PEGA TURKEY: ECONOMIC OVERVIEW & REAL ESTATE MARKET

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1 TURKEY: ECONOMIC OVERVIEW & REAL ESTATE MARKET Turkey is a dynamic emerging market economy. It is strategically located between Europe and Asia, between two cultures and borders the Mediterranean, Aegean and Black Seas. The country has a vibrant young population of over 64 million people over 73 percent of which lives in urban centers and a reputation for private sector entrepreneurship. In 2000, Turkey's GNP was about US$210 billion equivalent (about US$3,280 per capita). Agriculture accounts for some 16 percent of GDP, industry for 24 percent, and services for 60 percent. Turkey's investment rate is in the range of 24 percent of GNP, while imports and exports together represent about 50 percent of GNP. Turkey signed a customs union with the European Union in 1996 and became a candidate for EU membership at the Helsinki summit in December The sudden turmoil that hit Turkey's financial sector in late November 2000 seriously affected the economy in While the turmoil was triggered by an apparently isolated incident in the banking sector, this occurred in a context of falling investor confidence given the perception of a slowdown in reform implementation and growing macroeconomic risks. In this environment, the problem quickly spread throughout the banking sector, leading to a massive outflow of capital and rapid rise in domestic interest rates. The crawling peg rate system was abandoned and the Turkish Lira was floated, resulting in its initial devaluation of 40% against the US Dollar. In February 2002, Turkish inflation slowed more than expected, an indication of slight economic recovery after the previous year's financial crisis. Gross domestic product (GDP) grew 8.2 percent in the second quarter of 2002, the State Institute of Statistics announced. These figures brought first half GDP growth to 5.2 percent and GNP growth to 4.7 percent, suggesting that a 3 percent official growth projection for the end of the year could be surpassed by a comfortable margin. ( MH/100902i.html ) On a sectoral basis, growth in the second quarter was mainly driven by industry with 12.2 percent and by trade with 10 percent. Growth was restrained by an anticipated contraction in the construction sector and financial institutions with 5.3 percent and 9.6 percent respectively. 1 1

2 On the other hand, we can not observe any reflection of this growth rate on the real estate market yet. The vacancies are high and the rents tend to fall. The market remains immature, however, with the non-existence of financial resources; meaning that landowners and developers fund the vast majority of property. The investment market is composed of corporate investors, private investors and Real Estate Investment Trusts (REITs), known as Real Estate Investment Companies (REICs in Turkey). The introduction of REICs in 1997 enabled foreign capital to invest in the sector for the first time. There are currently 11 REICs in the market with eight of these being traded on the Istanbul Stock Exchange. REICs invest in residential commercial real estate, with the two largest funds operating exclusively in the commercial sector. One REIC invests exclusively in the residential sector. Further information on Turkey s REICs can be found at ( The biggest problem the real estate sector suffers is the high cost of capital. Banks do not prefer to make long or medium-term loans, due to high and unpredictable inflation rates. These high inflation rates lead people to Government housing projects and cooperative schemes (privately established housing unions). A mortgage system does not exist in the sector, however there are various banks and financial institutions working closely together with the Governmental Institutions on establishing the Turkish mortgage system. 2

3 OFFICE MARKET The real estate market in Turkey has made spectacular advances in the past 10 years, when the first high-rise buildings began to appear in Istanbul. The market remains immature, however, with the non-existence of financing resources meaning that landowners and developers fund the vast majority of office properties. No organized database of properties exists in the market and all NAI Pega s data is obtained by phone and face-toface interviews and does not include owneroccupied space, for which information is impossible to acquire. Class A buildings are concentrated in the Levent-Zincirlikuyu- Maslak region (in red), which is considered Istanbul s Central Business District (CBD). The primary suburban office markets are the Gunesli-Ikitelli and Merter districts (in blue) in the West on the European side, and Altunizade (in purple), Kozyatagi (in green), and Kavacik (in yellow) on the Asian side. 3

4 According to international standards and NAI Pega s affiliations with NAI (New America International) and SIOR (The Society of Industrial and Office Realtors), offices in Istanbul are classified as CBD, Class A and Class B; and out of CBD, Class A and Class B; and can be identified as follows: CBD : the area of greatest concentration of office space and business services. Istanbul s CBD consists of the Besiktas Maslak axis, including Besiktas, Fulya, Balmumcu, Zincirlikuyu, Esentepe, Sisli, Etiler, Akatlar, Levent and Maslak. Out of CBD : secondary concentrations of office space consisting of Kozyatagi, Altunizade, Kavacik, Merter and the airport region. Class A : Buildings prupose-built for office use that offer the highest technical standards available and amenities including, but not limited to: professional security, open office space, indoor parking, central HVAC, sprinklers and generator are considered Class A. While International Standards call for minimum floor plate size of 500m 2 for Class A consideration, in Turkey, some buildings with slightly smaller floor plates may be considered Class A if they meet the other criteria. Approximately 44 buildings in the CBD are considered Class A and Class B, and 116 suburban buildings are considered Class A and Class B. As of November 2002, the breakdown of CBD and out of CBD office vacancy rates and the rental rates are seen below. 60,00% 50,00% 40,00% 30,00% 20,00% 10,00% 0,00% Rental Rates November 2002 Vacancy Rent $13,09 58,54% 17,95% $9,66 CBD Out of CBD $14 $13 $12 $11 $10 $9 $8 4

5 Class A office stock current totals more than 1 million square meters, with approximately 50% of Class A office buildings located in the CBD. As of September 2002, the vacancy rate for CBD Class A offices is just under 17%, down from 19% in March. As of November 2002, this rate is %15,30. Another 212,010 m 2 of new Class A CBD office space is under construction. Class B office space within the CBD has seen a significant decrease in vacancy from 46% in March to 32%. The vacancy rate is 31.29% in November. The vacancy rate for Class A offices outside the CBD is 58%. Class B buildings located outside the CBD are often constructed indiscriminately; with no study of feasibility, and as such show the highest vacancies, currently over 59%. 70,00% 60,00% 50,00% 40,00% 30,00% 20,00% $14,04 $10,69 $11,50 $8,73 $16,00 $14,00 $12,00 $10,00 $8,00 $6,00 $4,00 10,00% $2,00 0,00% $- A Class CBD A Class out of CBD B Class CBD B Class out of CBD Vacancy Rent As seen in the above graphic, the average rental rate for Class A office space in the CBD is currently $ Rental rates for Class A space outside the CBD average just under $10,69. B Class office space in the CBD averages $11.50, compared to $13.10 in March, while rental rates for Class B office space outside the CBD average $8.73. Office leases in Istanbul are triple-net, with the tenant responsible for monthly common charges (currently between $1.50 and $4.50 per m 2 per month), and applicable taxes (VAT of 18% if the landlord is a corporate entity or withholding tax of 22% if the landlord is a private individual). 5

6 The following chart displays the analysis of weighted averages, a tool that takes into account the amount of vacant space relative to the rental rates being quoted by landlords in a given building. Using weighted averages, we can see that office space located within the CBD is generally more in line with market conditions than office space located outside the CBD in both classes. $16,00 $14,00 $12,00 $10,00 $8,00 $6,00 $4,00 $2,00 $14,04 $13,66 $10,69 $10,22 $11,50 $9,41 $8,73 $8,06 $- A Class CBD A Class out of CBD Quoted Rental Rate B Class CBD Weighted Average B Class out of CBD Weighted Average Rental Rates Average quoted rental rate weighted by the vacant space available at the rental rate, in each class. Obtained by multiplying each building's rent by the vacant space available in each building, adding the products and dividing by the sum of the vacant space available. 6

7 A breakdown of relative vacancy rates for each of the various business districts, on both European and Asian sides of Istanbul, can be seen in the chart below. Region 2002/ / / Weighted Average KAVACIK $ 9,19 $ 8,51 $ 7,68 ALTUNIZADE $ 9,98 $ 9,66 $ 10,21 KOZYATAGI-BOSTANCI $ 11,45 $ 10,28 $ 8,15 LEVENT-AKATLAR-ZINCIRLIKUYU $ 15,10 $ 13,89 $ 12,44 MASLAK $ 11,94 $ 12,29 $ 12,84 SISLI-BESIKTAS $ 13,00 $ 11,60 $ 10,14 HAVAALANI $ 8,52 $ 8,53 $ 8,67 The demand for office space is well below supply at the moment because of new construction and the relative stagnation of a market in the throes of an economic crisis. Vacancy rates are still high, especially on the Asian side and other non-cbd areas, mainly due to the influx of newly completed high and spacious buildings. In addition, the local market is replete with buildings that, although qualify as A-Type and are therefore included in this report, contribute to a skewed vacancy rate, and will remain largely vacant. NAI Pega maintain that the better-located and higher quality buildings that have been developed according to international requirements and standards will always have higher occupancy rates. During this economic crisis, sales have been all but nonexistent as asking prices remained slower to reflect the market s downturn than rental rates. This is due largely to the fact that properties are equity financed, therefore limiting the debt servicing that would otherwise cause landlords to reduce asking prices. Properties located in the CBD continue to remain more competitive in sales price than those located outside the CBD and landlords are responding with asking prices more in line with market values. In analyzing the below graphic, rental rates were on the rise in 1996 until the combination of the Russian Crisis in late 1998 and the Marmara earthquake in August of 1999 negatively impacted rental rates. Since 1999, a conspicuous fall in prices reflects both an over-supply of property in the market along with Turkey s continuing economic woes and the government s strict anti-inflationary measures. 7

8 NA I PEGA Rental Rate and Office Stock Office Stock Rent ($/mo/m²) m² m² m² m² m² m² m² m² m² 0 m² $19,0 $18,4 $18,0 $17,0 $16,0 $12,0 $12,2 $10, m² m² m² m² m² m² m² m² m² /1 2002/ $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $- Prior to 2001, landlords of Class A office space were privileged to offer a quality item with limited competition in the market. The combination of a surge in international-quality office stock and the ongoing economic crisis has resulted in better terms attainable for office tenants. Where such space was consistently delivered in a Shell & Core state, leaving tenants to fit out and decorate at their expense, landlords have become competitive in responding to the demands of prospective tenants in providing fit out. We see more and more landlords delivering new buildings complete with raised floors and suspended ceilings, a practice that was all but unheard of in the recent past. In addition, appealing rental rates make the office rental market more attractive than ever. 8

9 RETAIL MARKET The retail sector has been undergoing a rapid transformation since the late 1980 s. Prior to that the sector was dominated by mixed-use structures: lower floors housed shops, while the upper stories housed apartments or offices. The shopping mall-trend started in 1988 with Galleria in Ataköy. GENERAL INFORMATION ON SHOPPING CENTERS SHOPPING CENTER NAME LOCATION YEAR OPENED GLA (M²) NUMBER OF SHOPS PARKING CAPACITY EXISTING SHOPPING CENTERS GALLERIA ATAKÖY ATRIUM ATAKOY AKMERKEZ ETILER CAPITOL ALTUNIZADE CAROUSEL BAKIRKOY CARREFOUR KOZYATAGI GRANDHOUSE MALTEPE MIGROS BEYLIKDUZU MASS G.OSMANPASA MAXI SILIVRI MAYADROM AKATLAR PROFILO MECIDIYEKOY HAS CENTER BAHCELIEVLER OLIVIUM ZEYTINBURNU CARREFOUR VEGA ÜMRANIYE IS BANK LEVENT AY MERKEZ BEYLIKDÜZÜ n/a 500 NAUTILUS KADIKÖY FUTURE DEVELOPMENTS METROCITY 1. LEVENT ATA KOZYATAGI EGS PARK YESILKOY MAYADROM ETILER ETILER TATKO GAYRETTEPE TAT TOWERS ZINCIRLIKUYU ECZACIBASI ATRIUM LEVENT PORTO FLORIA FLORYA

10 Recent activity in the shopping center arena has been somewhat sluggish compared with past growth spurts. As in the office market, rental rates in the retail market were largely fixed to a range of to TL to the US Dollar for While retail rents did not fall as much as commercial rents, turnover and vacancies in Istanbul s most prestigious shopping malls are conspicuous. Several mixed-use projects under construction have failed to materialize, mainly due to landlords financing issues. Carrefour Vega Shopping Center, located in Umraniye, opened late in 2000 and consists of 93 shops in m² of GLA, including Spanish retailer Zara, English chain Top Shop and Sephora in addition to anchor, Carrefour. Another new boutique-type shopping center was opened at the Levent Is Bank Towers in The mall consists of 47 stores in an area of m 2. Opened in September 2002 is the Nautilus Shopping Center in Kadikoy. Nautilus consists of 52,000m 2 GLA, with 125 retail units including anchor, Carrefour, Çarsi, Tepe Cinemamaxx, Zara. to an enormous amount of available retail space. High street rents dropped as a loss of consumers disposable income left retailers in a bad position. Rental rates at shopping centers were revised accordingly, with retail expansion virtually nonexistent in the market. Retail ROI (return on investment) rates are also decreased during this period and interest in foreign retail firms is still slow. (Exceptions include Spanish retailer, Zara, slated to open a new retail unit in the prestigious Akmerkez mall as well as in Nautilus Shopping Center) As is common throughout the Istanbul real estate market, retail rental rates vary considerably depending on the particular situation of each landlord. With the economy beginning to show signs of improvement in the beginning of 2002, there is no doubt, however, that the time to enter the retail sector in Istanbul is now. The retail sector has not been immune to repercussions from the ongoing economic crisis in Turkey. With purchasing power significantly reduced as a result of the TL s devaluation and inflation levels hitting hard, the previously thriving retail sector was plagued by discounted prices and store closings. Reforms in the banking industry led 10

11 Beautiful Istanbul, being on the crossroads of two continents, has historically been a real attraction for visitors from all over the world. More so than in the past, as seasonality is becoming less significant, touristic activity is apparent throughout the year. This is mainly due to the fact that travellers are now visiting Istanbul both for leisure and for business purposes. The effects of the September 11 th terrorist attacks in the United States had a profound affect on the tourism industry, where occupancy rates free fell to 30% levels in October Compared to the same month a year earlier, when occupancy rates were at Category THE HOTEL MARKET Current Current # of Number of Rooms Establishments 80%, the 30% occupancy rates of October 2001 can be seen in perspective started slowly for the hotel sector, with the first four months of the year very slow. Buisiness picked up in May, but occupancy rates remained lower than usual for that time of year. September occupancy rates are good, with conference/congress business picking up and contributing to occupancy rates in line with pre-september 11th levels. October and November are looking strong as well. The following table outlines Istanbul s current and hotel situation. # of New Establishments by 2008 # of New Rooms in Star Hotels Star Hotels Star Hotels Star Hotels Star Hotels Special Class Holiday Villages nd and 3 rd Class Hotels with Municipality Approval Motels and Pensions with Municipality Approval Floating Hotels Municipality Guest Houses Other Guest Houses University Campuses Total The majority of 5 star hotels are found in what the industry calls: Congress Valley. This area is located on the European banks of the Bosphorus, between Taksim and Ortaköy. These prestigious hotels include: The Çiragan Palace, The Conrad, The Hilton, The Hyatt, The Ceylan Intercontinental, The Ritz Carlton and The Swissotel. These hotels saw summer 2002 occupancy rates of approximately 55-56%. In response to 11

12 increasing competitiveness and the near disappearance of cruise ships visiting Istanbul since September 11 th, hotels in Congress Valley reduced rates by approximately 15-20%. The majority of Istanbul s hotels can be found in the Taksim area, abundant in both reasonably priced tourist and business hotels. Most of these are 4 star hotels, with the largest being: The Divan, The Dorint, The Marmara and The Parksa Hilton. The absence of a 5-star hotel on the Asian Side is conspicuous. The quality hotel market is primarily a recreational - pleasure market responding to heavy demand from European and Russian travellers, who often travel in organized groups. Developments in this sector decelerated after 1996 and occupancy levels and average room rates increased accordingly. Occupancy rates in the quality hotel sector in Istanbul progressed consistently after 1994 as may be observed graphically below. This is primarily because the city has become an increasingly popular destination for conference and incentive related business in recent years. Occupancy Rates 4 Star Occupancy Rates 5 Star ,7 87,8 91, , ,3 67,8 69,4 74,5 69,6 70,1 65,6 74,2 62,0 67, ,5 55,4 56,

13 In spite of periods of soft tourism, vacancies remain unusual in downtown hotels in Istanbul, and refurbishment projects will become more important as a result. Such projects will be in the form of the conversion of existing dilapidated buildings into renovated hotels, usually concentrated in Istanbul' s older districts. Istanbul s newest 5 star hotel is the 245-room Ritz Carlton, which opened in October The renovation of a historic building near the Ciragan Hotel in the Besiktas/Ortakoy area is being developed as Istanbul s second Four Season s Hotel, the first one being located in Sultanahmet in the historical penninsula. The construction of an additional 5-star hotel in Ortakoy has been on hold since last year. METHODOLOGY AND REFERENCES NAI Pega used the following techniques for data collection: NAI Pega office stock database, which includes more than 180 A&B Class office buildings Face-to-face interviews with the landlords of main plaza buildings, Ministry of Tourism, Ankara Regular evaluation of periodicals, newspapers, and real estate magazines, Periodic meetings with the most prominent real estate companies of Istanbul, Cold Calling. 13