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Presentation for the 17th Annual Conference The European Real Estate Society 23- 26th June 2010, Milan , Italy

Presentation for the 17th Annual Conference The European Real Estate Society 23- 26th June 2010, Milan , Italy. AN ANALYSIS of the STRENGTHS and WEAKNESSES of the TURKISH REAL ESTATE MARKET 26.06.2010 Yener COŞKUN* Senior Specialist Capital Markets Board of Turkey

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Presentation for the 17th Annual Conference The European Real Estate Society 23- 26th June 2010, Milan , Italy

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  1. Presentationforthe 17th Annual Conference TheEuropean Real EstateSociety23- 26th June 2010, Milan, Italy AN ANALYSIS of the STRENGTHS and WEAKNESSES of the TURKISH REAL ESTATE MARKET 26.06.2010 Yener COŞKUN* SeniorSpecialist CapitalMarkets Board of Turkey *PhDCandidate, Ankara UniversityTheGraduateSchool of NaturalandAppliedSciences, Real EstateDevelopmentDepartment

  2. 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…

  3. OVERVIEW TO TURKISH ECONOMY AND REAL ESTATE SECTOR OPPORTUNITIES in TURKISH REAL ESTATE SECTOR DISADVANTAGES of TURKISH REAL ESTATE SECTOR A MODEL SUGGESTION Presentation Plan

  4. 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

  7. Real Estate and the Turkish Economy

  8. 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 Mataracı, 2004: 3). • As for cadastre, the works with a completion percentage of 88.1% as of 2009 (Çete et al., 2010: 627)

  9. 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)

  10. 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’

  11. 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.

  12. 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 (Halıcıoğlu, 2005: 1). • Social Housing by HAD

  13. 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).

  14. Opportunities in Turkish Real Estate MarketsMotives in Domestic DemandOpportunities in Istanbul RE MarketsAdvantages of REITs

  15. Motives in DomesticDemand • Highinflation+negativerealinterestratesIncresinginvestment in; • Preciousmetals (specificallythegold market) • Real estate (Coşkun, 2010a: 30). • Real estate is symbols of socio-politicalstatute (particularlyforruralarea). • Spending on housingfinanceandrentconsist of considerablepart of consumerpayments.

  16. Motives in DomesticDemand • Ownership ratio seems high in Turkey, • Averagehousingratio • 67 % in EU 27 countries • 68 % in Turkey • Theratio is below 40 % in the urban areas. • The main component of the strong domestic demand is residential. • Demographics, • Rural immigration, • Urbanization • Industrialization • Renewal • But stillhousingshortage in the market… EuropeanMortgageFederation (2007: 124) andKongar (2003: 562) .

  17. Opportunities in İstanbul Real EstateMarkets“TheLatestReports” • In the report Emerging Trends in Real Estate Europe 2010, ULI and PwC (2010: 9, 35) ranked İstanbul third for investment prospects and first for development. • Inthenexttwentyyears, thepopulation in theprovinces of Antalya, Bursa and İstanbul willlikelyincreasebymorethan 30% (Deutsche Bank Research, 2008: 7). • Thebuilt-uparea in theprovince of Istanbulincreasedbymorethan 40% between 1990 and 2005 (Deutsche Bank Research, 2008: 6). • Financialservices in İstanbul might createfurtherexpansion in realestatemarkets.

  18. Opportunities in İstanbul Real EstateMarkets“PotentialDevelopment” • İstanbul needsmoreofficespace, upper/middleclassresidential, logisticsandhotelinvestments. • It is estimatedthat 5 millionsqmnewofficespacewill be required in thenext 10 years in thelargest 25 cities (Altan, 2009: 18).

  19. Advantages of REITs • REITsofferleverageopportunitytorealestatecompanies. • Lessdeveloped, BUT, • Exemptedfromcorporateandincometaxes • Freedomtochoosetheirdividendpolicies • Significantlymoreflexibility in managingtheirportfoliosthantheircounterparts in developedcountries (Erol andTırtıroğlu, 2008: 2694).

  20. Disadvantages in Turkish Real EstateMarketsInefficientFinance-Real Estate LinkProblems in Real EstateAppraisalProblems in HousingCaricature: http://www.hse.gov.uk/myth/images/risk2.jpg (07.05.2010)

  21. InefficientFinance-Real Estate Link“Primary Market” • Real estategrowth may not reflectthesameamount of growth in primary/secondarymortgagemarkets. • Badnews • Housing loans or institutional housing finance has only 3 % of the total housingownership (Tüsiad, 2005: 83). • Residentialmortgagedebtpercapitawere € 30, € 100 and € 170 in Turkey (i.e.: € 650, € 860, € 1.170 in Crotia) (EuropeanMortgageFederation, 2007: 122). • Good News: Roomfordevelopment

  22. InefficientFinance-Real Estate Link“Secondary Market” • Capital market financebroadlydepends on stockfinancingratherthanbondfinancing • No securization in secondary market

  23. InefficientFinance-Real Estate Link“Secondary Market” • Legal Structure • General belief: mortgageregulation is sound. • CrowdingOut • Interestratesweregraduallydecreasing, • But still no securization. • Financialcrisis/constraintsarealsodestabilizingtherealestate market.

  24. Problems in Real EstateAppraisal • Appraisalproblems • Market/publicbasedrealestatetransactions • Appraisalproblemsareincreasing: NOISE in the MARKET!! • Land shortage in the urban area, • Complexity of landuseandzoningpractices • Data/InformationProblems: NOISE in the MARKET!! • Lesseffective data availability (salesandrentinformation/statistics) • No sound/generallyacceptedofficial/unofficialvaluemaps • Absence of realestateindex

  25. ProtectingPublicInterest • Intensivepoliticalcontentandcomplicatedstructure • Theappraisalneed of publicproperties • Publicinstitutions’ transactions (sale/lease/privatizationetc. agreements, expropriationetc.) • Decisions of courts • Thesystemimpliesweaknesses

  26. AppraisalProblems: Results • Lessobservablepricemechanisms/informationandnon-transparent market structure • Impairrationaldecision-making • Negativeimpacts on buyer/seller incentives in bothresidentialandcommercialmarkets. • Negativeimpactstomarketability of realestatesandrealestateinvestors’ satisfaction • ConsumerProtection (??) • Impairmortgagemarkets • Credit market ; increasingnon-performingloans • Securitizationmarkets; futureproblems Caricature: http://z.about.com/d/politicalhumor/1/0/Z/q/1/mortgage_morning_after.jpg

  27. AppraisalandPublicInterest • Publicsector is theleadingactor in realestate. • Centralandlocalgovernmentshaveextensiveauthorities • Appraisalrequirementsforpublic; • Sales, Lease, establishment of servitude, • Privatization of publicproperties, expropriation, • Contracts on build-operate-transfer • Publicprivatepartnership (PPP) • Intheexpropriation, thevalue of landmaychangedepends on thedecision of ; • ValueAppreciationCommission • SpecialValueAppreciationCommission • Expertwitness (Keskin, 2003)

  28. BetterStandardsforAppraisal • GoodNews • CMB has adoptedinternationalvaluationstandards as a regulation in 2006. • Regulatedappraisalactivities in bankingsectorandcapitalmarkets. • Badnews; • Lesseffective regulatory framework on public properties’ appraisal • Market culture and knowledge (??)

  29. Problems in Housing Market • IllegalBuildings • Permitstousebuildingscriterion, it is definedthat 67 out of 100 buildingsare illegal in Turkey (Turhan, 2008: 5-6). • Thenumber of irregularhousingreachedupto 2.200.000 in Turkey in early 2000s (Keleş, 2004: 560-561). • Cost of Land • In a typicalhousingconstruction (ordevelopmentprojects) CoL is rangingbetween 30%-50% in the urban area • Absence of effectivelandmanagementandland-useregulations

  30. SolvingHousing Problem • Can SocialHousingSolvethe Problem? • Mission of theState. • Low-costhousingformiddleandlowerclasspeople • HousingDevelopmentAdministrationproduced 423.854 housingunitbetweentheperiod of 2003-2010 • Sustainability?? (no secondary market formortgage) • WhatAboutOtherResidentials?

  31. A MODEL SUGGESTION: ESTABLISHMENT OF REAL ESTATE REGULATION AND SUPERVISION AGENCY

  32. Rationale • Failures of solvingtheproblems of; • Housing, • Land-use, • Urbanization, • Real estateappraisal, • Protectingconsumersandpublicbenefitetc.

  33. CustomerProtection • Conceptually, relatedto • Capitalmarkets, bankingandinsurance. • Inrealestate • Massivetransactions/unsophisticatedinvestors/Informationasymmetry • No (single/effective/financial market like)watchdog in the market • Particularlycritical in residentialandruralpropertytransactions. • InTurkeyconsumersareunprotected • Incompletehousingsales, • Real estate broker communications, • Mass-housingprojects, • Land-use/developmentprojects, • Cooperativesetc.

  34. DifferentFocus in InvestorProtection • For financially developed countries • Mortgage market financialtransactions/products, • Turkey • Real estate marketing/brokerage activities, • Non-institutionally financing real estate transactions

  35. PrimaryExpectations I • Toissueregulations/standardsfor • Real estatebrokerage/marketing/appraisal, andalsohousingfinance • Toenhance • consumerprotection, • publicinterest • market efficiency, • Tocoordinatetheauthorizedgovernmentinstitutionsbased on theaboveobjectives.

  36. PrimaryExpectations II • Topromotefair market practices, • To protect unsophisticatedinvestors, • Toenhanceappraisalprofession, • Toenhanceprimaryandsecondarymortgagemarketsthroughincentives, • Todeveloppoliciesforthemanagement of publicpropertiesand urban arealandshortage, • Todeveloppoliciesforsustainablehousingfinance, • Toissueperiodicpublicreports on realestatesales/rent data, indexesandvalue-maps,

  37. PrimaryExpectations III • Simplifying, consolidatingandconvergingzoningpractices, • Tooverseeforeignrealestateinvestments, • Toincreaseandcoordinatelocal/SROsauthorities on regulatory/supervisoryprocess, • Toissuereports on themajordevelopments, • Toanalyzethedevelopments in landusepractices, • Topubliclydisclosetheirbalancesheet, policiesandpractices.

  38. CONCLUSIONCarthagodelendaest, (Carthagemust be destroyed)CATO, Roman statesman • Limitations • Publicsidedoingbusinesscultureandpoliticalinfluence • Prerequisites • Suggestionmay be helpfultodiscusswith a newviewpoint of • consumerprotection • publicinterestand • market efficiency problems of theTurkishrealestatemarkets.

  39. Thank you very much for your attention... For discussion/more information • Adress: Capital Markets Board of Turkey, Eskişehir Yolu 8.Km No:156 06530 Ankara/Turkey • Phone: :(+90 312) 292 88 24 • e-mail:ycoskun@spk.gov.tr

  40. REFERENCES • Altan, Özgür. (2009). Momentum, Transformation and Institutionalization. Spring-Summer. Issue 3. GMTR Real Estate Turkey Executive Summary: 18. • Bank, Emin and Orhan Mataracı. (2004). Cadastral Data Management System in Turkey. FIG Working Week 2004, Athens, May 22-27, Greece. Available at: http://www.fig.net/pub/athens /papers/ts28/TS28_3_Bank_Mataraci.pdf • Capital Markets Board of Turkey. (2009). Annual Report 2008. Available at: http://www.cmb.gov.tr/displayfile.aspx?action=displayfile&pageid=53&fn=53.pdf (13.04.2010). • Central Bank of the Republic of Turkey. (2008b). Financial Stability Report. Volume 7. Available at: http://www.tcmb.gov.tr/yeni/eng/ (10.04.2010). • Coşkun, Yener. (2010a). Housing Market Without Mortgage: The Need of Transformation. Spring-Summer. GMTR Real Estate Turkey Executive Summary: 30. • Çete, Mehmet, H. Mustafa Palancıoğlu, Abdurrahman Geymen and Mehmet Alkan. (2010). The Turkish Cadastral Information System and Lessons Learned. Scientific Research and Essays 5 (7): 625-633. • Deloitte. (2009). European Powers of Construction 2008. Available at: www.deloitte.com (16.04.2010). • Deutsche Bank Research. (2008). Real Estate Investment in Turkey: Look Beyond Istanbul. August. • Ernst&Young. (2010). Global Real Estate Investment Trust Report 2010. Available at: http://www.ch.ey.com/Publication/vwLUAssets/Global-REIT-report-2010-Against-all-odds/$FILE /Global_REIT_report_2010_Against_all_odds.pdf (13.04.2010). • Erol, Işıl and Dogan Tırtıroğlu. (2008). The inflation-hedging properties of Turkish REITs. Applied Economics (40): 2671–2696. • European Mortgage Federation. (2007). Hypostat 2006: A Review of Europe’s Mortgage and Housing Markets. November. EMF Publication. Internet: http://www.hypo.org/Objects/6/Files/Hypostat %202006%20-%20Web%20Version.pdf (14.04.2010). • Halıcıoğlu, Ferda. (2005). The Demand for New Housing in Turkey: An Application of ARDL Model. Conference Paper. 2005 Business and Economics Society International Conference. July 22-25 2005. Grand Canyon. Arizona, USA. • Jones Lang Lasalle. (2008). Turkey’s Rising Stars A Region of New Opportunities. Available at: http://www.joneslanglasalle.com.tr/ResearchLevel2/ResearchDocument_3621.pdf (14.03.2010). • Keleş, Ruşen. (2004). Kentleşme Politikası. 8.Baskı. Ankara: İmge Kitabevi. • Keskin, Gülşen. (2003). Tarım Arazilerinin Kamulaştırılmasında Değer Biçme: Akyar Barajı Örneği. Akdeniz İ.İ.B.F. Dergisi (5): 91-107. • Kongar, Emre. (2003). 21. yüzyılda Türkiye: 2000’li yıllarda Türkiye’nin toplumsal yapısı. 32. Basım. Remzi Kitabevi. İstanbul. • Turhan, İbrahim. (2008). Housing Sector in Turkey: Challenges and Opportunities. 17 th Annual International Conference. July 4. İstanbul. The American Real Estate and Urban Economics Association. • TÜSİAD. (2005). Türkiye’de Yeniden Yapılanma Arayışları: Seçilmiş Sektör/Kurum Önerileri. Yayın No. TÜSİAD-T/2005-06/399. Haziran. TÜSİAD. • Urban Land Institute (ULI) and PriceWaterHoueseCoepers (PwC). (2010). Emerging Trends in Real Estate Europe 2010. Available at: www.pwc.com (14.04.2010).

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