Turkey Real Estate

Our new interviews with in-country sources in Ankara and Istanbul confirm that conditions within Turkey's commercial real estate sector remain fluid and dynamic. The general economic environment remains positive. A disciplined and under-geared banking sector ensured that the Turkish economy emerged from the world financial crisis additional or less unscathed. Interest rates have fallen to record low levels. In spite of mounting inflationary pressures, general perceptions of risk are moving in the right direction. Unsurprisingly, rental rates at the end of 2010 were higher than they had been year before.

However, this is not the whole story. For well over a time- up to early 2010 - we had been concerned about the apparent oversupply of space, particularly in the office and retail sub-sectors of Istanbul. As far as we can see, rents have held up well, in spite of lingering vacancy rates in the order of 30%. The implication is that new property has been absorbed. To the extent that oversupply is an issue in the city, it has been confined mainly to the lower ends of the office and retail sub-sectors. Industrial vacancy rates in Istanbul have remained low - suggesting that request has been supported by the general strength of the economy.

The key feature of the commercial real estate sector in Ankara through late 2009 and early 2010 was the tightness of supply of office space. Rents soared in H110 - apparently to unsustainably high levels. Our in-country sources indicated in the interviews that we held at the end of 2010 that rents had actually fallen back sharply in H210 - if not back to the levels that had been prevailing at the end of 2009. Looking forward, our sources are reasonably optimistic, as they envisage that rental rates will at worst move sideways (and additional likely increase slightly) through both 2011 and 2012.

Rental yields fell across the board in 2009, as it became clear that the world financial crisis had had limited impact on the Turkish real estate sector. The major theme in 2010 was convergence of net yields around 10%. This meant that, for instance, industrial yields fell somewhat in Ankara, but rose quite sharply in Istanbul.
The comments from our in-country sources in Turkey suggest that net yields will rise sharply in 2011, except in the Istanbul office sub-sector. We accept that net yields are likely to rise somewhat - thanks to gains in rents - but would be surprised if they rise to the levels foreseen by our sources (of 15% or so). Our sources say that further rises in rental yields are likely for 2012 - although we are hard pressed to reconcile this with the generally favourable economic prospects of Turkey. For the time being, we tentatively look for yields of around 15% across virtually amount sub-sectors from 2013 onwards: we note that we will likely revise these projected yields downwards in coming quarters.
For some time, the general trends in Turkey's commercial real estate sector have been favourable. Despite being affected by the world financial crisis in late 2008 and early 2009 like much of the world, structurally the industry was built in the right way and is now benefiting from that and from a resilient economy. The different sub-sectors in both cities have varying vacancy levels - from oversupply in Istanbul's office space market to a distinct lack of office space in Ankara. With little need for selling under pressure of foreclosure, thanks to sensible bank lending, these vacancy levels are likely only to be truly affected by new development projects adding to the available space.
Our new interviews with our in-country sources, which were conducted in late 2010, indicate that rents in most sub-sectors tracked sideways from H110 to the end of the year. The exception was in Ankara, where we saw a huge jump in the maximum rental costs for office space, from EUR35.50 per m2 per month in 2009 to EUR60 in H110, then back down to EUR37.50 in H210. The implication is that the general market conditions are healthy but awaiting further recovery in the in general economic and business environment - which is quite likely to happen through to 2015. The local market experts do seem to concur with this and are looking for some rents to advance in 2012 and some to remain stable. The local sources suggest that in 2012, we could see rental costs for retail space in Istanbul rise in the region of 15%. Given the actual rises that have taken place in 2010 and the stability that is anticipated for 2011 across the board, this appears reasonable.

Unlike much of the rest of Central and Eastern Europe, we don't expect to see a surge in capital values.The country has practised responsible lending by banks and this has provided stability in the industry, allowing developers and landlords to ride through less positive years without the need to shed real estate quickly and cheaply.

In practice, our sources expect yields to track upwards in the coming years as rental values increase faster than property values do.