Turkey’s thriving home-building industry has had a reversal of fortunes as the national economy slows down after four years of robust growth. The shift in global funds away from emerging markets, a devalued domestic currency, greater spending on imported oil and natural gas, increased interest rates on housing loans, rising inflationary expectations and concern over the conflict in the Middle East combined to hit the economy and batter the housing industry.
Such developments are hampering the nation’s construction industry, which fuelled the boom and made Turkey the fastest growing economy among the Organisation for Economic Co-operation and Development (OECD) countries in 2004 and 2005. But the development of new, modern shopping centres, business offices and hotels remains strong, as the real estate market attempts to bounce back from the crisis.
In the first quarter of 2006, the construction industry grew a mind-boggling 25.9%, after expanding 21.5% throughout 2005. The growth was spurred by government spending on big public sector projects, such as the $4.1bn Istanbul Marmaray, one of the world’s most ambitious urban rail commuter projects, and outlays on low-cost public housing projects in the country’s 81 provinces.
Then in May, severe fluctuations in global financial markets, sparked by an increase in US interest rates, jolted Turkey’s economy. Jittery foreign investors withdrew an estimated $14.5bn in funds from the Istanbul Stock Market in a month, as share prices tumbled by a third, and the new Turkish lira lost 17.3% against the US dollar in 10 days.
The crisis prompted the government to rescind a 15% withholding tax on foreign purchases of Turkish securities to lure back the investors’ funds. The Central Bank of Turkey raised interest rates on overnight borrowing from 13.25% to 17.50% to prevent further haemorrhaging of the lira, bring inflation under control and stabilise the market.
No mortgage law
Matters were made worse by the failure of the national assembly to enact legislation that would create a legal mortgage system in Turkey. The mortgage law, which was supposed to have come out last autumn, would have allowed the country’s banks to securitise housing loans and tap long-term foreign funding for housing finance to encourage home ownership and stimulate economic growth.
The changes in the economic conditions motivated Turkey’s 49 banks to raise yearly interest rates on 20-year housing loans from 11.88% in mid-May to as high as 28.2% in mid-July. Potential homeowners dropped requests for housing loans like hot potatoes, bankers said. Demand for housing loans has plunged by 90% as the interest rates have gone up, the general manager of a major Turkish bank noted.
“The market isn’t as strong as last year and I get a whiff of recession in the housing sector,” says Bülent Önen, regional manager at Tepe Construction Industry, one of Turkey’s leading real estate developers. “The market is very sensitive to interest rates. Prices for homes are artificially high.”
But demand for housing is still far outstripping supply, despite the slackening rate of sales, other experts said.
The law on mortgages was postponed to the new legislative year, which begins on October 1, due to a backlog of legal reforms that had priority for the government.
“The mortgage law will eventually come out,” said Haluk Sur, president of GYODER (the Association of Turkish Real Estate Investment Companies), in an interview with fDi. “It is like an arrow that has left the bow.”
Mr Sur says that the banks raised interest rates because they could no longer sustain the low-cost financing of the housing sector without an effective mortgage system. “They were willing initially to incur maturity mismatches by borrowing on the short-term and lending on the long-term to capture a greater share of a vibrant market.”
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.
Housing loans reached $12.199bn in the first five months of 2006; that is 9.5% of all bank loans and 37.1% more than the housing loans in the entire 12 months of 2006 (see table, page 56).
GYODER was expecting six million new homes to be built in Turkey by 2016. It predicts that Turkey’s annual housing loan market could swell to as much as $60bn annually when the mortgage system is operating in full swing.
Steel and cement
The construction industry has been hurt further by rising cement and steel costs. The price of steel increased 65% and the cost of ready-made concrete rose threefold since May because of the huge domestic demand for the building materials.
The crisis in the housing sector could jeopardise 193,792 housing units – mostly low-cost homes for low-income families – that the state housing development administration (TOKI) tendered in the past year in 278 regions across Turkey, government officials warned. It could also cripple private contractors that are developing and building the projects on a revenue-sharing basis with TOKI, they said.
“My responsibility is to protect our contractors. If they fail, we will go down with them. We will go to jail, and the responsible politicians [who started mass housing projects] will be indicted before the Supreme Court,” TOKI president Erdogan Bayraktar reportedly told a emergency meeting of private real estate developers and contractors working with the housing administration.
In response to the crisis, the government eased payment conditions for contractors working with TOKI and lowered their tax obligations. It also pledged to provide cement at below market prices from a state-controlled cement manufacturer and promised to import low-cost construction steel.
Experts warn that excessive bank borrowing could be the undoing of many construction companies. “I have encountered many crises in the 16 years I have headed my company, and have learned that companies using bank loans get wiped out, while those using their own capital remain standing. The same will happen this time,” says Serdar Inan, chairman of Inanlar Insaat, an Istanbul real estate development company.
The crisis in the housing sector, strangely, has not affected the market for commercial properties, where many foreign companies are the big investors. A surge is taking place in the building of new offices and shopping centres, particularly in the outlying areas of Istanbul, where new US-style suburbs are mushrooming.
Turkey had 93 modern shopping centres as of June 30, 2006, and 26 others were under construction, according to trade group the Turkish Council of Shopping Centers.
All this is strange in a country that introduced the concept of shopping centres to the world. The 15th-century Covered Bazaar is still the world’s biggest emporium with more than 4000 shops on 58 streets in a labyrinthine structure of connecting markets in central Istanbul, selling jewellery, furniture, garments, leatherwear, ceramics, carpets and other home textiles, and serving tourists and native customers who arrive on foot.
As a result of a building spree that began 20 years ago, Istanbul, with its 14 million population, now has more modern shopping centres than most European cities – 39 in all, and 16 more under construction. New York City, a metropolis of greater wealth, has 57 malls. Many complexes are mixed-use sites (a combination of shopping centres, office buildings, residences and hotels).
In May 2006, the state-of-the-art Kanyon Shopping Centre opened in Istanbul’s business district of Levent. Inspired by the forms of a natural canyon, the winding, contoured Kanyon is an open-air emporium. Its 160 shops sell mainly luxury foreign products and well-known Turkish brands. The mixed-use project, which includes business offices and an in-city residence, was designed by Jerde Partnership of Los Angeles, California, the Arup Group and Tabanoglu of Turkey, and was developed by Turkey’s Eczacibasi Holding and Is Real Estate Investment Company.
But there is still wide scope for the development of real estate finance. “The real estate market is still premature and the presence of financial institutions is still limited,” says Hakan Kodal, general manager of Yapi Kredi-Koray Real Estate Investment Company, one of Turkey’s leading real estate developers.
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.
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.
Aaereal has so far committed $322m to Turkey since entering the domestic market in 1999.