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Optimism based on Robust Fundamentals

Istanbul Skyscrapper

1 July, 2014

 Turkey’s real estate market continues its upward growth trend – Cityscape provides a detailed insight into the performance of its various asset classes.

 Driven by robust consumer spending, Turkey’s GDP grew stronger than expected in the last quarters of 2013, impacting positively on Turkey’s real estate sectors overall.

Togrul Gonden, Managing Partner, Cushman & Wakefield Istanbul, Turkey, describes the general current mood in the Turkish real estate market as “optimistic based on robust fundamentals.”

“We are seeing healthy demand in the office and retails sectors. The residential sector has seen a temporary cooling off since the beginning of the year. We expect the second half of 2014 to see residential demand picking up again on the back of decreasing interest rates. Economic growth in the first quarter caused a positive surprise and supports our optimistic view for the future,” Gonden commented.

With such optimism present, let’s look at the various asset classes in more detail.

Strong growth for office sector

Istanbul remains Turkey’s most developed and active office market, offering almost 3.4 million sqm of Grade A office stock, according to data from Jones Lang LaSalle (JLL) Turkey.

“The city remains top of the list for investors and occupiers seeking to enter the country. Occupier demand for Istanbul remained strong especially for A grade office supply during Q1 2014 both from domestic and multinational occupiers. The CBD was the most demanded sub market for office transactions in Q1 2014, hosting 92% of the total take-up. Especially the Levent and Maslak sub regions have been the most active sub markets,” Avi Alkas, Chairman of JLL Turkey commented.

Looking at demand drivers, according to Cushman & Wakefield’s latest annual Turkey review (published in March 2014), around 42% of Istanbul’s total office take-up was recorded in the banking and financial services sectors.

“As the financial centre of Turkey, Istanbul is an attractive location for banking and finance related institutions. In fact, both increasing demand and supply support this trend. The interest of international/multinational companies is growing and they open branches to manage their regional operations including Middle East, Africa, and Eastern Europe,” commented C&W’s Togrul Gonden.

“The government also aims to relocate government banks and public finance institutions from Ankara to Istanbul, to the new ‘Istanbul Finance Centre’ in Atasehir, which is expected to promote further growth of Istanbul’s finance sector,” Togrul Gonden added.

Throughout 2013, occupier demand for Istanbul remained robust, with new multinational companies entering the Turkish market and establishing offices in the city. According to Jones Lang LaSalle (JLL) Turkey, the trend of institutionalisation among national companies also boosted the demand for high-quality offices throughout last year.

“Demand for Grade A office buildings in particular, with their efficient design and infrastructure, has grown significantly. In 2013, there was an increasing demand among multinational companies for low-rise flat offices, to improve efficiency and communication in the office environment,” commented JLL’s Avi Alkas.

Despite the new office supply expected to enter the market in 2014, prime rent is envisaged to remain around EUR 35 per sqm/month due to high occupier demand, JLL research says. According to JLL, approximately 2.8 million sqm of office stock is currently under construction, due for completion by the end of 2017.

Around 1,28 million sqm of Grade A office space is expected to become operational by end-2017 in the Ataşehir region alone, as part of new Istanbul’s new Financial District, which will effectively double the existing office supply on Istanbul’s Asian side, JLL research further shows.

However, despite the large amount of office stock entering the market over the next few years, JLL do not believe Istanbul will face an oversupply scenario in the near future.

“The new Financial District project will guarantee the relocation process of many financial state institutions such as BRSA, CMB and state banks like Halkbank, Vakıf and Ziraat to the region with owner occupation. As a consequence of that, a centre of attraction will be formed for other financial institution and the supply/demand equilibrium will be preserved,” Avi Alkas of JLL commented.

Residential demand drivers

The residential sector has long been the driving force behind the growth of the Turkish real estate market.

“During the last 10 years, on the back of affordable mortgage loans, increasing demand for earthquake resistant buildings and the increasing housing need caused by a growing population & urban migration, the Turkish residential market grew significantly, particularly in Istanbul,” JLL’s Avi Alkas commented.

One major topic on Turkey’s agenda is Urban Regeneration. The Ministry of Environment and Urban Planning estimates that approximately 6.5 million buildings will be demolished and rebuilt within a term of 20 years within the scope of Urban Regeneration, to be primarily initiated in 35 cities.

Volatility in the hotel market

In times of uncertainty, the leisure sector is always the first sector to react to the present conditions.

“Political events surely had an impact on [Istanbul’s] double-digit growth trend. The higher-end hotel sector in Istanbul specifically has seen occupancy drops, which could partially be compensated by strong EUR and USD rates,” JLL’s Avi Alkas said.

Trading levels in Istanbul declined towards the end of 2013, a reflection of the drop in high-paying tourists due to travel warnings in H2.

Occupancy levels for general set hotels fell by 6.8% to 67.5% and revenue per available room for the general set was down to EUR 100.33 in 2013 with a 9.4% decrease, JLL research says.

“While the luxury sector does not immediately reflect the drop in occupancy in the same way, luxury hotels ended the year of 2013 with decreases in both ADR and REVPAR. Occupancy level for luxury sector hotels decreased by 5.1% reaching 68% and the revenue per available room decreased by 8,9% to EUR 168,56 in 2013,” Avi Alkas of JLL said.

Top performer retail

On the back of Turkey’s strong demographics with a significantly young population with increasing purchasing power, retail remains one of Turkey’s most promising sectors, which is why we have dedicated a separate article to it – please refer to page 72 of this edition.

Foreign trade boosts industrial market

According to Cushman & Wakefield, the Turkish industrial market performed well during 2013, while the main demand driving sectors, manufacturing and textile, recorded 7.4% and 6.4% growth respectively.

“Turkey’s logistics market is driven by its strategic location, stable macroeconomic growth, increasing foreign trade volume and a young and skilled labour force. The stable macroeconomic growth over the last decade has resulted in an expansion of international trade. For the upcoming period, the robust international import demand with the support of the global recovery and the Turkish lira depreciation, exports are expected to make a positive contribution to industrial growth,” explained C&W’s Togrul Gonden.

Cushman & Wakefield’s expert mentioned increased retail/consumer demand as another driver of the industrial market, especially major retailers, hypermarket chains, and e-commerce sectors.

From an investment perspective there is to say that to date, investor activity is still quite limited in the industrial and logistics subsectors linked primarily to the lack of investment grade product, says Togrul Gonden.

“Institutional investors have steered away from the industrial sector and focused more on offices and retail. In general, investment activities are quite limited with either transaction for owner occupancy or land acquisition for future development. However, planned infrastructure developments will be the key and drive the logistics/warehouse market. Especially large infrastructure projects like the 3rd Bosphorus Bridge, the 3rd Airport and the Eurasia Tunnel in Istanbul, the Istanbul-Izmir highway and the Izmit Gulf Bridge, and the fast speed railway connections are likely to promote industrial developments and have a significant impact on the logistics market,” C&W’s Togrul Gonden added.

Looking ahead

Experts remain positive when looking at the future of Turkey’s real estate.

“The economic fundamentals remain strong, as does demand both on office and on retail side. On the political side there is a presidential election in August where we do not expect any major surprises or risks to the overall political situation,” C&W’s Togrul Gonden said.

The C&W expert also expects interest rates to come down again in the short term, releasing some pressure on the residential sector.

Speaking about Urban Regeneration projects, Gonden pointed out that these are partially slowed down by shortfalls in the legal framework. However, “if the authorities manage to create a clear legal framework these projects will gain immediate traction with others to follow. This alone represents a huge opportunity for the Turkish real estate market,” the C&W expert concluded.