Real Estate Investment In Turkey: Look Beyond Intanbul

August 26, 2008 #$ Authors Zeynep Kudatgobilik +1 212 250-8524 zeynep.kudatgobilik@db.com Erich Ruppert Hochschule Aschaffenburg erich.ruppert@fh-aschaffenburg.de Ermina Topintzi +30 210 7256153 ermina.topintzi@rreef.com Tobias Just +49 69 910-31876 tobias.just@db.com Editor Tobias Just Technical Assistance Sabine Berger, Angelika Greiner Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter Real GDP expanded by almost 7% p.a. over the last 5 years. However, the Turkish economy remains vulnerable to external and domestic shocks. The domestic challenges are amplified by the global economic slowdown. GDP growth will remain between 4.0% and 4.5% for 2008 and 2009. Strong population growth, better qualified employees, deeper integration in the global flows of goods and capital and an ongoing process of macro- and microeconomic reforms promise an average growth rate of 5-6% p.a. for the next 15 years. Rising incomes of the increasingly urban population have helped changing the retail structure towards more western shopping formats. The still large supply pipeline is starting to bear supply-side risk for some Tier-I cities. Retail project developers will therefore have to focus on the smaller Tier-II cities, where significant pent-up demand still offers investment opportunities. Ongoing structural change towards more services and especially the shortage of modern office supply are the foundation for strong demand for investment in office space over the next ten years. Not counting replacement demand we expect additional demand for modern office space in excess of 5 million m² over the next 10 years in the largest 25 cities. ! " Within 10 years the number of households in Turkey could rise by 3.7 million. Combined with necessary replacements Turkey needs about 500,000 new housing units each year. In 2007 a new mortgage law was passed in Turkey. This new law will enable the mortgage system to develop. The total volume of mortgage loans could reach roughly USD 90 bn by 2015, up from almost nil in 2005. ! % Expected change in the number of households from 2007 to 2027, % -15 - 0 0 - 20 20 - 40 40 - 60 60 - 90 Sources: SIS, DB Research Current Issues 2 August26, 2008 Real estate investment in Turkey ’() `000 USD, real and nominal 14 12 10 8 6 4 2 1990 1994 1998 2002 2006 2010 Nominal Real Despite ongoing domestic political tension, vulnerabilities in the economy and continued volatility in global financial markets, Turkey remains an attractive longer-term investment market, being the second most populous country in Europe after Germany and the sixth largest European economy. It has a young and growing population of over 70 million – 43% of the Turkish population is under the age of 25 and sizable migration to the country’s cities is taking place. These demographic trends compare favourably against those of aging Europe. In addition, Turkey has increased its real per capita GDP in USD terms by more than 30% over the past 5 years. Naturally, growth in the economy and rising purchasing power levels have created increased demand for new housing and lifted the real estate market in general. Sources: IMF, Central Bank of Turkey * & + , Nominal GDP 2007, USD bn 800 600 400 200 0 Sources: Turkstat, DB Research - In this section, we will describe the shape of Turkey’s economy within the broader context of its long-term outlook, providing an overview of the macro and political environment, developments in growth, inflation and interest rates, FDI trends and the financial system. Macro and political environment The economy has made considerable progress in shaking off the legacy of the 2001 economic crisis and is on a path of growth and increased trade integration, underpinned by improved macro-economic stability and structural reforms. During the last five years real GDP growth has been impressive, with an annual average growth rate of 6.9%; inflation fell from an average of 77.5% in the 1990s to single digits between 2005 and 2007; interest rates have declined with a cautious monetary policy stance; and reductions in the ratios of fiscal deficit and public debt to GDP have created a positive environment. These macro improvements have been coupled with structural reforms, including liberalisation of key industries and reform of the banking sector. ./0 % of GDP 4 2 0 -2 -4 -6 Nevertheless, the Turkish economy remains vulnerable to external and domestic disturbances. Despite progress and improved resilience in the economy, Turkey’s economic fundamentals remain weaker than some of the major emerging market (EM) countries, particularly compared to the BRIC-countries. A widening current account (C/A) deficit (7% of GDP), large external financing needs, recent inflationary pressures and heightened domestic political concerns continue to expose Turkey to a sudden reversal of capital inflows. The possibility of a worsening in global financial markets, the deepening of the credit crisis and increasing political uncertain-ties are key risk factors for the near future. -8 2000 2002 2004 2006 2008 Sources: DB Research, Turkish Treasury 1 Heightened domestic political tensions have increased political risk in the short-term. The IslamicAKP government and the secular establishment have been at odds. The recent decision of the Constitutional Court not to ban the AKP following its indictment for alleged attempts to undermine the constitution has improved the short-term outlook. But it remains to be seen whether this decision leads to a long-lasting truce or another round of tensions down the line. On the back of rising political and global risks, Standard & Poor`s (S&P) on April 4, 2008 temporarily changed its outlook on the August26, 2008 3 Current Issues . " 2.5 60 2.0 40 1.5 1.0 20 0.5 0 01 02 03 04 05 06 07 08 TRY / USD (left axis) TRY (left axis), EUR ISE 100 Index (right axis), `000 Sources: DB Global Markets, Bloomberg 2 4 5-year CDS spread, bp 700 600 500 400 300 200 100 0 04 05 06 07 08 Source: DB Global Markets 5 Sluggish growth in construction and the domestic real estate market ) %, yoy 30 20 10 0 -10 -20 -30 nation`s BB- credit rating to “negative” from “stable” but returned at the end of July. Increasing global risk aversion on the back of the US credit market turmoil has led to a deterioration in Turkey’s financing outlook and in market sentiment overall. While the Turkish economy has become more resilient to and flexible against international shocks, the credit crisis has led to a deterioration in market senti-ment and created volatility in domestic financial markets.1 Downside risks are substantial, as the economy relies on a large amount of external financing. The cost of market financing has increased and funding to domestic banks from securitised loans has contracted. Despite all of this, longer-term FDI decisions do not seem to have been greatly affected. The subprime crisis has not had a direct impact on banks, as the Turkish mortgage system does not allow subprime loans and the banking system is well regulated. Non-performing loans, as a percentage of all housing loans in Turkey, represent less than half a percent. Growth, inflation and interest rates Global credit squeeze, escalating political tensions and monetary tightening will weigh on economic growth in 2008. From 2006 to 2007, the annual growth rate decreased from 6.9% to 4.5%. Slower growth in 2007 was attributable to the strength of the Turkish currency, which hurt the export industry, the delayed effects of monetary tightening in mid-2006 and a drought-related drop in agricultural output. The most significant slowdowns in growth in 2007 were in agriculture, construction and manufacturing. The unfavourable developments in the global economy which began during the second half of 2007 have increased downside risks on domestic and external demand growth. Heightened uncertainties point to an even more challenging environment for growth per-formance going forward – real growth is projected at 4.2% and 4.4%, for 2008 and 2009 respectively. Forward-looking indicators on consumption and investment spending also point to a softening in domestic demand. However, growth is expected to pick up in the medium term, when global and domestic political uncertainties dissipate. From 2005 through the first half of 2007, construction was one of the most important growth sectors in the Turkish economy. Private con-struction projects and public investments supported this growth. But, by the end of 2007, construction activity stagnated. Rising prices of commodities, including iron, copper, steel and cement have con-tributed to increased construction costs. The real estate market has also seen a slowdown in growth since late 2006, affected success-ively by the economic turmoil of May-June 2006, an unease in domestic markets due to political tensions surrounding the 2007 elections, global market volatility due to the subprime mortgage crisis in the US and higher energy prices. Rising policy rates that led to rising interest rates for housing financing instruments have also dampened demand for real estate purchases. 1999 2001 2003 2005 2007 Gross fixed capital Government consumption Private consumption Source: Turkstat 3 Worsened inflation expectations and the already visible secondary effects of the surge in energy and food prices have slowed the disinflation process and forced the Central Bank of Turkey (CBT) to abandon its original 2009 inflation target (it will also overshoot its 1 The impact of the current global credit crunch remains limited when compared to earlier financial markets turmoil. The May-June 2006 turbulence resulted in high capital outflows, a sharper depreciation of the TRY and a significant rise in interest rates (Central Bank of Turkey (CBT) raised rates by 425 bps). 4 August26, 2008 Real estate investment in Turkey $ Growth rates of selected sectors, % 30 20 2008 target by a substantial margin). We expect inflation to trend down and decline visibly with the help of favourable base effects in 2009. With the inflation trend declining in the long term, the CBT is expected to gradually ease monetary policy and bring real interest rates between 5% and 7% over the next few years. Impressive FDI trends during recent years 10 0 -10 -20 2003 2004 2005 2006 2007 2008 Agriculture Manufacturing Construction Source: Turkstat 6 % 80 60 40 20 0 2002 2004 2006 2008 Policy rate Inflation Source: Bloomberg 8 ( USD bn 25 20 15 10 5 0 2000 2002 2004 2006 2008 Sources: Turkish Treasury, DB Research 9 ... - tailieumienphi.vn