Higher interest rates pressure Turkey's real estate market

Higher interest rates and a tighter monetary policy in Turkey are likely to rein in on the local construction and property industries, according to Özlem Atalay, research analyst at agent DTZ in Turkey.

'High interest rates mean high costs for players in the real estate and construction sectors,' he told PropertyEU.

A number of emerging markets including Turkey were thrown into disarray last week following significant capital outflows from US investors in particular. So far a decision by the Turkish Central Bank to raise interest rates to 12% from 7.75% previously has not managed to stabilise the value of the lira while experts believe it will have a negative effect on the country’s economic growth.

After a short-lived surge earlier this week, the Turkish lira slipped again against the dollar to 2.26 to the US dollar on Friday. The currency, which used to trade at 1.7 to the US dollar less than 12 months ago, reached an all-time low earlier this month amid ongoing turmoil across emerging markets. India and Brazil have also increased their lending rates to fight inflation and support their currencies.

In Turkey, the interest rate hike has already affected the housing mortgage rate which has risen from 0.75 at the end of the third quarter of 2013 to 1.15 at present. 'This may reduce investment in the residential sector in the short and mid term,' Atalay added.

Around 701,000 housing units were sold in 2012 and as many as 1.15 million in 2013, but DTZ expects this number wlll not rise further in 2014, despite the country's strong demographics (i.e. the need of housing on the part of a growing young population)

In the commercial property sector, a total of 422,500 m2 of retail space was delivered in the first half of last year, the largest volume in Europe. Development in the retail sector has largely been fuelled by foreign investors flocking to the country in search of higher yields.

‘Turkey has been on a major development drive with many foreign institutional investors ready to jump in,’ commented Andreas Hohlmann, country manager at ECE Turkey, which manages over a dozen malls across the country. ‘While I do not expect foreign investors to change plans because of the current market volatility, some will likely put their planned investments on hold and postpone their decisions to enter the country,’ he predicted.

Ongoing market turbulence is expected to have a negative effect on yields, which are currently put at 7% for prime retail in Istanbul, and at over 9.75% in other cities. ‘However,’ Hohlmann said, ‘there have not been so many transactions lately and I do not expect any real estate to come to market in this environment, so the impact on yields will largely remain unclear.’

For those foreign investors willing to take the risk, the depreciation of the Turkish lira means they can buy at a bargain, Atalay added. ‘There is a considerable amount of quality office space in Istanbul either under construction or in the pipeline as well as retail accommodation across the country that can appeal to foreign investors who are looking for high returns.’

While Hohlmann agrees today's market represents an opportunity for euro-denominated investors - 'for €1 you get 25% more Turkish liras', he also reckons the situation has become difficult in the occupier market. 'Retailers with turnover in Turkish liras and euro- or dollar-denominated rents are struggling to meet payments, which have jumped 25% from one day to the other. This is a huge burden and it will need some short term adaptations.’

Turkey's central bank said last week that the interest rate hike was intended to combat inflation and stem capital outflows. While economists have praised the Turkish government’s initiative, they also believe the move might dent domestic spending and economic growth in the country. Turkey is forecasting a GDP growth of 4% for 2014, sharply down from the 8% growth it realised in both 2010 and 2011. GDP rose ‘only’ 3.6% in 2013.