Political and financial turmoil in Turkey is threatening to snap a critical pillar of the government’s economic policy: real-estate development.
For the past decade, developers have been building homes, malls and office buildings at a record pace. The real-estate industry has anchored a 5% average growth rate in the $800 billion economy since 2002, accounting for 30% of gross domestic product over that period, according to Intes, Turkey’s union of construction-industry companies.
But a sharp decline in the Turkish lira and rising interest rates, coupled with political turmoil since last year, are threatening to slow that growth engine. Investors are also reluctant to buy real estate during a 16-month election cycle that could chart Turkey’s path for the next decade.
Already, apartment sales have slumped because buyers have to pay higher interest rates on mortgages, now at an average 14% compared with record lows of about 7.4% in May 2013.
“Higher rates and a weakening currency are negatively impacting property sales because people can’t plan ahead and … have no trust,” says Fulya Kenber, a 58-year-old Century 21 broker in Istanbul’s central Besiktas neighborhood.
Emlak Konut GYO, EKGYO.IS +0.44% the biggest Turkish real-estate developer, said home sales plummeted 39% in January compared with the previous month. Analysts said the property giant is forecasting sales of 10,000 units this year, down from 15,175 last year.
“If I said there’s very high demand and people aren’t scared, I would be lying,” says Burcu Alim, a sales representative at developer Agaoglu’s headquarters in Atasehir, a former pasture on the Asian side of Istanbul that has been transformed into a dense district of soaring apartment blocks.
Meanwhile, the lira’s slump—of up to 30% to a record low against the dollar—is making it harder for some commercial tenants to pay rents. Most retail leases in Turkey require stores to pay rent in euros or dollars, but sales are all in lira.
As a result, numerous landlords were forced to provide emergency price cuts to help tenants make ends meet. Turkey’s second-biggest developer, Torunlar GYO, said it fixed the exchange rate at 1.95 liras per dollar in January—then an 18% discount—for tenants at Mall of Istanbul, a landmark project just minutes away from Turkey’s biggest airport.
The plummeting lira also has created headaches for many developers, whose foreign-currency debt due within one year surged more than fourfold to $101.3 billion in 2013, central bank data show.
Investors have taken note, punishing real-estate companies with large external debt and no foreign-currency income. Sinpas GYO’s shares have dropped 56% since the lira selloff started in May after the U.S. Federal Reserve signaled an end to its monetary easing. Turkey’s benchmark BIST 100 Stock Index fell 34% in the same period.
As the lira fell, pushing prices higher, the central bank more than doubled a key interest rate to support the currency and convince investors it will fight inflation. Analysts say the move will hamper the economy.
“I don’t think the construction industry can set the framework for and continue to support economic growth,” says Gulay Elif Girgin, chief economist at Seker Invest in Istanbul.
To be sure, the slowdown may prove to be a temporary hiccup.The country’s young population, with a median age of 30, supports demand for roughly 400,000 new homes a year, analysts say. Rising incomes that tripled to more than $10,000 since 2002 also have stoked interest.
Also, while mortgage rates have jumped from record lows, they are still below historically prohibitive rates that were as high as 50% in 2002. Prime Minister Recep Tayyip Erdogan’s Justice and Development Party, or AKP, continues to embrace real-estate development as a driver of growth and has unveiled plans to support property prices.
But GDP growth is forecast to fall by half to 2% this year and doubts are growing about several megaprojects promoted by the government, including turning a big swath of Atasehir into a global financial center and a $30 billion plan to develop Istanbul’s third airport.
Also, sales and leasing will have to pick up for the real-estate engine to keep humming. That may get harder as skyscrapers rise on the Asian and European hills lining the Bosporus.