Office property dilemma in Istanbul

The strong economic recovery in Turkey over the last few years has fuelled a large number of office developments in Istanbul, yet there is still a shortage of high-quality properties. On the other hand, too many new offices may already be under construction, according to a new report by DEGI's research department.

Between 2004 and 2005, foreign direct investment in Turkey rose from $2.8 bn (EUR 2.19 bn) to $8.6 bn, and is expected to reach $23 bn in the current year. The economy as a whole has performed strongly, with GDP growing by 8.9% in 2004 and 7.4% last year. Growth just under 5% is forecast for 2006 and 2007. Istanbul, the bridge between Europe and Asia, has been at the forefront of this economic upturn. The city is the largest and most developed office property market in Turkey, with 2 million m² of class A and B office space in mid 2006. The European side accounted for 65% and the Asian side for the remaining 35%.

The economic recovery has fuelled a great many development projects and a corresponding and swift rise of office space. Yet that there is still a shortage of high-quality office properties, DEGI said. This has spurred on developers and over the next three years the supply of class A space is expected to increase by a further 225,000 m². Demand is being driven by internally-operating companies, mainly firms in the financial, manufacturing, IT and communications sectors. The Asian side of the city is preferred by manufacturers due to its easy accessibility, good infrastructure and below-average rent levels. Since bottoming out in 2003, rents have bounced back strongly and Prime rentals are currently at EUR 15,29 per m². DEGI said it expects an increase to almost EUR 17.50 per m² within the next year.

There is a flip side to Istanbul office market renaissance. 'The lively demand for high-quality office properties has caused the vacancy rate in the class A segment to decrease steadily. Nevertheless, many office buildings still bear signs that read 'kiralik' - to let,' DEGI said. It expects the present vacancy rate of 17% to fall to 15% by 2008. The surge of investors has led to a decrease in initial returns, and though top returns are still in double digits at 11%. DEGI said it expects returns to fall to 8% and 9% in the coming years.

Developers have responded to the buoyant situation with large-scale office construction projects but the question remains, DEGI said, whether the market can absorb all the projects in the pipeline for 2010. 'Consequently, we expect a surplus supply in the medium term, sending vacancy rates up and rent levels down,' But DEGI said that there is great potential for appreciation on investments in the longer term.


Foreign investors are also considering Ankara and Izmir but insufficient market maturity and transparency as well as highly complex ownership structures in some cases meant that it is too early for 'safety-orientated investors’ to enter the markets. 'Opportunists, however, will get their money's worth,' the report said.