Civil unrest and vulnerability to US monetary tightening has cast doubt on an economic success story. Lynn Strongin Dodds reports

Turkey may have enjoyed a healthy flow of business in the first half of 2013, but the second half is not expected to be as buoyant, despite the recent investment upgrade by rating agencies Moody’s Investors Services and Fitch Ratings. International investors have grown unsettled due to anti-government clashes, a spluttering economy and upcoming elections over the next two years.

Institutions first started to get nervous in June when demonstrations erupted to stop the redevelopment of Istanbul’s Taksim Square and Gezi Park. They soon snowballed into a nationwide anti-government protests that lasted weeks after a harsh crackdown by riot police. Their concerns were also not helped by the macroeconomic picture when the US Federal Reserve threatened to end quantitative easing, which would have a negative impact on all emerging market countries.

The Fed’s decision not to taper and deputy prime minister Bulent Arinc’s apologies to injured protesters only gave a temporary relief. Unrest, albeit on a smaller scale, returned in September across the country, and the International Monetary Fund issued a warning over the economy. It admonished the government for “too much public spending, excessive reliance on domestic demand and loose monetary policy”. It said that surging imports would push the current account deficit to 7% of GDP this year, far above safe levels at a time when the US Federal Reserve and other G10 central banks are starting to tighten the monetary purse.

The country is the largest economy in the Central and Eastern European region and had been one of the star performers in the developing world. Its GDP growth rate of 4.4% in the second quarter was the envy of its more advanced neighbours but beneath the surface lurked serious problems. As independent economic firm Capital Economics noted in its report, Turkey is now among the most vulnerable of the emerging market economies, because of an external deficit “funded almost entirely by short-term, and potentially volatile, portfolio inflows and borrowing from banks abroad”.

This is unwelcome news for prime minister Recep Tayyip Erdogan of the ruling Justice and Development Party (AKP) who has been at the helm for over a decade. He is facing local and presidential elections in 2014 and a general election a year later, but it is unclear what the outcome will be, or whether the party’s president Abdullah Gul will run against him.

“Financial and economic difficulties in the euro-zone have impacted growth as well as liquidity in commercial real estate,” according to Kerim Cin, founder and managing partner of Colliers International (Turkey). “Adding to the negative effects of the regional and global markets, potential political instability may further hit the growth and weaken the economy. Turkey’s economy has been stable because of the one-party government (the AK party), but that could change if there is a coalition. As a result all these factors, people have become more cautious about making investments in the short term – one to three years – due to the uncertainty, although I am optimistic that over the longer term things will settle down and there will be opportunities.”

JLL is also positive about the country’s long-term outlook. In a recent half-year report, it notes that while the recent public protests against the government led to concern among investors, “we expect this to be temporary, with limited impact on investor demand, particularly from those with experience in the market”. It continues: “We have largely remained confident about Turkey’s future.”

JLL shows that retail was the most active in the first half, during which GIC acquired a 50% stake in Optimum Göztepe in Istanbul for about €181m and in Optimum Ankara for $165m. Both were owned by Rönesans, the leading retail and office developer in Turkey.
Also noteworthy was the €140m sale of Meydan Ümraniye, Istanbul – with IKEA, Real and Media Satürn as the anchors – to Gülaylar Group, one of the major jewellery retailers in Turkey. The deals injected much-needed transparency into the sector by showing that yield levels were in the range of 8.0-8.5%.  

Analysts believe there is scope for further development as there is a significant undersupply of new retail facilities relative to the urban populations. Industry figures show that institutional-quality retail space per capita in Turkey is only 40% of the European average and the demographic trends such as an expanding middle class, a low median age of 29, increasing female participation in the labour force and rising global brand awareness should further fuel demand.

“Retail has always been the flavour of the month and it still has potential because there are not that many modern high-quality shopping centres in Istanbul as well as the other major cities,” says David Hutchings, head of European Research at Cushman & Wakefield. “However, I also think there are and will be opportunities in office, multi-family and logistics which are needed to support the growth of retail.”

The problem with the office segment is that Istanbul dominates and there is a dearth of tradeable assets. In addition, activity is either dominated by local institutional investors or owner-occupiers buying buildings that are under construction. The city also rules the logistics sector which caters to companies offering fast-moving consumer goods, telecommunications, 3PL, automotive, and electrical & electronics. So far this year, there has only been one transaction – the disposal of the 11,000sqm Gökçe Construction warehouse for an undisclosed price.

According to JLL estimates, some of the existing warehouse assets with credible institutional tenants with a long-lease contract are being considered for disposal at too aggressive yield expectations of 6% and 7%. These assets are mainly in the preferred logistics sub-markets on the Asian side of Istanbul and, while there are a number of institutional investors that are willing to invest, the yields will remain a barrier. As a result, activity is likely to be dominated by development projects by land owners.

Cin also notes that regardless of which sectors investors are looking at they must do their homework, especially in Istanbul. “In general, whether it is retail, hotels, offices or residential, investors know that the value will go up if the building is located in the centre of the city,” he says. “However, outside that you need to understand the local dynamics, shopping habits, traffic patterns and development. For example, the older European part of the city is poised for development and restoration in the next 10 years, while the Asian coast also has undeveloped opportunities, particularly in regards to tourism. However, both parts of the city offer long-term investments but today investors should be selective, based on price.”