Mark Bentley
Apr 19 2018

Turkish real estate ills reflect Erdoğan’s snap poll decision

Turkey’s real estate industry is going through hard times, reflecting a wider malaise in the economy and contributing to a decision by President Recep Tayyip Erdoğan on Wednesday to call snap elections on June 24.

This week, the country’s leading real estate group appealed to the government for financial aid, saying rising interest rates are leading to stagnation in the sector.

The struggles of Turkish real estate companies – house prices are rising at just one-third of the inflation rate – are the direct result of government measures to stimulate the economy, which have pushed inflation into double digits and the lira to record lows against the dollar. Erdoğan, likely aware that the economy may now run out of steam, has realised that elections should be brought forward to ensure he wins a second term as president.

Erdoğan, citing economic developments and Turkey’s military operation in Syria, told reporters at his palace in Ankara that elections will be held on June 24, 18 months earlier than scheduled.

The government’s tax breaks and loan guarantees have pushed annual consumer price inflation to 10.2 percent and producer price rises to 14.3 percent. The government’s measures have also widened the current account deficit to almost 6 percent of GDP, leading to a slump in the lira’s value. The currency’s depreciation to as low as 4.17 per dollar is a double-whammy for construction companies, many of whom have borrowed in dollars to help fund expansion.

The government should now give tax breaks to real estate companies to compensate for the cost of rising interest rates, Feyzullah Yetgin, head of the Real Estate and Real Estate Investment Companies (GYODER), said in a speech at a conference in Istanbul on Tuesday. Sales taxes for property purchases should also be simplified and reduced, he said.

The price of new homes in Turkey rose 3.7 percent annually in March, just over one-third of the rate of inflation, according to March data from GYODER. Prices rose 0.4 percent month-on-month, with the value of larger properties increasing just 0.1 percent. Meanwhile, the cost of raw materials used in construction is surging 17 percent, according to official data.

erdoğan bahçeli
Turkish President Recep Tayyip Erdoğan agrees with political ally Devlet Bahçeli to hold early polls

Turkey’s high inflation rate means banks must charge home buyers higher rates of interest to make a profit. Mortgage rates in the country now exceed 1 percent monthly, a traditional psychological barrier that deters people from buying property.

Economic confidence among construction companies is also slumping, suggesting deeper problems in the sector. Confidence dropped to 78.9 in March from 83.8 in February in a latest survey by the state statistics institute published on March 27. The decline was the biggest of any area of the economy. Any reading below 100 indicates pessimism about the future.

Nowhere are the problems in Turkey’s real estate industry more acute than in Istanbul, the country’s largest city of 15 million people. East of Pendik, on the city’s Anatolian edge near the city’s Sabiha Gökçen airport, dozens of high-rise apartment blocks remain unfinished or uninhabited. Towers in a similar state of construction are also strewn across the city to the west, beyond the main Ataturk airport. Buildings in Ankara near the main airport are also half empty or unfinished.

Nazmi Durbakayim, head of the Istanbul Constructors’ Association (INDER), said the government should help boost the industry by introducing incentives for lower wage earners to buy property. Eighty-five percent of people who want to buy their first home can afford monthly repayments of only 1,500 liras ($365) to 2,000 liras ($490) per month, he said.

Consumer confidence in Turkey is also at a low ebb as elections approach. It fell to 71.3 in March from 72.3 in February, according to the statistics office. Unemployment is also on the rise – the jobless rate increased to 10.8 percent in January, the highest in 10 months, from 10.4 percent in December.

The price of land is also eroding the profits of real estate firms, said Erden Timur, the head of Turkish property company Nef. Land costs in Istanbul can constitute more than 50 percent of constructors’ total costs, while levels in Europe vary between 7 percent and 15 percent, he said.

Erdoğan, in a written statement to this week’s real estate conference, said the country was relying on construction companies to help Turkey become one of the world’s top 10 economies by 2023, its centenary year. It currently lies 17th.

Turkey’s economy of $850 billion would have to almost triple in size to catch up with Russia, in 10th place, which boasts GDP of $2.2 billion.

Calling elections for June carries risks for the president. Elections in Turkey traditionally lead to an economic slowdown because consumers and businesses tend to delay economic decisions. While the snap poll may minimise this, Erdoğan is set to face a serious challenge from Meral Akşener, the leader of the Good Party (IP) and the first serious right-wing alternative to his rule since his Justice and Development Party (AKP) won power in 2002. A small Islamist group -- the Felicity Party (SP) -- may also erode Erdoğan's vote share.

Akşener will not make it easy for Erdoğan and has a strong economic team behind her, led by former Central Bank Governor Durmuş Yılmaz, who has slammed Erdoğan’s economic policies as reminiscent of those that his predecessors followed prior to a financial crisis in 2001.

The construction industry has proven the mainstay of Turkey’s economic growth since Erdoğan won power. The president will need to introduce swift measures to help this important constituency and employer of labour if he is to avoid losing what might prove to be essential voter support come June.