Neville Moss looks at the emerging shopping centre market in Istanbul where exceptional fundamentals present a solid long-term outlook

A growing number of international investors are looking at Turkey, attracted by a stable economic environment and one of the fastest-growing economies in Europe.

The economy has grown by 23% since 2004 and GDP per capita (€8,960) is now comparable with Poland in 1995 and Hungary in 1997. And the good times are expected to continue, with the Economist Intelligence Unit forecasting GDP growth of over 5% a year until 2010.

Integral to Turkey's recent economic success is the booming retail sector, which is rapidly evolving to embrace western shopping habits. Although traditional shopping still dominates in rural areas and the eastern part of the country, hypermarkets and shopping centres are now the main shopping destination in the large cities of western Turkey for a growing and increasingly urban population.

Urbanisation has been a key social trend in Turkey for many years as the rural population migrates towards the cities to take advantage of employment opportunities and improved living standards. And nowhere has grown faster than Istanbul where the population rose from 7.2m in 1990 to more than 11.5m in 2007, becoming one of Europe's ‘mega cities' alongside Moscow, Paris and London. Over the next 10 years Istanbul's population is expected to rise by 14%, way ahead of the other major cities.
Istanbul's first modern shopping centre, the 40,000m2 Galleria, opened in the western outskirts of the city in 1988. In spite of its success, the market developed slowly and only a handful of centres were built over the next decade, including the 36,400m2 Akmerkez, which opened in 1993 in an upmarket residential area of the city. Akmerkez has received five ICSC awards, which includes the ‘Worldwide Shopping Centre of the Year' in 1996.

Development really took off in 1998 and by January 2007 the number of shopping centres and developing formats in the Istanbul area had risen to 45 (out of 134 in Turkey). The shopping centres are located on both sides of the Bosphorus, mostly in suburban areas along motorways, and many have set new standards of quality that compare with the best schemes in the eurozone, such as the Kanyon, which opened in 2006 and is anchored by Harvey Nichols, under franchise to Unitim Tekstil.
With the lack of ‘high street' retailing in Istanbul (there are just three main high street shopping areas) shopping centres have become a major destination for the increasing number of better-off city dwellers who have been attracted to the wide range of retailers on offer in a single location, and more recently to the growing presence of international retailers.

Looking ahead, another 31 centres are due to open in Istanbul in 2007-08, including the 110,000m2 Forum Istanbul in 2008, which will be the largest in Turkey, and the 84,000m2 Istinye Park, which is due to open in August this year and will focus on high-end retailers. In addition, two high profile smaller schemes will open this year: the 40,000m2 Bakirkoy Shopping Centre, developed by KKG (Kameroglu-Keles-Gûl) Group, and the 46,000m2 Altinyildez Outlet Centre, developed by Boyner Holding.
In spite of the current development boom the level of space remains low by European standards. In 2008, Istanbul is scheduled to have 175m2 per 1,000 population but this compares with Warsaw (500m2), Prague (400m2) and Budapest (300m2). So the long-term potential for further development in Istanbul is still significant.

Most of the existing shopping centres were developed by Turkish companies, but international companies are now leading the way, driven by the increase in investor interest which has enabled projects to be activated.

While the focus for new development will be in Istanbul and the capital Ankara, developers such as Multi Turkmall (a joint venture between Dutch developer Multi Development and Turkish developer Turkmall, but now wholly owned by Multi Development) and ECE are increasingly targeting the underdeveloped regional cities. Jones Lang LaSalle believes that there is the potential for another 300 new shopping centres in Turkey over the next 10-15 years.

The first retail investment transactions in Turkey took place in 2003. Corio was granted a 47% interest as the major subscriber in the IPO of Akmerkez GYO, which owned around 95% of the Akmerkez shopping centre in Istanbul. The total investment amounted to approximately €148m, and was initiated by Corio's ambition to diversify its portfolio.

In 2005/2006, Multi Turkmall, recognising the increasing interest of foreign investors, sold three regional shopping centres.

The shopping centre Forum Bornova in Izmir, completed in 2006, was sold for around €100m to the German fund CGI. In spring 2006 the 45,000m2 Forum Trabzon was purchased by Meinl European Land and the 65,000m2 Forum Mersin was sold to the German fund DIFA.

The largest retail investment deal to date was completed in 2006/07, when St Martin's Corporation purchased from the Municipality of Istanbul and Cevahir Holdings their share in the Cevahir shopping centre for more than €600m. This is the largest shopping centre in Turkey, comprising 108,000m2 retail and 11,000m2 of leisure space.

Due in a large part to this deal, retail investment volume increased threefold in 2006 to €770m. In 2007 volumes are expected to grow further. Investors are reassured by a more stable economic climate and a strong economy, but are particularly attracted to the prospect of better rental growth than elsewhere in Europe.

By the end of the first quarter, transaction volumes totalled around €100m, but another €100m of forward commitments was agreed that would put Turkey in the top five retail investment destinations in Europe for the year.

One fly in ointment is the evolving political situation. The government has called for an early election for 22 July which is still likely to see the ruling AKP party retain power but the election of the president will remain a major source of tension.

It should also be noted that the way in which real estate is bought and sold is still evolving, there are few benchmarks and consequently transparency remains low.
While this might cause some investors to pause for thought, the long-term fundamentals for the economy and retail sector remain extremely positive and Jones Lang LaSalle believes that Turkey will become one of Europe's largest retail investment markets by 2009.