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Turkey's emerging property market - a double-edged deal

Turkey is relatively new and unknown to property investors, with a booming economy yet undeveloped property market...

Does this mean you should avoid Turkey completely, or is the market ready for early investors who want to maximise return?

At Property Secrets we believe Turkey is ready for the more experienced investor who is willing to take some risk in order to reap great financial reward.

The Republic of Turkey is a young, developing democracy with strong secular traditions, despite the fact that 99% of the population is Muslim. The country is, however, politically unstable due to the importance of the army in political life as a guarantor of the secularism.

Despite the risks, investor confidence is high, FDI inflow is very strong and the Turkish economy is booming. GDP grew by an average 7% between 2002 and 2006 while at the same time GDP per capita grew by 80%.

These indicators are promising for the future, but financial stability is not yet fully established in Turkey and with high government debt, the country is vulnerable to a squeeze in global credit in the coming months.

However, with a government committed to introducing further economic reforms and maintaining a tight monetary policy, it is likely that economic prosperity will continue in the future.

Good economic performance translates into an emerging property market. Economic growth results in better job prospects, improved real wages, higher GDP per capita and consequently more purchasing power, which in turn triggers a demand for higher living standards.

Turkey is at a slightly uncertain stage for investors, here's why:

• Political risk
• Financial stability not fully established
• Unpredictable exit strategy
• Booming economy
• Strong demand triggered by new mortgage law
• Rapidly growing urban population
• Housing needs estimated for 4.3 million units
• Evidence of strong capital growth, but prices still relatively low
• EU candidate, but membership not on the horizon

Our 52 page Turkey Property Market Profile aims to answer all your questions about Turkey and if and when you should think about investing there. It includes an economic snapshot, information about the property market, Turkey's presence in Europe, investing in Turkey as well as an overview of where Turkey should fit in your property portfolio.

Where does Turkey fit into Europe?

Turkey is a Eurasian country linking the East to the West. It borders Bulgaria to the northwest; Greece to the west and Georgia to the northeast. Turkey also borders the Mediterranean Sea to the south, the Aegean Sea to the west, and the Black Sea to the north.

With Iran, Iraq and Syria as close neighbours, Turkey borders one of the most volatile areas in the world. The fact that Turkey also has the second largest army in NATO means the country has an important strategic position within Europe and the wider world.

Excerpt - p10...

In 1959 Turkey made its first application to join the EU and after that an Association Agreement was signed in 1963. The country never became a full member and current negotiations, which began in October 2005, are still no closer to achieving membership in 2007

Turkey's EU accession has been making very slow progress for more than 40 years. The major reasons behind this are the EU's concerns regarding political issues like human rights, the status of Kurdish minorities, the political rivalry with Greece over Cyprus' status and the recent constitutional crisis.

The Economy in Turkey is coming on strong but how does this affect property? You can learn what effect this will have in the Turkey Property Market Profile but in brief, here is a taster of how the economy is getting on...

Excerpt - Economic snapshot...

GDP in Turkey has been growing strongly apart from minor falls in 2003 and 2006.

Growth in the last five years has averaged above 7%, one of the highest rates in Europe. It is been forecast by some observers that the Turkish economy will grow by more than 5% in the next 5 to 10 years.

The Central Bank of Turkey maintains and controls monetary policy in the country. Since 2002, when the Central Bank of Turkey introduced the financial reforms plan backed by International Monetary Fund (IMF), financial and price stability have improved.

Foreign direct investment in Turkey is rapidly increasing as a result of the Turkish government consistently working hard to make investment both easier and more attractive.

The latest data from Turkish Statistical Institute for May 2007 reveals that the country's labour force is 52,415,000. This translates into an employment rate of 44.5%, which is the lowest among European countries.

The income per capita in Turkey rose by 9% in 18 months. In the first quarter of 2007 it was 689 per month. This rising income per capita will increase purchasing power.

So...how do we classify the market and why?

In general, we classify Turkey in the emerging phase with high risk and high reward, here are some highlights...

Excerpt - p21...

When we classify the Turkish market we have to remember that the market has two faces: the coastal and the continental.

Turkey's main cities like Istanbul or Ankara are markets in the emerging phase of development, which means that almost all the necessary components for sustained capital growth are in place.

These markets are characterised by domestic demand outstripping supply due to a rapidly growing urban population and generally poor quality housing stock.

Mortgages are becoming more widely available due to the new mortgage laws that are coming into effect in January 2008. However, interest rates remain high and need to fall in order to see Turks borrowing in significant numbers.

Prices are relatively low, even though they have been growing at 20-30% per year.

The coastal market in Turkey is currently driven by foreign investors from the UK, Ireland, Germany and the USA with people looking to purchase holiday homes.

We believe that coastal properties should not be treated as pure investments. Investments on the coast are more risky due to the lack of a domestic market.

The Turkish market in its emerging phase carries a higher risk with potential high rewards. It is unlikely that prices will fall sharply because domestic demand is strong, but the exit strategy is extremely unpredictable.

So now we have covered the history, economy and where we classify Turkey, we come onto the interesting stuff - the property market...

The Turkey Property Market Profile goes into detail about housing stock, supply and demand, the mortgage market and rental market.

Here, in brief, is what you will learn:

Supply & Demand

The housing stock in Turkey is currently 16.3 million.

The stock is mainly of very poor quality. According to the Housing Administration Secretariat, 55% of the stock in the country is unauthorised for habitation.

The number of construction permits for residential development have been rising since 2002. In 2005, this number almost tripled from 2002 levels. However, the supply is not enough to meet with demand.

The Mortgage market

In 2006 when interest rates began to fall, more people decided to borrow money from the bank. As a result the number of consumer loans has been rising rapidly and in 2006 it had risen to 7% of GDP. This figure is still below the Eurozone average of 65% and very low in comparison to developed markets like UK (70%) or the USA (65%).

However what is really important is the fact that Turkish people are getting more enthusiastic about borrowing, because that means they will borrow to buy a property.

At the moment it is fair to say that Turks haven't caught the borrowing bug just yet.

New mortgage law will definitely help to make that happen with loans made available for projects under construction, but to see any boom in mortgage lending, interest rates will need to fall.

Property Price

Turkish properties in cities represent good value for money, especially taking into consideration that fact that the rentals markets are pretty good too.

Properties in Turkey's major cities are cheaper than in other emerging markets in Europe. For example, 90-100 sqm apartments centrally located in Istanbul would cost around £100,000, while the same apartment in Warsaw would cost £180,000.

The market is growing by an average 25-30% per year; however, some cities like Istanbul grew by 85% in 2006. It is anticipated that this growth trend will continue for the next few years aided by the wider availability of mortgages

Rentals

Home ownership in Turkey is around 70% including unauthorised housing, but the rate varies between provinces.

In Istanbul and the capital Ankara 58% of households own their own homes, while up to 35% of households rent.

In Izmir and Antalya home ownership is higher among households at 64% and 66% respectively and a smaller percentage of around 27% of households rent.

Such figures indicate strong rental markets in the cities. Additionally high inward migration from rural areas provides a further boost to rentals.

Finally, the Turkey Property Market Profile goes on to establish where Turkey will fit into an inverstor's property portfolio. In a nutshell, here is what we think:

Excerpt - p49...

Turkish properties in the main cities provide excellent investment opportunities. They represent good value for money, the new mortgage law is due to come into effect and the domestic market is strong, and further boosted by a performing economy.

The property market has already taken off and will experience further price growth due to rising housing needs and increasing affordability among Turkish people.

This is tempting for any property investors ready to take advantage of this emerging market. However, the Turkish market is only for long-term investors, who are ready to take the higher risk. This is because the exit strategy is highly unpredictable due to a lack of political and financial stability, which should not be underestimated by potential investors.

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