Housing ambition

GYODER, the Association of Real Estate Investment Companies, expects a new mortgage finance scheme to energise much more than just the country’s housing market, writes Metin Demirsar. Gyoder, the Istanbul-based Association of Real Estate Investment Companies, is gearing up for a national housing finance system that is expected to galvanise Turkey’s construction industry and property market, allow middle and low-income families to become home owners, fuel economic growth across the country and draw in foreign investment. Turkey’s Grand National Assembly is slated to pass legislation on a legalised mortgage system at the start of 2006. “The mortgage system will be a sustainable financial model for the housing industry, banks and the public,” says Haluk Sur, chairman of GYODER and president of Ihlas Real Estate Investment Trust, one of Turkey’s leading property developers. He says that 60% of the country’s 75 million inhabitants will benefit.





Savings hit High inflation, combined with steep interest rates, has constrained the housing market and eroded the personal savings of millions of Turks for a generation. From 1978 to 2001, annual inflation based on consumer prices averaged anywhere between 47% and 125%. “In the 1960s and 1970s, a civil servant could buy a house with his retirement compensation and pension. In the 1980s, he could buy only a car. In the 1990s, his retirement compensation was enough only to purchase a few household appliances,” says Mr Sur, a civil and environmental engineer. Not only that but nearly 55% of all homes in Turkey are slum dwellings, not recorded by authorities and thus untaxed. Vast neighbourhoods of slum houses, known as ‘gece kondu’ (‘night landings’ – literally built overnight on private property or state lands by an influx of Anatolian peasantry), encircle the cities, mar the urban landscape and make up to 70% of the dwellings in the metropolitan areas of western Turkey. These shoddily built housing units are unsafe in earthquake-prone Turkey, Mr Sur says. Now, falling inflation, lower interest rates and a booming economy are at last helping to revive the housing market. In 2004, the economy grew by 9.9%, the highest among members of the Organisation for Economic Co-operation and Development, in the third successive year of robust growth, the State Institute of Statistics reports. Bankers predict that the economy would continue to improve in 2005, supported by an influx of foreign investment and the start of Turkey’s EU entry talks on October 3. At the end of September, year-to-year inflation, based on consumer prices, had fallen to 8%, the lowest level in more than 35 years. In November interest rates on 25-year housing loans dipped to a monthly 1.17% from 2.5% last year, and were expected to drop below 1% by the end of 2006. In the first nine months of 2005, housing loans stood at $6.607bn – about 7% of total bank loans, according to the Central Bank of Turkey. That was a huge increase on last year, when 100,445 individuals took out housing loans totalling $2.544bn (3.42% of all bank loans).


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Housing ambition 2

Rapid growth

According to GYODER estimates, a record 600,000 homes will be sold in Turkey in 2005, up 22.4% from 2004’s figure of 490,000. “The mortgage business is set to grow rapidly, given the recovery in the economy and declining interest rates,” Bülent Sengönül, an equity analyst with Is Investment, one of Turkey’s biggest brokerage houses, wrote in a report on real estate investment companies.
According to Mert Ülker, a certified financial analyst at brokerage house TEB Investment: “Availability of longer-term consumer financing at historically attractive rates has unleashed the pent-up demand in the (housing) industry.”
Most Turkish banks now see long-term housing finance as one of the few areas where they will be able to make profits. Currently, banks give out housing loans as consumer credits, financing loans from their own assets or by borrowing from local and international money markets. But experts say this poses enormous risks.
“The banking system can’t support the housing industry under the present circumstances,” said Tevik Türel, senior vice-president and director of the Eurasia and Middle East region for Stewart International (a Houston, Texas-based real estate information company), at a foreign investors’ conference in Istanbul in mid-November. “Banks are borrowing funds on the short term and lending them out over the long term. This is producing huge maturity mismatches. The banking system will face serious difficulties in 2006 if a viable mortgage system isn’t introduced soon.”
Under the draft law on mortgage finance, banks and leasing companies will provide long-term mortgage loans and lease-like credits to prospective home buyers, covering up to 70% of the total cost of their homes. The home owner will have to meet at least 30% of the cost in advance. The banks and leasing companies will sell the mortgage contracts to a pool of new mortgage finance companies that are to be established, which will issue bonds, asset-backed securities and mortgage-covered bonds on the domestic and international markets to institutional investors, such as insurance companies and pension funds, to provide long-term funding.
“We are trying to create a system where individuals who want to become home owners will be able to tap the funds of investors who have long-term savings,” says Dogan Cansizlar, president of the Capital Market Board (SPK), an agency that regulates the capital markets.

Secondary market

“A secondary market will emerge and it will become easier to become a home owner in Turkey,” says Mr Sur. He predicts that Turkey’s annual housing loan market could reach $60bn once the mortgage system is in full swing.
Another knock-on effect, he says, will be a reduction in the number of jobless Turks. At 9.1%, Turkey has one of the highest unemployment rates in Europe. Unemployment is particularly high among white-collar workers, many of whom lost their jobs during the 2001 recession. “Long-term financing will allow the construction industry and the real estate market to grow further and help to solve Turkey’s unemployment problem,” says Mr Sur.
Manufacturers of cement, glass, steel, forestry products, home textiles, furniture and building materials, as well as producers and retailers of construction equipment, motor vehicles, household appliances and home electronics, stand to benefit from the coming boom, he says. “The Turkish mortgage market will feed over 240 side industries and will make great contributions to the economy.”

High expectations

Turkey expects to attract considerable foreign investment into the real estate sector once the mortgage law has been passed. Dubai International Properties plans to spend $5bn on property development in Turkey, including construction of Europe’s two tallest buildings in Istanbul, the twin 350-metre Dubai Towers.
A consortium led by Royal Caribbean Cruises has won a tender to operate the Galataport, Istanbul’s passenger liner gateway, for 49 years for $4.3bn. The consortium plans to spend $500m on rehabilitating the port and building new hotels, restaurants, cinemas, convention centres, customs facilities, cultural centres, playgrounds, a shopping centre, a museum and a covered car park.
Foreign concerns Rabobank, Fortisbank, Barclays Capital, GE Consumer Finance, Deutsche Bank and General Motors Acceptance Corp have all announced they will enter the Turkish mortgage market.

LOBBYING FOR CHANGE:
GYODER has led the way in lobbying for a mortgage finance system and assisting the Capital Market Board in preparing the draft law that is now before the Turkish national legislature.Founded by a group of real estate development companies in 1999, GYODER encourages growth of the property market, supports the activities of member companies, introduces and maintains standards in quality and control in building projects and training issues, and acts as a lobby for the industry. Today, with nearly 130 members, it has focused on the institutionalisation of the real estate sector and creation of modern cities through new developments, as well as supporting urban renewal and rehabilitation in the inner cities.Members include developers and owners of shopping malls, hypermarket chains, commercial offices, housing complexes, new residential neighbourhoods, restaurant and fast food chains, hotels and holiday villages, as well as major contractors, property assessors and sellers, and commercial banks. Foreign members include Germany’s Metro and Spain’s Real hypermarket chains, US real estate marketing company Remax, property information services firm Stewart International, and the domestic franchises of fast food chains Pizza Hut and Kentucky Fried Chicken.“Our association aims to rehabilitate the housing market in Turkey and take measures against unregistered and low-quality construction of homes and buildings,” says Haluk Sur, GYODER chairman.Once the new mortgage system is in operation, he says, even low income families may abandon the slums for better housing in new areas of the cities.

The Turkish mortgage market

The mortgage market in Turkey is small but growing and has had its ups and downs, as Doga Taslardan explains
he Turkish economy has been growing by around 6 per cent a year for the last five years, which is faster than many developed economies and most emerging markets.
Turkey lured in yield-seeking foreign investors thanks to a lucky combination of several factors such as: the global abandonment of liquidity, low returns in safe-heaven countries, overall positive outlook towards emerging markets, EU accession talks kicking off by late 2004, increased transparency and stability of the Turkish financial sector as well as positive relations with the USA regarding geo-politics of the Middle East.
The making of an ‘economic boom’ was rather simple: as confidence lifted towards Turkey global money poured in – in the form of both savings and loans – and as a result of considerable access to longer and less expensive international funding by Turkish banks, borrowing rates fell, which in turn fuelled consumption and thus the economic engine.
Rosy macroeconomics enabled the Turkish finance sector to offer long-term funding at relatively cheap prices for the first time in history. Thus the overall loan portfolio has risen considerably for the last two years, reaching US$110 billion by September 2006.

Total Loan Portfolio & % of GDPSource: Central Bank of Turkish Republic (Colored bars represents economic downturns.)
Despite the rapid growth, total loan volume is still minimal, with only 29 per cent of GDP compared to European countries where the average is 121 per cent of GDP.

Total Loan Portfolios / GDPSource: European Central Bank & Central Bank of Turkish Republic
Consumer credit explosion
Economic growth gave birth to better job prospects, improved real wages, higher GDP per capita and consequently more purchasing power, which in turn fuelled the demand for higher living standards. The Turkish lira gained strength and stability against the US dollar and the euro, allowing for low and steady prices on both imported and local goods. Relatively low prices coupled with the availability – for the first time – of long-term funds and low interest rates saw individuals rushing to finance new homes, imported vehicles and other big-ticket items. Such favourable lending conditions allowed more people to buy, bringing about a consumer credit explosion. The rapid growth of consumer loans together with credit cards had reached 40 per cent of the overall loan portfolio as of September 2006.

Total Loan Portfolio BreakdownAs the figures demonstrate, the economic recovery first manifested itself within the consumer loan sector. This increased appetite for borrowing was born out of pent-up demand along with a dramatic shift in public attitudes towards the notion of credit. Turks used to frown upon borrowing and bought goods with whatever was in their pockets or however much they could gather from their networks of family and friends. Within the last few years, however, owning a product or service without making an immediate payment is seen as acceptable, if not desirable. Since banks usually obtain above-market margins for consumer lending they were eager to fund to individuals.
Despite the rapid growth, however, as of September 2006, consumer lending was only 7 per cent of Turkey’s GDP, far behind that of developed economies (around 57 per cent in the Eurozone, 65 per cent in the US and over 70 per cent in the UK). Closing of this gap also presents lucrative opportunities for European banks squeezed by tight margins in their home countries who have rushed into Turkey over the last couple of years. These include Citibank, GE Consumer Finance, HSBC, BNP Paribas, Fortis and Uni Credito, which have been effectively operating in Turkey since 2005.

Consumer Loans / GDPSource: European Central Bank & Central Bank of Turkish Republic Mortgage lending. The pick-up in consumer lending has been particularly striking in mortgages after the long-awaited fall in interest rates gathered pace in 2005. The breakdown of consumer loans in Chart 3 demonstrates the effects of the 1998 and 2001 financial crises, which helped dry out consumer lending due to unacceptably high interest rates. The graph also reveals how mortgage volumes increased the most within the overall consumer loan portfolio to reach unprecedented levels by September 2006. In 2003, mortgages represented only 14 per cent of the overall loan portfolio, whereas today mortgages have a share of 49 per cent.

Consumer Loan Breakdown (Million $)Source: Turkish Banking Association & Central Bank of the Turkish Republic
In 2004, the Turkish mortgage market grew by 200 per cent, reaching $1.8 billion from $625 million the year before. In 2005, mortgage lending quadrupled, up by 407 per cent to $9.5 billion, thanks to the most favourable lending conditions in history and the pent-up demand for quality housing.
The two main reasons behind the 2005 ‘gold-rush’ for mortgages were falling rates from 2.5 per cent down to 1.05 per cent monthly (13.35 per cent APR) and extending maturities up to 30 years from only three. This was the first time such striking financing schemes had occurred in living memory due to the lack of an ‘affordable’ housing finance system in Turkey.
As of September 2006, mortgage loans totalled up to $15.1 billion while experts believe if the right circumstances were in place, the $20 billion threshold will be broken by 2007. On a top-down comparison, if Turkey’s outstanding mortgages/GDP reaches 10 per cent, similar to other emerging countries (like Hungary), the mortgage market could easily reach $35–40 billion within the next three to four years.
The main factors preventing faster development of mortgage volumes are relatively high interest rates at around 1.9 per cent monthly (25 per cent APR), a high initial down-payment requirement of around 15 to 20 per cent, other accessibility issues (low, undocumented, seasonal income, etc) and the overall lack of consumer confidence thanks to a rollercoaster economy since the mini-crisis felt in May 2006.
The country missed out on multiple socioeconomic benefits of a comprehensive national housing policy, which would maximise funds for housing or create subsidies. In the absence of favourable lending terms and regulatory frameworks to ensure healthy competition among lenders, only a negligible part of society was able to get a mortgage and so own a house. The share of mortgage lending in GDP in Turkey is still as low as 4 per cent (55 per cent in the USA and 39 per cent in the Eurozone).

Mortgage Loans / GDPSource: European Central Bank & Central Bank of Turkish Republic Investments.
With a population of over 70 million, Turkey has a lucrative mortgage market potential. Plus, real estate has been the primary investment choice in the country due to decades of high inflation and an unstable economy, along with an unsophisticated investor profile to profit from stock markets, equities, bonds, bills, etc. Houses, on the other hand, prevented people’s savings from being eroded by inflation – houses don’t lose their value in the long run, unless there is a major earthquake.
An ineffective and almost non-existent housing finance system hinders the growth and development of a potentially booming Turkish real estate sector. Restricted to short maturities and relatively high interest rates, over the years Turks had to fund homes through a combination of personal savings (66 per cent), help of family and friends (23 per cent), participation in housing cooperatives (8 per cent) and loans (3 per cent).
Every year, all over the world, approximately US$5 trillion worth of funds are transferred to homebuyers over the capital markets. The lack of a modern housing finance system prevents Turkey from taking advantage of these widely available funds and services. This all changed when the rates gradually came down during 2005. Due to favourable economic conditions, both local and foreign investors were willing to provide funds to Turkish homebuyers with better terms.
The availability of longer-term funds to banks significantly extended maturities, which in turn altered the investment behaviour of households from short-term to mid- and long-term investments. Thanks to the recent boom in consumer loans borrowers were able to make long-term investments, such as buying a house through mortgages, and build up down-payments for housing.

Housing shortage
Now that the appetite is there to use the financial sector’s leverage to own a house, consumers were faced with another well-known reality of Turkey: quality-housing shortages. Turkey has struggled with overpopulation, internal migration, unplanned urbanisation, and unqualified and illegal housing for decades. More than 60 per cent of the housing stock is built illegally without a proper licence, while at least 40 per cent needs renewal, especially in the face of a significant earthquake threat.
It is estimated that Turkey needs approximately 400,000 new residences each year, of which only around 200,000 are being built. However, along with the population growth, downsizing of family units and the increase in urbanisation, the annual housing need is estimated at 600,000 in 2010 and 800,000 in 2015.

Proposed mortgage law
Finally, recognising the severe housing problems caused by the lack of a housing finance system, the government appointed the Capital Markets Board to establish the legal framework for the mortgage business back in mid-2004. The proposed mortgage law drafted by the board has still not been enacted by Parliament, yet is promised to be in effect by Q1 2007. Since the pent-up demand for quality housing is enormous, establishing a healthy mortgage market will improve the standard of living and make Turkey a more attractive EU candidate.
The efficiency of the proposed housing finance system depends on a variety of factors, including macroeconomic stability and implementation of adequate internal infrastructure, such as:
Well-functioning and independent appraisal profession
Effective and quicker foreclosure procedure
Capital market institutions and instruments for securitisation of mortgages
Minimised operational costs in lending and securitisation
Government support through tax incentives, at least during the infancy period.

According to the draft law, only legally built, registered and certified houses will be eligible as collateral when taking out a mortgage. Only Capital Market Board-certified appraisers will be legally permitted to perform the valuations.
From the banks’ point of view, the new legislation will allow for new funding mechanisms, such as asset-backed securitisations and covered bond issues, which are currently uncommon in Turkey. Furthermore, the banks, along with the construction companies, will be jointly responsible and liable in case of non-delivery, late-delivery and/ or defects in constructions for the amount of loan granted within the first year of origination. In addition, foreclosure processes will be improved significantly, allowing for easier and timely default collection and auctioning.
For the consumers, the draft law introduces early payment fees of up to 2 per cent of the outstanding balance, which currently do not exist. The proposed mortgage law allows for floating rates, indexed to a common index and with certain caps, along with hybrid products (fixed and floating rates). Currently only fixed-rate mortgages are available.

Housing accessibilityProspects of mortgage legislation had raised hopes in many burdened by high rents for decades. This goal to become a homeowner with the new mortgage law – which is taking two and a half years to be enacted – coupled with favourable financing conditions increased the number of households eligible for homeownership, only to see house prices rocket through the roof. The government failed to fight against supply shortages with techniques such as active land supply and land development policy. Thus the ‘accessibility’’ provided by cheap rates has been absorbed by high prices, thanks to unexpectedly high demand.
This all came to a halt last spring. Triggered by the US Federal Reserve’s rising benchmark interest rates in May, investors pulled their money out of emerging markets in a frenzy. Turkey suffered the most from heavy sell-offs, thanks to its monstrous current-account deficit. When investors become sceptical about the sustainability of the country’s economic boom Turks had to watch the Turkish lira sink by around 30 per cent in value over a month.
The overall shakiness of the economy has definitely hurt the mortgage market as well. Mortgage rates rose back up to 1.8 per cent (monthly) from where they stood at 1.05 per cent just a few weeks before. With increasing interest rates, consumers shy away from loans, bringing the housing sales to a near halt. Between June 2005 and June 2006 the mortgage market grew at about 2.46 per cent each week on average. In July, however, the effects of the crisis of May to June started to be felt severely, and the the average weekly growth for July to September fell to 0.2 per cent. There were three main reasons
behind these figures: decreasing consumer confidence, increasing mortgage rates and rising house prices indexed to the US dollar.
In the short run it looks hard to recover from the setbacks suffered by the mortgage market in May. But there is unlikely to be permanent damage with a population of 70 million hungry for quality housing. MFG
Doga Taslardan is a specialist in the Turkish mortgage market
Endnotes:
1 Some investors recorded unprecedented returns around 50-70 per cent on short-term bonds over the last three years while monthly-rolled-over annual savings gained over 20 per cent just last year.
2 Local goods produced with relatively cheap imported raw materials.
3 Before 2005 maturities on mortgages were up to three years. Throughout 2005 they were extended to 30 years.


Source : MFG

At Last a Turkish Mortgage

Turkeys State Minister and Deputy Prime Minister, Abdullatif Sener, has said a bill regulating the implementation of Turkeys new mortgage system is top priority on the agenda for the 2006 parliamentary year. So within months investors will soon be able to take out a conventional mortgage for up to 30 years to finance their property purchase in Turkey.
Currently, Turkish banks offer only short-term loans, limiting the number of mortgages that can be granted. This has somewhat limited the real estate economy in Turkey today. However the reduction of extremely high levels of inflation through a floating foreign exchange regime and tight monetary policy have led to improvements in Turkeys economic conditions. The countrys high interest rates have, in turn, fallen from around 24% at the end of 2004 to an encouraging 13% at the end of 2005.
Turkey has a huge population of just over 70 million which expands by 2 per cent each year and while 70 per cent of the population is younger than 30 years of age, there is a strong demand for property in Turkey. The new mortgage facilities will boost the Turkish property market to great new levels and we expect to see a dramatic increase in property construction in general, including holiday homes. With over 25 million tourists visiting Turkey each year, the new legislation will undoubtedly encourage further growth in tourism and create some encouraging new buy-to-let opportunities.
Turkey boasts some stunning mountain and coastal scenery as well as a rich and exciting culture, making it a top worldwide tourist destination. Added to this, the current economic climate in Turkey is strong and actively favours foreign investment in the property market, while most experts predict it is now sitting on the brink of a property boom. The introduction of the Turkish mortgage will prove invaluable to finance purchases in numerous new developments currently under construction in prime beach-front locations - it seems there has never been a better time to buy into this growing property investment market.
Finally, with Turkeys EU accession due sooner rather than later, the Turkish mortgage will go a long way to bring Turkey into line with the standards and practices expected from worldwide property purchasers. We believe the results will prove very inspiring to our investors.



Source: Property Showroom

New Turkish Mortgage System

Turkey’s long awaited mortgage system is firmly on the agenda of the Turkish Government in the run up to the country’s elections, according to reports from the Turkish Daily News this week. Turkey has waited for 15 months for the bill regarding the new mortgage system to be passed in Parliament – this has now been announced to take place before the end of February.The decision to pass the mortgage bill is seen as part of the Turkish Government’s plans to place themselves favourably before the impending elections. This is due to the fact that so many people stand to benefit from accessible mortgages: property purchasers will be able to take advantage of the financing and real estate prices across the board are likely to increase once the bill is passed.Currently, banks offer loans with fixed interest rates, but the new mortgage system will provide purchasers with interest rates that are flexible to adapt to market conditions. As a result, the system is predicted to cause banks to reduce their loan interest rates. Tax advantages under the bill should come into effect within two years.
News of the mortgage bill was received enthusiastically by potential buyers who have been anticipating its passing for some time. It is predicted that these buyers will now take advantage of Turkish mortgages, which will further bolster Turkey’s healthy real estate market.


Source: Obelisk

Turkish property ''to benefit'' from change in law

The Turkish property market is set to receive a boost in investment following a change in the law governing the industry, it has been claimed.Real estate company Rightmove points out that Turkey has been a favourite among UK holidaymakers for years but has only recently come to the attention of overseas property investors.According to Justin Figgins of Rightmove, this is due to a legislation change that has made investment in Turkish property a more achievable prospect for Britons."Though well known as a fantastic but low cost holiday destination, Turkey is now set to become one of the next big things in overseas property thanks to a change in Turkish law," Mr Figgins said."This change means that foreigners can now obtain Turkish mortgages, which will inevitably lead to an influx of investors to the Turkish coastal resorts where the real bargains are."Prior to the adjustment in the law, the only foreigners able to purchase property in Turkey were cash buyers, but such transactions became increasingly rare as prices increased, prompting the change in regulations.

Source: Adfero Ltd