Turkey - An attractive proposition

15 February 2011

For anyone visiting Istanbul, it has been quite interesting to see the amount of construction going on in the city. The same applies to other first tier cities around the country.

Topping 18.4% growth in the first three quarters of 2010, there is no doubt that the construction sector is  leading the GDP growth, which is estimated to be around 8% for 2010.

The growth, and also lending, have been unstoppable. The growth in total loans, year on year, in 2010 was 35%. Recently, the Central Bank had to increase reserves to cool down the credits.

Although the mortgage market has just started growing, the effect on lending was significant. The total amount of mortgages showed a 35% growth, carrying the total stock to just over 1 million, in a country where the number of households is 18 million. Also, mortgage rates have been continously decreasing to relatively reasonable levels of 8-9%, after 30 years of chronically high inflation.

Whilst many developed economies cannot see when deleveraging will come to an end, the Turkish economy is just starting to leverage.

Thanks to the healthy banking sector and the young and growing population, Turkey is taking its spot on the radar screens of international real estate investors, law firms, consultants and other real estate market players, but it is no longer a market for short term opportunistic investments. It is a market with huge opportunities, but also weaknesses and threats. Lack of existing institutional investors, lack of available "A" class stock, highly competent local investors and high land prices are the main barriers for the newcomers.

"Investors should always search for alternative routes, try to enter share deals instead of asset deals, work with prominent tax and legal advisors and should not rely on old opinions/structures before double checking with the current legislation as the tax environment is rapidly changing" said Mr.Ersun Bayraktaroglu, Head of Real Estate Group at PWC, during our discussion during the GRI Istanbul event in January 2011.

"Turkey is more transparent compared to a few years ago" said Murat Ergin, Managing Director of Kuzeybati, local partner of Savills. "Investors should try to understand the culture and business environment, should find a local partner if the market looks confusing. They should always follow the legal guidelines, should not establish relations only through personal contacts and they should not count only on their partners' words, they should ask questions themselves" he added.

Legal ownership and zoning issues are a small part of investors' due diligence. It is believed that if there is a building permit and a title deed in place, there will not be any issues in the future, which is not the case. There are quite a number of issues that an investor should take into consideration before and during the transaction, even if everything seems to be in order.

Challenges to ownership and building permits after acquisition or start of construction, are issues that many investors and lenders have to deal with. These vary but the most common issues are:

  • Challenges to ownership and building permits by organizations such as the Chamber of City Planners and Architects, opposing Municipal Council members, former owners of the land and unhappy neighbours. This is due to faulty planning applications, an increased construction area, a former owner being unhappy with a revised planning, title being transferred by fraudsters or erroneous registration of transfers or mortgages.
  • Challenges by the State, due to discrepancies between cadastral maps and title registry records, or as a result of a property being located on state owned land.

Reasons vary but the conslusion is the same; no investor or lender wants to deal with these issues after completion of the transaction.  

In collaboration with our insurance partners in Turkey, FAF International have been providing investors and lenders with unique insurance solutions to derisk property and mortgage transactions, allowing them to tailor the transaction process around their objectives.

These insurance solutions are highly appreciated by our clients, as they are operating an unfamiliar market and need to safeguard their investments.

You would rather have unbreakable eggs than many baskets, wouldn't you?

 

Mustafa Özdemir, Managing Director, FAF International Turkey