of 4-5%. “Yield compression is now forcing investors to consider alternatives, and developers are starting to look at projects,” he says.
This can only be good news for Turkey as it strives to become a truly European investment choice.
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Deutsche Bank Real Estate is poised to enter the Turkish market and expects to make a serious purchase within the next two months. Nils Hübener, head of acquisitions western and southern Europe, says it will focus on shopping centres. No limit has been set on investment, and Hübener says the planned purchase will be “just a taster”. In total, around $610m has been set aside for southern Europe. But Hübener hints that the acquisition of a shopping centre for around $100m will help DB Real Estate diversify without over-exposing it. Returns remain hard to judge. Neither of the two recent deals, involving Dutch fund Corio and CGI (see main piece), tested the market. Using an average rent, both represent initial yields of 10%. “Yields in the provinces are still double digit, but one of the best, such as Akmerkez, could easily be single digit,” says Hübener. But, he adds: “I don’t see any reason why Turkey could not come into line with Portugal at 7-7.5%, or even Spain at below 7%,” he says. “But there is still a lot of market risk, untransparencies and virtually no product.” With only 24m2 of floorspace per 1,000 people, and two-thirds of the population under 35, it is easy to see how demand will fuel yield compression. Economic stability is returning, and reforms to introduce mortgages should boost levels of disposable income. Hübener says, however, that it can be difficult to get a clear picture of the market. “Purchasing power data just doesn’t exist,”he says. |
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“Do business in Turkey, but come in with your eyes open,” says Peter Cook, deputy consul general at the British embassy, and head of the UK Trade & Investment department in Istanbul. More than 40 UK companies have heeded this advice, and the UK is now Turkey’s fifth-largest source of foreign investors. Bilateral trade reached £4.4bn in 2004. Here is how to follow in their footsteps: Red tape Form filling and bureaucracy remain the biggest barrier to investment. “Turkey is still perceived as a difficult market,” says Cook. Faced with the option of spending weeks in a queue, some try to cut corners. “While officially we can’t tolerate the alternative, we understand how companies get frustrated and why business ‘fixers’ are employed,” says Cook. Property ownership In theory, foreign investors can own property. But in June, the country’s Supreme Court enforced a size restriction. The government is in the process of overturning this, but Cook’s advice is clear: do not try to do business alone. “In Turkey, you need a partner to help you,”he says. Partnership It may sound obvious, but take time to choose the right partner and allow for an element of risk. “One minute he could be flavour of the month with the government, the next he could be hauled up before them,” says Cook. “A lot don’t believe in business fidelity”. Yased — www.yased.org.tr — a private organisation made up of business professionals from international companies operating in Turkey, has been set up to help stimulate foreign investment. Banking reforms The latest tranche of foreign investment in the banking industry will be a key barometer for the country. It should help release capital in the sector, ensuring greater management and movement of capital in and out of the country, and give international investors a greater degree of security over their equity. Cook says reforms are also under way for mortgages, pensions and derivatives that, in turn, will positively affect the housing market, improve the surveying of buildings and bolster Turkey’s insurance industry. Labour It is difficult to hire and fire, so it can be difficult to extract yourself if the worst happens. The country is also fiercely nationalistic and wary about foreign nationals taking jobs away from the locals. IMF reforms forcing privatisations have become a sensitive issue among the country’s trade unions. The side effects can be frustrating for business. Cook cites the example of a Japanese firm that wanted to bring in a dozen engineers to train its Turkish workforce, but the government refused to hand out work permits. “The Turkish government said, why can’t you fly the workforce to Tokyo?” European Union Turkey’s future role in the EU is uncertain, but the possibility of stronger links has been a major boost for the Turkish economy, and spurred international companies to reopen their operations in the country. Both the business and political community, however, believe it will be another 10-15 years before Turkey actually becomes a member of the EU. Black market It is a taboo subject, but Cook says the country’s black market could account for upto 30% of the national income. The IMF, backed by the international community, is demanding moves towards more indirect taxation, such as that based on consumption, airport departures and so on, which are easier to measure and collect. Security Terrorist attacks on 20 November 2003 against the British consulate in Istanbul and the HSBC headquarters killed 33 people. Small-scale terrorist attacks have been a regular feature since, with targets normally tourist resorts on Turkey’s coast. However, Cook says this should not deter companies from coming to the country. To reinforce this, the British consulate in Istanbul has been built at the same location as the previous building. “We could have built a fortress up in the hills,” says Cook.”We opted to stay put.” |
