Keith’s Weekly Property News January 16-2021

I will go light on the notes this week as the storyline remains largely unchanged in the second week of the year. Sourcing properties at all-time low due to sellers hesitation. Compounding this, many Turks are looking to pick up any real estate they can as a hedge against inflation. This trend, too, is expected to continue. Despite the drastically rising cost of production, this week many developers unveiled new projects. However, the completion dates are far away and possibly will be plagued by delays. Nonetheless, I am sure they will sell well due to large local demand. As housing sales to foreigners account for a relatively small 3% of the greater pie, it will be Turks who lead an inevitable surge in prices.

So who remains a seller on the secondary market? Always those who really need to sell will be selling. Also, those who re-adjust their prices in line will sell if they get the price they are asking. Finally, another small group; those who are looking to upgrade might be sellers. The largest category, those who are in no great rush to sell, will mostly remain on the sidelines for the time being. Until that changes, our options will be reduced and the job of finding standouts will be much harder. That is purely due to the fallout from the currency crisis.

This week was the first week in perhaps 6-8 weeks were there were not huge shifts in the currency, which traded in the 13.2-138 band for the entire week. It feels shaky and poses challenges all around. If USD rises very much or if it falls considerably, it materially impacts deals. We have to be ever mindful of that when entering into contracts. Suddenly, that average 2 week closing period seems like an eternity. We do our best to keep the paper work moving speedily along, but are sometimes hit with unforeseen delays that may even push closings to 3 weeks. There is not much that can be done about that. Given that Turkish buyers can close in a matter of days, this is somewhat of a disadvantage. I have even had sellers tell me they prefer to sell to a Turk as there is less uncertainty. This is again, largely misinformation, with agencies trying to deter an owner from accepting an offer from a foreign client, while they try to buy time to find another client. Keep in mind, many listings are not exclusive in Turkey. Gees, even the guy in the corner store is often a broker of sorts, as are the tea sellers in the bottom of many buildings.

One of our so-called ‘instruments’ to level the playing field has been to ‘stabilise’ the price in USD at time of deposit payment. This seems like a good approach. It guarantees that the seller will get X amount of dollars, no matter where the USD goes between time of signing the deposit contract and closing, 2-3 weeks out. The default amount is still lira, so if the lira gains in that time, the buyer ends up paying more USD and the same amount of lira as was used as baseline in the contract. This offers a lot of protection for the seller and has often been absolutely necessary to keep deals alive, especially ones where we have had to ask the seller to wait for POAs, bank account openings, extra paper work etc. But all of this currency volatility poses risks for buyers and we need to be ever vigilant about that.

For at least the past month I have been using 14 as a rather arbitrary but seemingly useful number when doing my calculations about what constitutes a reasonable deal or not. You have to jump in somewhere and for me, this appears to be the ‘mean’ number. I then revert back to USD to see if the numbers add up. In practice it works pretty well. Unfortunately, if the USD goes to 11 or to 18, it again becomes less useful. Such is the nature of the dilemma and I do not see much way out of it. Before, when there was less volatility, I would tentatively counsel clients to start converting the money in tranches prior to a sale, or if they wanted, they could convert it all when they saw a rate they deemed favourable. Many would wait right up to sale date to convert. There really is no right answer or certainly not one that I am aware of. I suppose if it were me, I would do the tranche approach; a kind of ‘dollar cost averaging’. But the risk with that is if the deal collapses for one reason or another, you might get ‘trapped’ in lira if the lira loses value. If it strengthens, you will have made a nice carry trade…but that is not really our business and we assume most of our clients are just seeking the best deal they can get on a particular real estate item. So plenty to think about in this topsy-turvy market.

Some of the above about the difficulty of sourcing properties may sound counter-intuitive to those who read about record-breaking numbers of sales to both foreigners and locals alike in December. Keep in mind that 80% of our business is in the core downtown areas of Kagithane, Besiktas, Şişli, and Beyoglu. I am almost 100% sure that sales have slumped markedly in these areas and that has in fact been supported by random discussions with officials in the land registries of those municipalities. This neatly coincides with the neighbourhoods that we looked at in last week’s zoom session, and that had high USD ‘immunity’, or at least in the prices being asked. You could put Kadikoy into that mix and, apparently Uskudar, though possibly for different reasons. Obviously, throughout much of Turkey sales are very brisk, as well as in some parts of Istanbul.

This week I will also be doing a small survey on the zoom session to get feedback about what type of things could be added to the zoom sessions. I enjoy doing them immensely, but a little shake up there might be a good idea, so I certainly welcome feedback.

Links preview for the upcoming week (distributed in meeting)

Keith’s weekly property News January 9-2022

Another arduous week in the market to open the New Year. Still plenty of hesitation as the USD creeps back up near the 14 level. Many question marks as to whether the government’s bold currency gamble will pay off. It seems the jury is still out there and, as always, this causes sclerosis in the property market. We will update you regularly on the impact it has on the frontier. Suffice to say, for the time being, it is creating huge challenges for sourcing properties.

Rather than belabour the above ad nauseam, this week I would like to return to some fundamentals, with a closer look at sqm pricing and the advantages and disadvantages of new/old buildings. P

Historical USD pricing is actually quite helpful, as it allows us to quite easily tell where we are today in relation to 5-10 years ago. The good news is that when we look at the historical USD pricing, I feel we can clearly see we are nowhere near bubble territory. Good days ahead on the Istanbul property market are not out of the question. Why would they be? If you are waiting for the currency crisis to get worse, that is probably a mistaken approach. 

Now is as good a time as any. And the historical data on USD pricing shows that. Prices are still cheap. Finding the properties is hard, but there is no other mega-city that I know of that can match Istanbul in terms of affordability. If you want luxury, we have that, too. But that never comes cheap. I have visited places like Belgrade and Bucharest and saw places for 3-4K/sqm. These are relative backwaters compared to Istanbul (my apologies to any Romanians/Serbs). 

Paying 3k/sqm in Belgrade for a nice neighbourhood just seems pricey, when you look at the economic fundamentals. I see this throughout many European countries. 3K/sqm in Bratislava? I am sure I would prefer to own comparable property in Istanbul for that price. 3k/sqm for a nice neighbourhood in Sofia? Big pass. 3k/sqm for decent neighbourhood in Tehran? I would expect much less. Istanbul is still a bargain when I compare to most cities I have visited in the last 10-15 years. Decent neighbourhood in Budapest? Now about 3K/sqm. Tbilisi, 2.5k+/sqm (rip off), We do not even really need to mention Northern Europe.

We have had a fair bit of demand for properties in newer buildings lately, built in the past 20 years, so I thought I would address the different options at this point and mention some of the challenges in sorting this type of property.

First of all, a quick review of the type of new buildings to be found on the market:

1- ’Mom and Pop’. These are much smaller buildings and may offer nothing extra in the way of facilities. Perhaps, at most, they have underground parking. The finishes are usually not great. The entry price on these can be lower, but still we increasingly see that 1750USD or lira equivalent is the entry mark. If it is in a favourable neighbourhood, you can expect to pay much more, perhaps up to 2500-3000 USD/sqm.

In the outer areas of the city, you could expect to see prices as low as 1000-1250USD/sqm. These are usually in neighbourhoods that most of us would agree, are not attractive. You probably would not want to live there yourself and can only be considered from an investment perspective. Given energy costs and long commutes, it seems more central options are better, even if you have to pay more.

2- Hotel-style comfort. These properties usually offer a range of facilities from underground parking to fitness areas, concierge, shops and more. In the downtown area it is getting increasingly hard to find these projects for under 2750USD/sqm. The prices range from 2750-3750USD/sqm for projects in the central parts of the city.

3- Luxury projects (Zorlu, Rotana, Sapphire, Divan Bomonti, Istinye Park).

The absolute lowest entry point for these projects is 4-5000USD/sqm. Expect to pay significantly more if there is a great view or a Bosphorous view. Zorlu probably tops out the market at 8-10K. The facilities are beyond 5 start hotel; shopping centre, cinemas, performing arts theatres and much, much more. Probably more luxury than most Western tastes are accustomed to. Popular with Middle Eastern buyers and affluent Turks. High quality finishing and good locations. Usually these properties are not purchased for yield and capital appreciation is expected to be low.

Challenges to buying newer buildings

Newer building more frequently come up with ‘tax issues’. For the uninitiated, what this effectively means is that 70-80% of the properties online cannot be used for CBI. There is nothing intrinsically wrong with the properties that would make them non-CBI compliant. The issue is that if the owner has owned it for less than 5 years – and has under-declared on the original sales price – again a very widespread phenomenon – then they are unlikely to sell to a buyer that needs, or wants, to declare the full sales value. 

Unfortunately, for our purposes, most of the time, we need to declare the full value. Therefore, we lose access right away to a huge amount of properties. I mean really huge. So, when you research online, keep this in mind. When we make our calls and do our initial due diligence, it is the very first question we ask, ‘Has the deed passed 5 years?’ If it has not, we more often that not are left with an un-actionable property. That is a great pity as it sharply reduces the amount of properties that are eligible for foreign buyers, or at least for CBI buyers. 

Again, I must emphasise that there is NOTHİNG fundamentally non-CBI compliant about these properties. It is purely the sellers unwillingness to declare full value that makes them unsuitable.

Many disreputable agencies will tell you that all secondary market properties are unsuitable for CBI. That is pure misinformation. Almost ALL secondary market properties are suitable for CBI – if the owners agree to show full sales price. The agencies who say this just do not want to deal with the complexity and inefficiency of the secondary markets, not to mention the lower paydays.

SQM prices on older properties

As the market in Istanbul is so asymmetric, with values jumping all over the place from street to street, talking even generally about sqm pricing is always perilous. However, I think with the help of a few descriptors, we can bring some clarity to the picture. 

Mostly in core downtown (Şişli, Beşiktaş, Beyoglu, and Kagithane), your prices for unrenovated properties run about 1K USD/sqm, a bit more in Beyoglu and Beşiktaş and a bit less in Kagithane. If it has a decent city view, a balcony, or a lift, this could go up to 1500USD/sqm. 

These are for quite decent locations, though certainly not prime. Many areas in Mesrutiyet, Kurtulus, Merkez, Bomonti fit into this range. 

Most properties in desirable parts of Beyoglu and Besşitaş are well beyond this price tag, more likely upwards of 2K/sqm. Prime areas in all of the above neighbourhoods are MUCH higher. If we think prime Cihangir, prime Beşiktaş and prime Nişantaşi, we seriously should be thinking around 3k/sqm. Perhaps add on about 750USD/sqm for a renovated property, the standard and aesthetic of which varies greatly. Generally, we like the play of buying very close to the prime areas and wait for gentrification to perform its secret ministry. Nowadays, a good-looking price tag for an unrenovated property, with decent characteristics, in an area which is close to a prime area, should run around 1250-1500USD/sqm range.

Older properties VS newer?

This is one of the most frequent questions I get asked. For me, personally, I prefer older. There are many reasons why; I like to take on renovation projects where value can be added, the entry point is much lower, there is a lot to choose from, and sometimes you find neglected properties at great prices. 

However, having said that, I also really love some quality new build projects, with the simplicity, convenience and often, the architecture. In the end, it is really a matter of personal choice. Many people worry about the earthquake factor. In that case, I suggest a newer building. 

From a hard-nosed investment perspective, my math leads me to the conclusion that, given a slightly longer investment time frame, even destruction of your property in an earthquake will not materially affect your investment. It would be a tragedy, pure and simple. 

But keep in mind, much of the value of the property lies in its location and the land share. Add to that the premium of having a new building (min 40%), part of the re-build being covered by earthquake insurance, and, post-apocalypse scenario, you can see that investment-wise, it is not a doomsday scenario. Factor in the likelihood of the building actually collapsing in a low risk seismic area and you see a different picture.

In the end, we are happy to look at all different kinds of properties, yet we certainly avoid older buildings in higher earthquake risk zones, or buildings that are shoddily constructed or completely unkempt. Newer properties tend to carry a 40% minimum price premium. If your investment amount is low, these may be off the table for budgets under 1 or maybe even 1.5 mil lira.

Just a quick preview of what we may look at this week. Links to be shared in zoom session

Properties will be viewed in zoom session

Keith’s Weekly Property News January 2-2022

Reflecting on the past year is a bit like reflecting on a lifetime. That is how much happened. The year started out with great hope, and the hope turned to full-on reality as the CBI program brought investors from every corner of the globe. As early on as March, it was obvious that this would not be just another year. Covid measures mostly dropped off, Turkey seemed to be kicking it into high gear and the property market seemed to be following. Prices had been beaten down for years and foreign interest was being meaningfully felt for the first time in a half decade. The market was mostly predictable, as were yields, capital growth projections and expectations. I felt buoyed by all of this and, in fact, quite bullish. Reasonable deals were aplenty and closing them was not a monumental task each time. Things were functioning smoothly. This lasted well through to late September.But as from time to time happens in Turkey, a great blur descended on the property market; the currency crisis of 2021. Closing deals became nearly impossible. Even cash-hungry developers seemed reluctant to sell, or at least felt forced to increase their prices as the sceptre of hugely increasing costs must have been intimidating to say the least. All of their projections and calculations must have been discarded and projects newly started likely were delayed. The secondary market, often plagued by inefficiency due to the whims of individual sellers, became nothing less than a fiasco in November and December. We probably had a ratio of 10 broken deals to every 1 ending in success. The moving targets of CBI demands with evaluations and amounts needed to close out CBIs, made for even more diabolically unpredictable scenarios. In the end, a year that had been steaming forward, ended with a fizzle and a big question mark.

I am also slowly coming to terms with rising prices….everywhere. And I am starting to make adjustments to new realities, one of which is much higher lira pricing for property. There are many reasons for this; reduced loan rates, property in demand as inflation hedge and continued foreign interest (a much lower impact, albeit).
I believe when all this currency mess comes out in the wash, we will see a surge in TRY housing costs, but a slight fall in USD pricing. But as I have said many times, this will not be obvious until the dust settles and stability returns. I expect yields is where the bit hit will be felt, as local affordability will trump all other market forces. Real estate prices in mega-cities can soar, particularly if housing loans become more affordable, but these very same forces will also chip away at yields.
In light of that, we may want to put the yield play on the back burner for now and focus on properties that look to be good bets over, say, 5 years for appreciation. Keep in mind, there was a pretty steady decline in USD prices from about 2015 onwards right up til 2019. Istanbul had become absurdly cheap in some areas. It could become quite pricey in 5 years. That would mean a lot of appreciation. There is no certainty about this, but one thing is for sure, we are nowhere near a bubble. When everywhere else seems to be in a bubble of some sort or another, I am still a buyer here, under the right conditions. So for those who have patience and nerve to ride the roller coaster that is Turkey, the risk/reward profile might not be nearly as dire as you may have thought. It is an uncertain start to the New year, but we would do well to remind ourselves of the many advantages Turkey possesses.

Just to round those out:

1- young population.
2-production base.
3-tourism and important geographical position/hub.
4- Great destination for digital nomads and remote workers.
5- Regional powerhouse.

Properties will be viewed in zoom session