Presentation%20for%20the%2017th%20Annual%20Conference%20The%20European%20Real%20Estate%20Society%2023-%2026th%20June%202010,%20Milan,%20Italy

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Presentation for the 17th Annual Conference The
European Real Estate Society23- 26th June 2010,
Milan, Italy

• AN ANALYSIS of the STRENGTHS and WEAKNESSES of
  the TURKISH REAL ESTATE MARKET
• 26.06.2010
• Yener COSKUN
• Senior Specialist
• Capital Markets Board of Turkey
• PhD Candidate, Ankara University The Graduate
  School of Natural and Applied Sciences, Real
  Estate Development Department

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• Professional Experience
• Capital Markets Board of Turkey, Senior
  Specialist (1995-Current)
• Education
• Ankara University, Faculty of Political Science,
  Public Finance Dpt. (1989-1994)
• University of Pennsylvania, Wharton School,
  Visiting Scholar, Capital Markets Program
  (2003-2004)
• Gazi University, Business Management Dpt., MSc,
  Banking (2005-2007)
• Ankara University, The Graduate School of Natural
  and Applied Sciences, Real Estate Development
  Dpt., PhD Candidate, Real Estate Development
  (2008-Current)
• Publications
• Published books/journal articles planned
  book/book chapters/journal articles

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Presentation Plan

• OVERVIEW TO TURKISH ECONOMY AND REAL ESTATE
  SECTOR
• OPPORTUNITIES in TURKISH REAL ESTATE SECTOR

• DISADVANTAGES of TURKISH REAL ESTATE SECTOR
• A MODEL SUGGESTION

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OVERVIEW TO TURKISH ECONOMY AND REAL ESTATE
SECTOR
5
The Outlook of Turkish Economy

• Growth pattern and financial sector
• Open economy and liberal regulations in finance
  sectors
• Short term capital movements
• Intensive portfolio investments on stocks and
  T-bonds
• Crisis
• Turkey has faced several financial crisis arisen
  from the banking sector
• 2000-2001 banking crisis, was the most
  destructive one
• 2003-2007 Boom Period
• Liquidity surplus in global economy
• Increasing stability/positive outlook of the
  Turkish economy
• FDI between the 2005-2009/9 period is 73 billion
  USD

6
Global Financial Crisis and Turkish Economy

• Economy enjoys having less developed markets
• No crisis conditions in banking, capital markets
  and insurance sectors
• External impacts
• Negative growth,
• Increasing unemployment etc.
• Real Estate Sector
• Currently
• Excess supply in housing
• Decrease in property values
• Positive long-term outlook

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Real Estate and the Turkish Economy
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Fundamentals

• Forest, Pasture, Cadastral Area
• The area of Turkey is 778.000 km².
• 26 is forest, 12.3 is pasture area
• The rest is the cadastral area which contains
  480.000 km², in total.
• Residential and rural area
• Residential area is about 5 (40.000 km²)
• Rural area is about 56 (440.000 km²).
• Parcels and Registers
• There are approximately 35.000.000 parcels
• 600.000 registers in Turkey
• (Bank and Mataraci, 2004 3).
• As for cadastre, the works with a completion
  percentage of 88.1 as of 2009 (Çete et al.,
  2010 627)

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Demographic Trends and Real Estate

• Urban population
• Population growth and inter-regional migration
  significant drivers
• Increased by some 10 million dwellers,
• Istanbul alone has grown by nearly 2 million new
  inhabitants.
• The last census counted a population of roughly
  70.6 m at the end of 2007.
• In 2007 the fertility rate was at 2.2 (children
  per woman) compared to an average fertility rate
  of 1.5 for the EU-25 countries.
• With currently more than 53 of inhabitants
  younger than 30 years
• Overall growth and construction volume reached
  24 bn in 2007.
• Deutsche Bank Research (2008 7), Deloitte (2009
  77) and Jones Lang Lasalle (2008 5)

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Household Sentiments

• Real estate economy is growing at the expense of
  financial economy
• The motive is related to protection of savings
  from adverse impacts of
• High inflation rates,
• Negative real interest rate
• Real estate represents
• Hedging instrument rather than a short-term
  investment instrument,
• Particularly for the perception of the middle and
  lower - income residents

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Construction Sector

• Construction activities seems critical for
• GDP growth
• Employment
• Turkey is among the top countries in the export
  construction services.
• In the period of 1972-2009
• About 700 Turkish contractors have completed,
• Over 5.000 projects
• In 75 countries
• The total value 155 billion USD.

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Housing Construction

• Most housing in Turkey is produced by
• private developers,
• public, quasi-public (cooperatives)
• private organizations.
• There are also substantial amount of shanty
  houses (Halicioglu, 2005 1).
• Social Housing by HAD

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Housing Shortage

• Due to population growth and continuing
  urbanization
• Turkey will require an additional 5,5 million
  housing units,by 2015.
• 500,000 new housing units required to be built
  annually
• (Turhan, 2008 4).

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Opportunities in Turkish Real Estate
MarketsMotives in Domestic DemandOpportunities
in Istanbul RE MarketsAdvantages of REITs
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Motives in Domestic Demand

• High inflationnegative real interest rates
  Incresing investment in
• Precious metals (specifically the gold market)
• Real estate (Coskun, 2010a 30).
• Real estate is symbols of socio-political statute
  (particularly for rural area).
• Spending on housing finance and rent consist of
  considerable part of consumer payments.

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Motives in Domestic Demand

• Ownership ratio seems high in Turkey,
• Average housing ratio
• 67 in EU 27 countries
• 68 in Turkey
• The ratio is below 40 in the urban areas.
• The main component of the strong domestic demand
  is residential.
• Demographics,
• Rural immigration,
• Urbanization
• Industrialization
• Renewal
• But still housing shortage in the market
• European Mortgage Federation (2007 124) and
  Kongar (2003 562) .

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Opportunities in Istanbul Real Estate
MarketsThe Latest Reports

• In the report Emerging Trends in Real Estate
  Europe 2010, ULI and PwC (2010 9, 35) ranked
  Istanbul third for investment prospects and first
  for development.
• In the next twenty years, the population in the
  provinces of Antalya, Bursa and Istanbul will
  likely increase by more than 30 (Deutsche Bank
  Research, 2008 7).
• The built-up area in the province of Istanbul
  increased by more than 40 between 1990 and 2005
  (Deutsche Bank Research, 2008 6).
• Financial services in Istanbul might create
  further expansion in real estate markets.

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Opportunities in Istanbul Real Estate
MarketsPotential Development

• Istanbul needs more office space, upper/middle
  class residential, logistics and hotel
  investments.
• It is estimated that 5 million sqm new office
  space will be required in the next 10 years in
  the largest 25 cities (Altan, 2009 18).

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Advantages of REITs

• REITs offer leverage opportunity to real estate
  companies.
• Less developed, BUT,
• Exempted from corporate and income taxes
• Freedom to choose their dividend policies
• Significantly more flexibility in managing their
  portfolios than their counterparts in developed
  countries (Erol and Tirtiroglu, 2008 2694).

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Disadvantages in Turkish Real Estate
MarketsInefficient Finance-Real Estate
LinkProblems in Real Estate AppraisalProblems
in Housing Caricature http//www.hse.gov.uk/my
th/images/risk2.jpg (07.05.2010)
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Inefficient Finance-Real Estate LinkPrimary
Market

• Real estate growth may not reflect the same
  amount of growth in primary/secondary mortgage
  markets.
• Bad news
• Housing loans or institutional housing finance
  has only 3 of the total housing ownership
  (Tüsiad, 2005 83).
• Residential mortgage debt per capita were 30,
  100 and 170 in Turkey (i.e. 650, 860,
  1.170 in Crotia) (European Mortgage Federation,
  2007 122).
• Good News Room for development

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Inefficient Finance-Real Estate LinkSecondary
Market

• Capital market finance broadly depends on stock
  financing rather than bond financing
• No securization in secondary market

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Inefficient Finance-Real Estate LinkSecondary
Market

• Legal Structure
• General belief mortgage regulation is sound.
• Crowding Out
• Interest rates were gradually decreasing,
• But still no securization.
• Financial crisis/constraints are also
  destabilizing the real estate market.

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Problems in Real Estate Appraisal

• Appraisal problems
• Market/public based real estate transactions
• Appraisal problems are increasing NOISE in the
  MARKET!!
• Land shortage in the urban area,
• Complexity of land use and zoning practices
• Data/Information Problems NOISE in the MARKET!!
• Less effective data availability (sales and rent
  information/statistics)
• No sound/generally accepted official/unofficial
  value maps
• Absence of real estate index

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Protecting Public Interest

• Intensive political content and complicated
  structure
• The appraisal need of public properties
• Public institutions transactions
  (sale/lease/privatization etc. agreements,
  expropriation etc.)
• Decisions of courts
• The system implies weaknesses

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Appraisal Problems Results

• Less observable price mechanisms/information and
  non-transparent market structure
• Impair rational decision-making
• Negative impacts on buyer/seller incentives in
  both residential and commercial markets.
• Negative impacts to marketability of real estates
  and real estate investors satisfaction
• Consumer Protection (??)
• Impair mortgage markets
• Credit market increasing non-performing loans
• Securitization markets future problems
• Caricature http//z.about.com/d/politicalhumor/1/
  0/Z/q/1/mortgage_morning_after.jpg

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Appraisal and Public Interest

• Public sector is the leading actor in real
  estate.
• Central and local governments have extensive
  authorities
• Appraisal requirements for public
• Sales, Lease, establishment of servitude,
• Privatization of public properties,
  expropriation,
• Contracts on build-operate-transfer
• Public private partnership (PPP)
• In the expropriation, the value of land may
  change depends on the decision of
• Value Appreciation Commission
• Special Value Appreciation Commission
• Expert witness (Keskin, 2003)

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Better Standards for Appraisal

• Good News
• CMB has adopted international valuation standards
  as a regulation in 2006.
• Regulated appraisal activities in banking sector
  and capital markets.
• Bad news
• Less effective regulatory framework on public
  properties appraisal
• Market culture and knowledge (??)

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Problems in Housing Market

• Illegal Buildings
• Permits to use buildings criterion, it is defined
  that 67 out of 100 buildings are illegal in
  Turkey (Turhan, 2008 5-6).
• The number of irregular housing reached up to
  2.200.000 in Turkey in early 2000s (Keles, 2004
  560-561).
• Cost of Land
• In a typical housing construction (or development
  projects) CoL is ranging between 30-50 in the
  urban area
• Absence of effective land management and land-use
  regulations

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Solving Housing Problem

• Can Social Housing Solve the Problem?
• Mission of the State.
• Low-cost housing for middle and lower class
  people
• Housing Development Administration produced
  423.854 housing unit between the period of
  2003-2010
• Sustainability?? (no secondary market for
  mortgage)
• What About Other Residentials?

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A MODEL SUGGESTION ESTABLISHMENT OF REAL ESTATE
REGULATION AND SUPERVISION AGENCY
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Rationale

• Failures of solving the problems of
• Housing,
• Land-use,
• Urbanization,
• Real estate appraisal,
• Protecting consumers and public benefit etc.

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Customer Protection

• Conceptually, related to
• Capital markets, banking and insurance.
• In real estate
• Massive transactions/unsophisticated
  investors/Information asymmetry
• No (single/effective/financial market
  like)watchdog in the market
• Particularly critical in residential and rural
  property transactions.
• In Turkey consumers are unprotected
• Incomplete housing sales,
• Real estate broker communications,
• Mass-housing projects,
• Land-use/development projects,
• Cooperatives etc.

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Different Focus in Investor Protection

• For financially developed countries
• Mortgage market financial transactions/products,
• Turkey
• Real estate marketing/brokerage activities,
• Non-institutionally financing real estate
  transactions

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Primary Expectations I

• To issue regulations/standards for
• Real estate brokerage/marketing/appraisal, and
  also housing finance
• To enhance
• consumer protection,
• public interest
• market efficiency,
• To coordinate the authorized government
  institutions based on the above objectives.

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Primary Expectations II

• To promote fair market practices,
• To protect unsophisticated investors,
• To enhance appraisal profession,
• To enhance primary and secondary mortgage markets
  through incentives,
• To develop policies for the management of public
  properties and urban area land shortage,
• To develop policies for sustainable housing
  finance,
• To issue periodic public reports on real estate
  sales/rent data, indexes and value-maps,

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Primary Expectations III

• Simplifying, consolidating and converging zoning
  practices,
• To oversee foreign real estate investments,
• To increase and coordinate local/SROs authorities
  on regulatory/supervisory process,
• To issue reports on the major developments,
• To analyze the developments in land use
  practices,
• To publicly disclose their balance sheet,
  policies and practices.

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CONCLUSIONCarthago delenda est, (Carthage must
be destroyed)CATO, Roman statesman

• Limitations
• Public side doing business culture and political
  influence
• Prerequisites
• Suggestion may be helpful to discuss with a new
  viewpoint of
• consumer protection
• public interest and
• market efficiency
• problems of the Turkish real estate markets.

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Thank you very much for your attention...

• For discussion/more information
• Adress Capital Markets Board of Turkey,
  Eskisehir Yolu 8.Km No156 06530 Ankara/Turkey
• Phone [phone]
• e-mailycoskun_at_spk.gov.tr

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