Exciting long-term development scenario
A house is still viewed as the preferred investment alternative as per recent public surveys and Bekir Cumurcu, GM at Nurol REIC, agrees that "housing is a safe investment area and consequently a major form of wealth holding". A pre-2001 crisis study conducted by the Capital Markets Board (CMB) suggested that real estate accounted for 86% of the value of overall assets held by the Turkish people.
Robust GDP growth, favourable demographics and changing consumption habits suggest that demand for the property sector will remain strong for the foreseeable future. An already highly urbanised population of around 73m is growing at a rate of 1.28% pa. The rate of urbanisation was 64.9% in 2000, and is predicted to be 68.8% in 2006, 72% in 2010 and 75% in 2015. Half of the population is under the age of 26 and the average household size is declining, with the compound annual growth rate (CAGR) of the number of households forecast at 2.8% for the next decade.
After three years of stagnation, Turkey's real estate market has heated up since mid-2004, fuelled by improving economic fundamentals and widespread hopes about the country's eventual accession to the EU. Along with the economic recovery property prices have recovered from their post-crisis lows.
In a lower inflation and real-interest-rate environment, the property market should benefit not only from the channeling of funds from the previously higher-yielding fixed-income instruments, but also from the introduction of mortgage schemes in the mid-term. Availability of longer-term consumer financing at historically attractive rates has unleashed and will continue to unleash the pent-up demand in the industry as real estate is a rather lagging sector of the economy. Currently long-term housing loans have reached $7.7bn (€5.9bn) and constitute 2.48% of Turkish GNP (compared with 0.4% in 2003).
Haluk Sur, head of the Association of Real Estate Investment Companies (GYODER) predicts the volume of housing loans to reach $76.5bn and make up 15% of the GNP by 2015. The wider availability of mortgages in the mid-to-longer term will certainly raise affordability levels and increase demand for better housing across the price spectrum, providing a further boost to the sector.
As life assurance and private pension fund schemes are rather underdeveloped in Turkey and banks have certain restrictions on property holdings, real estate investment companies (REIC) have taken the lead in the institutional real estate investment market. With their professional, transparent, liquid and diversified structure, REICs will benefit to a great extent from the prevailing upbeat expectations for the real estate sector.
The long-term investment perspective and risk aversion of the flourishing private pension funds should also lead to a certain allocation of real estate related assets in their portfolios going forward, as a hedge against inflation, raising institutional real estate demand. Earthquake consciousness has raised demand for the property held in REIC portfolios, inherently deemed to be of superior quality, as they are fully insured and quality-controlled.
The Turkish REIC sector only dates back to 1997. The growth motive at the pioneering development stage, as well as the distorting effects of inflation on earnings (that leads to the distribution of capital rather than real earnings as dividends) has led Turkish REICs, thus far, to refrain from paying generous dividends. Currently no requirements exist for Turkish REICs to pay the bulk of their earnings as dividends as is the case in some other countries.
The mandatory switch to IFRS accounting as of 2005 will better unveil operational results due to the employment of ‘percentage-of-completion' method for recording property sales rather than the ‘completed contract' method historically used under CMB accounts, improving the transparency and visibility of REICs. Arlin Polat, managing director of Stewart International in Turkey, thinks that the "new mortgage system will increase transparency, helping eliminate money-laundering and the gray market, while positively affecting FDI in Turkey."
There are 10 listed REICs on the ISE, which have similar characteristics to their counterparts in developed countries. Turkish REICs are exempt from corporate taxes, while they are required to float at least 49% of their shares to the public. All REICs are set up by large established groups which retain majority/controlling stakes. Banks or their respective social security foundations are major shareholders of five of the REICs (namely Atakule, Garanti, Is, Vakif and Yapi Kredi Koray).
The major shareholders of the other four listed REICs are either conglomerates or leading companies of conglomerates whose chief interests include construction & contracting (Alarko, Ihlas, Nurol, and Akmerkez). The last REIC, EGS, has been under the control of the Savings Deposit Insurance Fund (SDIF) since 2002 after it seized EGS Bank due to insolvency in 2001.
Sizable stakes of Alarko, EGS, Yapi Kredi Koray, and Akmerkez were offered to foreign investors at their IPOs. On the other hand, the IPOs of the other six REICs were mainly conducted in the domestic market.
The bulk of the portfolios of the 10 listed REICs are invested in commercial assets, with smaller shares in residential, land, and liquid assets. The reason for the notably high share of commercial property in overall REIC assets is that the two largest REICs at the ISE in terms of NAV, namely Is REIC and Akmerkez, and one mid-sized REIC, namely Atakule, have virtually wholly allocated their real estate portfolios in commercial assets. The Akmerkez REIC is wholly composed of the shopping center of the same name.
In Hakan Kodal's, GM of Yapi Kredi Koray, opinion, the retail market is experiencing a slight bubble. Shopping centres are considered top priority in the commercial real estate market due to their growth potential. At present, average annual yields are between 11-12%. Senay Azak-Matt, GM at Aareal Bank Turkey, says that the sector is completing its first stage of development and that Istanbul, as an example, has relatively less mall space per capita than other European cities. In addition, she adds that shopping centres are also expanding from big cities to other cities. New investments will be towards regional, super regional, and entertainment centres. With all the projects planned, the financing needed and the immense potential it is not surprising to see why Aareal has decided to open a local office.
The trend may be changing with the introduction of the mortgage system. According to Can Fuat Gurlesel from GYODER, "the new mortgage system targets the use of long term and constant funding. This system comprises primary and secondary markets. The primary market will enable households to use mortgages through authorised banks and other financial institutions."
He added that "the real change takes place at the secondary market level, whereby banks and financial institutions will in turn sell mortgages issued in the primary market or mortgage backed securities to obtain funding. Mortgage institutions brokering these transactions as well as domestic or foreign investment institutions granting long term funds will be the institutional actors of the secondary mortgage market." Zafer Arslan, managing director at KEOPS in Turkey, believes that the ìnew mortgage law with go through a two to three year transition period, but will eventually improve the residential real estate sector.
The decrease in interest rates, economic expansion, the increase in personal incomes, and the housing loans will be the most important determinants for the demand and sales prices.
The prices of the housing units which are suitable for mortgage financing will increase relatively faster compared to other housing prices. As tenants will become home owners, the supply of rental units will rise, causing rents of older residential units to drop. The rents of the new housing units will rise faster.
With higher returns in residential real estate expected. Kodal, indicated that "as an opportunity and return-oriented company, Yapi Kredi is rebuilding its concept by exploiting new niche markets slowly shifting focus from the retail market to residential". REICs listed on the ISE are required by the CMB to submit a quarterly portfolio valuation, which is audited by an independent auditor.
This valuation table is based on the appraisal of a CMB-accredited property surveyor, which annually provides an expert value for the real estate portfolio. As a surveyor"we supply an open market value for developed property and an estimated sales value for ongoing real estate projects, derived from prices of completed comparable property," says Cansel Turgut Yazici, general manager at TSKB Real Estate Appraisal.
Costs to be incurred in the completion of the projects are deducted from these valuations on a quarterly basis in order to reach a residual value for each project. On top of the value of the real estate portfolio, cash and marketable securities, receivables and other current assets are added and liabilities are deducted in order to reach the NAV for the REIC.
The total market value of the 10 listed REICs stands at $1.18bn. The aggregate P/NAV of the companies is 0.85. REIC shares are not highly liquid, with an average daily trading volume under $2m per stock. With European and US real estate markets saturated, investors are looking to developing markets to diversify their portfolios. Turkey is becoming an attractive option.
Turkey's EU membership process is having a positive impact on the real estate sector by improving transparency, control, imposing high standards, institutionalisation, and statistical data gathering.
Foreign investors are flocking to Turkey to find partners and get a piece of the action. GYODER's ‘Turkish Real Estate Summit', in its sixth year in 2006, was a huge success with a record number of participants and is proof that Turkey is an untapped goldmine. Even a recent report by ULI/PWC in 2005 on developing real estate markets ranks Istanbul at the top of 27 metropolitan cities regarding real estate development potential excluding risks. The relative decrease in inflation and harmonisation of interest rates with global standards will help the sector experience a fast, stable, predictable, and most importantly long term development process.