Dutch high street specialist Vastned has cut its losses due to growing uncertainties in the Turkish market, Judi Seebus and Elvan Bayraktaroglu write in the April 2017 edition of PropertyEU Magazine.
Listed Dutch retail property company Vastned has made good on its announcement in March that it was selling its Turkish business and pulling out of the market as part of its strategy of focusing on five major European cities.
Commenting on the move, Vastned CEO Taco de Groot said the divestment of the Turkish assets 'clearly adds to the further stability of the portfolio'. 'The current geopolitical, political, and economic situation in Turkey and the expectation that it will not improve in the short to medium term, makes its less attractive for retailers to be present in Istanbul, putting rents under pressure in the future,' he said.
Write-downs
The news of the pending sale came in March just a few weeks after Vastned said it was writing down €33 mln on its portfolio in Istanbul. 'We see that consumer spending has been declining for quite some time now and tourists – a major source of income for the Turkish economy – are avoiding the country,' De Groot added. 'Additionally the negative impact of the fall of the Turkish lira, increases the rental costs for retailers relatively strongly. All this combined makes it less attractive for retailers to be present in Istanbul, putting market rents under pressure in the coming years,' he added.
Vastned had €133 mln worth of assets in Istanbul’s prime shopping district, including the 2,500 m2 H&M store at 85 Istiklal Caddesi and the 2,000 m2 asset housing fashion brand Koton at Istasyon Caddesi. The portfolio value was reduced to €100 mln by the writedown announced at the end of 2016.
Vastned entered the Turkish retail property market 10 years ago with the acquisition of the Elysium shopping centre in Istanbul for € 9.7 mln. At the time, the goal was to expand the Turkish portfolio to a maximum of 10% of the total value of the portfolio which in 2006 amounted to €1.6 bn. At the time the biggest risk for the Amsterdam-listed company was the volatile Turkish lira. Vastned tried to cover part of the risk by forcing Turkish retailers to pay the rent in euros or dollars and financing investments in dollars.
Ten years later, analysts congratulated De Groot for finally calling it quits in Turkey. But, in an interview with PropertyEU, he said he had mixed feelings about the move. 'The Turks are very nice, hard-working people. Just five years ago, Turkey was on the right track in terms of its demographics and progress as an emerging economy. We were building a high-quality portfolio in Istanbul and Turkey accounted for about 8-9% of the total.'
Rents continies to drop
That said, Vastned had been planning to sell the Turkish portfolio for some time, he added. 'Five years ago the forecasts were positive, but for the past 3 ½ years we haven’t bought anything in Turkey because we saw things were slowly changing.’ Rents will continue to drop for the foreseeable future, he predicted. ‘We don’t see Turkey turning the corner in two or three years time.'
Recently, ratings agency Moody's announced it had become even more negative about the short-term outlook for the Turkish economy and reduced its rating from stable to negative. Generally this is a signal that the creditworthiness of a country is due to be lowered. One of the reasons Moody’s gave for its negative outlook was the further erosion of Turkey’s institutional strength. Economic growth forecasts have also worsened, less funds are available for loans while borrowing costs for consumers are rising.
Two earlier bids to sell Vastned's Turkish portfolio were aborted due to political unrest in the country. In an initial attempt in 2014, an investor from Abu Dhabi was lined up for the sale but pulled out shortly after the riots broke out on Taksin Square. A second attempt last year involving an Asian buyer fared a similar fate in the wake of the coup over the summer. 'Sentiment changed after that,' De Groot noted.
It was third time lucky for the Dutch retail specialist: the Turkish portfolio was sold to an unnamed local investor earlier this year, generating a profit of €5.9 mln for Vastned. Part of the proceeds of the divestment will be used for a share buy-back of around €50 mln. The assets sold are all located on well-known high streets in Istanbul.
Vastned announced that its gross rental income in Istanbul fell to €651 per m2 in 2016 from €653 per m2 in 2015. All in all, Turkey generated rental income of €8.6 mln in 2016, equivalent to the year-earlier period.
Shopping centres are safer
Vastned is not the only Dutch investor that has retreated from the Turkish market in recent years. In 2012, its Amsterdam-based peer Redevco sold its entire Turkish portfolio to US private equity giant Blackstone. The portfolio included the Gordion Shopping Center in Ankara, Erzurum Shopping Center and Magnesia Shopping Center in Manisa. Redevco had already announced a new strategy at end-2011 focusing on a more limited number of markets in western Europe and the Turkish asstes no longer fitted into that plan. The Redevco portfolio was subsequently merged with that of another Dutch retail specialist Multi after Blackstone acquired the company via a distressed debt deal.
Multi has been active in Turkey since the beginning of the millennium when it successfully tapped into the company’s robust economic growth prospects and aligned its strategy to the strong population growth and rising disposable income. In contrast to western Europe, Turkish shopping centres could be developed much faster than in countries like the Netherlands with far less red tape. They also generated higher returns.
A year after Multi fell into Blackstone’s hands, the developer started building the Forum Gaziantep mall in the southeast of the country close to the Syrian border. At the time, Multi announced plans to build another five shopping centres in Turkey. The company had already developed 10 malls in the country and the six new malls drove up the estimated value of the Turkish portfolio to some €4 bn.
Multi now owns and manages 11 large shopping centres in Turkey and manages another three for third parties. The malls are spread throughout the country with a concentration in Istanbul and Ankara.
Multi's outgoing CEO Jaap Blokhuis said that despite 'challenging conditions', the centres are performing above the national average in terms of sales and attracted more visitors last year than in 2015. 'Although consumer spending growth has slackened somewhat, we are seeing a strong rise in retail turnover. In addition, Turkish consumers prefer to shop in shopping centres rather than on the high street. This is because they offer both a safe environment and the retail offer is much more varied,' he said.
Multi recently confirmed plans to sell 24 shopping centres, including its entire Dutch portfolio, and a number of major shopping centres elsewhere in Europe. However, reliable sources claim it is unlikely that the company will sell its portfolio in Turkey as the timing is not right.
