If I had known what kind of week it was going to be, I probably would have planned a vacation. The rapid deterioration of the lira left sellers, myself and just about everyone feeling anxious and disoriented. Most deals that we were working on collapsed. New property arrivals on the market have been very limited in the past few weeks; many owners opted to raise their prices.
I am still trying to process it and have been hesitant to accept a re-set on prices. I believe that things have to stabilise before I can sift through the detritus and see the way forward. At this point, all I can say is that the volatility has caused a significant dislocation in the market and it might not be sorted out for an undetermined period of time.
Developers are also facing huge price increases in their costs in lira terms and are raising their prices across the board. But will there be buyers at those prices? For currency holders, you will certainly not be paying more, but the fact is, you should probably be paying less. As I have maintained in the past, house price increases can only close a portion of the gap in currency depreciation. So, if we posit that the currency has depreciated 20% in a matter of weeks, we could allow for a 10% increase in housing, but certainly not 20%. Some sellers even overcompensate and put their prices even higher. This is untenable for us and we will not transact under those conditions.
The silver lining playbook? Adapt. Keep focussed on value. Move lightning fast when opportunity appears and also adjust the way we frame deposit contracts. From now, we will be fixing the contracts at USD at the time of the deposit agreement. In that way, if something slows up the closing, the sellers will not panic and we will be able to close the deal. It seems like an equitable solution.
How else can we adapt? Istanbul is a mega-city with 20 million people. We mostly focus on neighbourhoods where our clients would enjoy living. We are making a combination of lifestyle plus good, common-sense real estate investments.
Perhaps we have to modify this somewhat. Could a percentage of our clients just go where the good deals are, regardless of the lifestyle component? This is tough in practice. Most people invest by emotion and want to identify with the property they are purchasing. I am in favour of a more pragmatic, opportunity-driven strategy, at least for that percentage of clients who prioritise the investment angle.
I think places like Kagithane, on the secondary market, will see less increase in lira pricing. This can be a great opportunity. We should be snapping up properties there that are close to large development projects and transportation links. That neighbourhood will be unrecognisable in 5-7 years. Of course, it takes time to source deals there, but if a client commits to my proposal, I will try to find a basket of new build properties there that offer 6-7 % yield with good capital appreciation prospects. I have even considered opening a small office there in order to make it a new base. Beyoglu, Besiktas, and to a lesser extent, Şişli, will continue to be tough deal making environments if this latest madness continues.
Owners in these areas are often Western-leaning and certainly view the world through USD terms. In Kagithane and Eyup we can say that it is less the case. That is an arbitrage moment.
I certainly make no promises, but it seems that crisis often brings opportunity. It would be a pity to miss it because we were asleep while at the wheel or fearful when we should have been greedy. I hope we can address this head-on in tonight’s meeting and , as always, I am counting on the brilliant minds in our community to help me tackle the issues hand in hand, as we are all in this together and seek not only the best outcome for ourselves, but also keeping a mind’s eye on the future welfare of the country we have chosen to invest in.
What other arbitrage possibilities exist? Perhaps focusing on developers who have almost completed projects, but not sold all their units. Negotiate bulk purchases at previous lira prices? They will effectively be taking a USD loss, but this might be palatable if other alternatives for them are less appealing. Their overall costs will have already been paid for (labour and materials costs will have already been booked). They might adopt a GMTHO attitude (get me the hell out)
Hunting for distressed developers seems to be a perilous task and one I am not really confident enough to seek out in this milieu of uncertainty. Developers who have just started projects seem also to be risky. Undoubtedly, their preference would be to delay projects as much as possible as their budget projections must have run amok in the past few weeks. Therefore, a projected finish of January 2023 looks unattractive as that might very well be July 2023 or beyond. It seems foolhardy to tie up your money over such a period.
I have been in close contact with 2 developers in particular to try to strike a deal on group purchase, but rather predictably one fell through last week. Hopefully, I will have good news on that front this week.
Forgive a rough Canadian colloquialism, but the past week was mostly pi%+ing in the breeze. Much of what we tried to do just blew back at us without any result. Next week, we are going to slow things down a bit, take a broader look at the market, and then when we feel we have our bearings set, move forward with sure steps.
I feel confident an opportunity will present itself. We just need to keep finely attuned so that we can catch it.
There were several other news-worthy items from the week, but we can discuss those in the zoom session.
Property links to be distributed during zoom session.