With several sizeable retail malls, the Turkish metropolis of Istanbul should offer investors currently chasing big-ticket deals a simple solution. Russell Handy reports

Talk of the need for ‘scale’ among investors has been increasing in recent months, notably at October’s Expo Real.

This year’s annual gathering in Munich of real estate investors, developers and advisers was abuzz with talk of size. Portfolio deals are an obvious solution, while the likes of London have provided investors in the office sector with plenty of opportunity to source so-called ‘big ticket’ deals.

Conversely, a scarcity of office, industrial or logistics stock has resulted in large-scale foreign investment in Turkish real estate being typically focused on retail. Large shopping centres, however, rarely trade.

European investors in Istanbul have been and gone. Dutch firm Redevco, which entered  in 2006, turned its back on the country in 2012, selling its Turkish platform to Blackstone as it ceased to develop in emerging markets.

Across Turkey, there are 331 shopping centres with a total leasable area of just under 10m sqm, according to research by Colliers International’s Istanbul office. And the the figure is forecast to reach 11m sqm by the end of next year. The cities of Istanbul and Ankara jointly take up 53% of the country’s total shopping centre leasable area. There are 114 shopping centres in Istanbul alone, with a further 28 under development.

Istanbul, ranked highly in TH Real Estate’s Picking Tomorrow’s World Cities report, is expected to outpace all major European cities in its retail sector growth by 2030.

The First Bosphorus bridge

The First Bosphorus bridge

For now, Istanbul is still some way off being back under the spotlight as it was in 2008 when the Kuwait Investment Authority (KIA) paid $750m for the city’s Cevahir shopping mall – Europe’s biggest deal at the time.

“As a result of investments made in recent years, the shopping centre supply is strong in Turkey,” Colliers’ report says. “Location, design, concept and shop-mix of the project should be evaluated when making shopping centre investments.”

Colliers says that while well-developed and well-designed shopping centres are “always in demand by customers”, new developments should be executed with a “strategic approach”.

GIC last year took a 20% stake in a Turkish real estate developer. The Singapore sovereign wealth fund bought the shareholding in Rönesans Gayrimenkul Yatırım (RGY), the real estate arm of Turkey’s Rönesans Group.

GIC is investing €250m in RGY, which will use the capital for acquisitions and new developments across Turkey.

Ankara-based RGY is targeting Turkey’s largest cities, as well as developing an existing 460,000sqm pipeline of retail, office and mixed-use projects.

At the time, Chris Morrish, regional head of GIC Real Estate for Europe, said he was confident Turkey would continue to grow and present good investment opportunities.

RGY and GIC first formed 50:50 joint ventures in 2012, investing in the Optimum shopping centre concept in Istanbul, Ankara and Izmir.

Few retail transactions have taken place, despite investors’ slow move up the risk curve and away from more core European markets.

Turkey has historically attracted overseas capital from investors who saw the longer-term potential of the country’s demographics.

The world’s 17th largest economy is enjoying increasing per capita income, according to the World Bank. Since the global financial crisis, Turkey has created around 6.3m jobs. Unemployment, however, remains around 10%.

After growing 4.2% in 2013, the Turkish economy slowed to 2.9% last year.

As recent events in the Turkish capital Ankara demonstrate, political uncertainty poses a risk to the country’s prospects.

“Turkey has been vulnerable to changes in investor sentiment,” a report by the World Bank notes.

This June’s general election result, when president Recep Tayyip Erdogan’s AKP party failed to secure a majority, has unsettled the country and affected consumer confidence. Prior to the election, the country’s consumer confidence index dropped to 64.3 – its lowest level since December 2009.

Voters are due to return to the polls in November.

“Our best-case scenario is that parliament will be able to form a coalition government, clarifying the uncertain political scene, and that investment will remain active during the remainder of the year, with the successful closure of a number of ongoing transactions,” says a recent report by advisory firm JLL.

Political uncertainty has caused Turkey’s lira to fluctuate this year. “The depreciation of the Turkish lira has had a particularly negative impact on rental costs,” says JLL. “It is therefore observed that leasing transactions are proceeding slowly.”

Currency fluctuation, says JLL, is having more impact on international retailers already operating in Turkey than on those planning to enter but not yet operational. 

Geopolitical risk is behind the low ranking of Istanbul’s retail sector as it languishes at the foot of Cushman & Wakefield’s index of fair value. The advisory firm’s research into real estate pricing ranked the Turkish city as the most “fully priced”.

As of June this year, about 1.7m Syrians were registered as refugees by the Republic of Turkey, according to the United Nations’ High Commissioner for Refugees.

“Hosting significant number of refugees and experiencing warfare on the country’s border have had an impact on macroeconomic indicators such as public expenditure, the unemployment rate and political stability,” says JLL.

If large-scale investment is for now unlikely, there is clearly still potential for inroads into Turkish retail through asset management. The likes of Pradera and Germany’s Management für Immobilien are active in the day-to-day running of Turkish retail.

A large domestic market and an expanding middle class are significant advantages. Turkey will achieve a retail sales growth rate of 5% between 2015 and 2017, higher than mature European markets, according to Oxford Economics. 

For now, however, taking a medium or long-term view in a country faced with such short-term instability is proving difficult.

Istanbul infrastructure catch-up 

Ranked as the world’s most car-congested city and with continued population growth, Istanbul – which failed in its bid to host the 2020 Olympics – is playing infrastructure catch-up.

Conceived in 2003, the 15km Eurasia tunnel is due for completion next year. More than a decade in the making, the tunnel is expected to ease pressure on Istanbul’s major highways. The tunnel, developed by Korea’s SK E&C and Turkey’s Yapi Merkezi, will serve the Kazlıçeşme-Göztepe route, where traffic is at its most intense. Journey times are expected to be cut from 100 minutes to 15 minutes.

The $1.2bn (€1bn) project is funded by loans from both sides of the Bosphorus, with backing from the European Investment Bank and Korea’s EximBank.

The general consensus is that Istanbul needs more public transport – specifically more Metro lines – to ease the citizens’ reliance on cars.

Other major schemes include Yavuz Sultan Selim, a third road bridge over the river Bosphorus, the Marmaray rail tunnel under the Marmara sea, and a new, third airport (Ordu-Giresun). The airport, which the Cengiz-Kolin-Limak-Mapa-Kalyon consortium began developing earlier this year, is due to be completed in 2018.

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