Turkish retail real estate values relatively untouched

    “We cannot attach a precise figure to how far the market has declined,” says Idil Hamzadi, research manager at Jones Lang LaSalle (JLL). “There have not been any transactions in the markets since the end of 2007,” she said, explaining that unlike markets in Europe where many investors were highly leveraged, in Turkey retail property investors are able to hold off selling their units until the crisis subsides and demand once again rises.

The Turkish high-end commercial real estate market is dominated by the retail sector, followed by office space and logistics. According to most experts, all three of these real estate sectors are far from having reached their potential.

This is especially the case for commercial retail. Study after study has found that the Turkish high-end retail market in particular is under developed. As a result a number of investors flooded the market looking to take advantage of the relatively cheaper expenses associated with setting up shop in Istanbul along with the favorable demographics that make the Turkish consumer a potential power consumer.

“The volatility in prices has had the biggest effect in transactions. A lot of people are delaying their decision to buy new houses, rent new offices and even rent new shops because no one is sure which way prices, rents or yields will go,” said Kerim Cin, managing partner of Colliers International in İstanbul, earlier in the year. “Because banks are in a much better position here than in the West, we have not seen many foreclosures, and so the prices have not decreased dramatically yet.”

Market has huge untapped potential

But despite the difficulty in evaluating the cost of land, as a result of a lack of transactions, one way of evaluating the value of commercial retail real estate suggests that the market has been left relatively intact. Rent yields were reported by Hamzadi as not having changed much compared to the rest of Europe. “All in all, investors in Europe have been affected much more noticeably than in Turkey. In London, for example, there has been a significant adjustment in yields,” she told Sunday's Zaman.

The boom in real estate prices and the growing consumer power of the Turkish consumer led to international companies rushing into the market and causing a rapid expansion in the retail sector. “They [retailers] did not want to give up their market share to rivals,” explains Hamzadi, who said they began opening branches in every mall around the country without necessarily assessing the feasibility of the project.

Although the sector has in fact grown in real terms, the slashing of prices to keep buyers in the stores has resulted in a significant fall in profits.. Hamzadi and others who Sunday's Zaman spoke with estimate profits to have dropped by a significant amount, despite an increase in turnover.

Despite the demands of retailers, however, retail spaces have been very reluctant to reduce the rents, at least in part because rents are heavily factored into the valuation of a piece of real estate.

Rents fall with mass relocations

Nonetheless, plummeting profits have caused retailers, first in a trickle and then in a flood, to begin demanding from their landlords a dramatic reduction in rent. While this was initially resisted by landlords on the grounds that the effects of the crisis were temporary, the sheer scale of the collective requests and the very real threat of mass relocations caused shopping mall owners to take a number of actions to alleviate the burden while at the same time minimizing the effects to their properties' valuation, which will still show rents at pre-crisis levels and thus keep shareholders happy.

“The sector is at the bottom of the bottom,” he said, adding that “tenants are beginning to ask for too much, and it's next to impossible to make them happy.” The arrangements were assorted, including a dramatic reduction in taxes, rebates and assistance with advertising budgets.

One senior manager with a deluxe Anatolian shopping center, who spoke with Sunday's Zaman on condition of anonymity, said a number of brand new shopping malls were quite literally giving free rent for fixed periods of time with repayment deferred by upwards of 10 years. The same source also stated that a lot of malls have agreed to foot the decorating costs -- a considerable expense -- in exchange for not having an empty mall.

He said the end result was an effective reduction in rent by 30 percent. He stated that they are giving rental reductions of 15 percent to businesses in the food court. Some fashion stores were getting discounts amounting to about 40 percent. Likely surprising to some, store owners and brands that one might think have the least need of obtaining rental subsidies are receiving the highest discounts  “We want to keep our big brand name stores happy.”         

Although the average cost of the discounts had come down by 5 percent, from 35 percent to 30 percent in the second half of the 2009, he said he was not hopeful that things would improve any time soon and result in a return to normal. “We are making money,” he said, referring to the large shopping mall he managed, “but a lot of malls are actually losing money. Their profit on their income statements is negative.”

Despite these cuts in rents, he was not able to point to any reduction in the value of properties in the shopping complex. Nor was he able to point to any changes in the yields, which have been pointed to by some as being relatively unchanged when compared to European yields. 

Instead of reducing rents outright, an increasing number of companies are also starting to fix exchange rates in contracts in order to sweeten leases. She was quick to point out, however, that these were “effective rents” and that there was no change in the actual contracts. And she did not believe that there would be any reflections of these effective rental reductions on the actual rent contracts. “The sector is already recovering -- not to the same extent as 2007, but recovering nonetheless.”

According to Hamzadi the retail sector's troublesome times were brought about at least in part by “too many malls” -- especially in some areas of İstanbul. “It became a trend -- every investor that had available land preferred to make a retail real estate investment. Now there has been a healthy correction.”

But contrary to popular opinion, the retail shopping market is far from reaching a saturation point in the view of Hamzadi -- even in areas where there is a high concentration of shopping centers such as the Levent, Maslak and Mecidiyeköy areas. “There are many shopping centers and malls in this area,” she said, adding that they very often “complemented one another. One project might bring a lot of entertainment.” She said the income groups in the region, moreover, support such a growth in shopping centers. “The demographics are in favor of Turkey.”

‘Modern stores are few in number’

Beylikdüzü is one area that offers especially promising retail expansion in the high-end sector. “There are many shopping centers,” she said, “but the number of modern retail stores is quite limited.”

From an investor's point of view, she stated that commercial real estate still offered a lot of promise. And although the sector is dominated by retail, office real estate was another sector that is seen as having “huge potential” for investors. Office real estate in the Grade A category -- the highest category -- was almost entirely concentrated in Istanbul and is in short supply. “Ankara and İzmir are developing, but not at the same pace,” Hamzadi said.

The real estate tied to the logistics sector also offered great promises. Although it is now one of the sectors hardest hit by the crisis as exports and imports have virtually collapsed, Turkey's geo-strategic position was seen as very beneficial for Turkey's logistics' real estate, going on to become one of the largest in the world. “The sector is going to boom,” she told Sunday's Zaman. In addition to established centers like Istanbul, İzmit and İzmir, secondary markets like Mersin, Trabzon and Sinop would soon explode, she said.

“All three types of commercial real estate offer big opportunities for investors,” she stated. “Turkey is a huge country; it has a huge young and expanding middle class; its [gross domestic product] GDP is growing, and an increasing number of multinational companies are being set up in Turkey. The demand side is going up.”