Alarm Over Istanbul’s Building Boom (NYTimes)

Landon Thomas (May 20, 2014) from The New York Times reports on a possible bust of Turkish economy based on construction sector:

ISTANBUL — “We are invading Istanbul again,” the real estate agent said enthusiastically as she ticked off the selling points of Turkey’s most ambitious development extravaganza to date: Maslak 1453.

Named for the year this bicontinental city passed from Christian to Muslim hands, Maslak 1453 has been planned as a vast complex of 24 towers, shopping malls galore and, not least, a 1,453-meter-long (4,767-foot) shopping promenade that celebrates the most consequential date in Turkish history.

Upon completion in 2015, it will be the largest real estate development in all of Europe and perhaps the ultimate expression of the pell-mell construction boom that has underpinned Turkey’s decade of rapid growth under Recep Tayyip Erdogan, the nation’s Islamist prime minister.

Mr. Erdogan’s timing was perfect, coinciding with the global liquidity glut unleashed by the world’s leading central banks to restore growth in the advanced industrial economies after the Great Recession. One result was a sharp increase in lending by Turkish banks, much of it directed toward property developers.

But as Turkish interest rates spike and the economy slows, local bankers and real estate experts are becoming increasingly worried that Istanbul’s real estate market may be heading for a fall.

And they are reminded of similarities between the situation here and what happened in Spain and Ireland, where alliances among banks, developers and politicians contributed to the creation of real estate bubbles that popped once interest rates began to rise, puncturing the overall economies as well.

Bas Princen City edge Instabul 2009  10 x 15 RGB 98
Photo by Bas Princen

“The official numbers are showing signs of risk,” said Hakan Eren, a real estate investment adviser. “The result could be a bust if this is not well managed.”

According to research by Mustafa Sonmez, author of numerous books on the Turkish economy, Mr. Erdogan has favored the construction and real estate sectors at the expense of important export sectors.

“It’s a shame,” said Mr. Sonmez, who calculates that construction spending is now about 9 percent of the overall economy, a level that the International Monetary Fund has found to be associated with problems in other countries. “We have used all this free money to build houses and feed the domestic market.”

To date, the local market had been remarkably resilient, overcoming a global rise in interest rates caused by last year’s “taper tantrum” surrounding the Federal Reserve’s decision to begin cutting back on stimulus, and the anti-government, anti-development street protests at Taksim Square here in Istanbul.

But in the first three months of the year, unit sales for new apartments were down about 60 percent compared to the same period last year, according to Emlak Konut, the country’s largest real estate investment company.

Moreover, Mr. Eren said, the inventory of unsold housing units has risen to 1.5 million, compared to levels close to zero several years ago, a clear sign that the slowing economy and higher interest rates are cutting into demand.

The potential for a real estate crash highlights the role of the relatively obscure Housing Development Administration, commonly known as Toki, in fueling the boom.

Traditionally a bureaucratic backwater with a mandate to push for more affordable homes, Toki emerged as a housing power center when its bylaws were changed in January 2004 to bring it under the direct control of Mr. Erdogan less than a year after he was elected. Under his sponsorship, Toki amassed choice properties at little or no cost, auctioned them off to developers and took a cut of the profits.

According to Mr. Sonmez, Toki has been particularly aggressive in backing high-end projects undertaken by developers with ties to Mr. Erdogan. They include Ali Agaoglu, the billionaire businessman behind Maslak 1453, who late last year was one of a number of business executives, bankers and politicians questioned by the police as part of a broad corruption investigation. Also questioned were two Toki board members.

“The rise of Erdogan and the construction industry in Turkey have been one and the same,” Mr. Sonmez said.

In light of Istanbul’s extraordinary growth spurt over the last decade, of course, a metamorphosis of the city’s skyline was to be expected, and many of Istanbul’s new development projects have been financially successful. But some of the more recent, highly ambitious real estate schemes are proving more problematic.

One of the most closely watched is the Mall of Istanbul, a grandiose experiment conceived by a business magnate, Aziz Torun, who in the early 1970s was a friend and classmate of Mr. Erdogan at a religious vocational school in Istanbul. It has soaring towers, a cavernous mall and even an indoor amusement park with roller coasters. And until Maslak 1453 opens for business, the Mall of Istanbul holds the distinction of being Turkey’s largest mixed-use development.

Real estate experts point out, however, that these types of big projects are likely to suffer from the economy’s increasing volatility. This past January, the day after the Turkish central bank made a drastic move to prop up the lira by doubling interest rates, Mr. Torun did his best to address these concerns.

He promised that the Mall of Istanbul would open in April — although the grand opening is now set for June, with Mr. Erdogan expected to attend — and said his company had “stuck out our neck” by striking rental agreements with prospective retailers, which track the value of the dollar, at a favorable exchange rate.

During a visit late last month, a sales agent was quick to catalog the Mall of Istanbul’s attractions: easy parking, proximity to the airport and, of course, the on-site amusement park.

But will wealthy foreigners or aspiring Turkish professionals snap up pricey apartments or flock to yet another opulent shopping mall? Especially one located in an industrial park at the intersection of two major highways more than 10 miles outside central Istanbul?

Mr. Sonmez, the author and real estate expert, remains unconvinced.

“All this is problematic,” he said, citing the project’s location. “The Mall of Istanbul could be the Titanic of shopping malls in Turkey.”

Correction: May 21, 2014 
An earlier version of this article characterized incorrectly Turkey’s housing inventory in recent years. The inventory of unsold housing units was close to zero several years ago, not one year ago.

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