REAL ESTATE BOOM IN ISTANBUL GOING THROUGH THE ROOF

UNCLAS SECTION 01 OF 02 ISTANBUL 000956

SIPDIS

STATE FOR EUR/SE AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER

E.O. 12958: N/A
TAGS: EFIN ECON EINV TU
SUBJECT: REAL ESTATE BOOM IN ISTANBUL GOING THROUGH THE ROOF

REF: ISTANBUL 00798


1. (U) Summary: Real estate in Istanbul is flourishing, as
property prices have on average doubled in the past two
years. A confluence of demographic, economic, financial, and
structural forces have come together to make owning housing
increasingly desirable. The most important of these is the
fall in interest rates following the 2001 financial crisis.
In response to increased demand, the price of real estate in
Istanbul since 2004 has skyrocketed. Before the recent
interest rate increases and concomitant suspension in demand,
market analysts expected this appreciation to continue at a
pace of at least 10% per year through 2010, with prices in
some areas increasing much more dramatically. End Summary.

--------------
A Story of Increasing Demand
--------------


2. (U) After 1999, demand for real estate began to take off
in Istanbul. Following the Kocaeli earthquake that killed
over 17,000, people began looking for earthquake-resistant
construction. At the same time, Istanbul,s population also
continued to grow steadily, increasing the need in housing
stock. The Association of Real Estate Investment Companies
(GYODER) estimates the number of households in Istanbul will
increase from 2.9 million in 2005 to 4.1 million in 2015,
resulting in a need for 1.2 million new dwellings simply from
population growth. Finally, approximately 200,000 houses
will be needed to replace naturally ageing structures.


3. (U) Simultaneously, life-style changes are also
contributing to increasing housing demand -- children are
moving out of parental dwellings in search of their own
abode, and car ownership is increasing the distance that
families can commute. The Turkish word for home is Ev;,
the word for getting married is Evlenmek., This shared
root reflects how housing is a cultural value for Turkish
people, and that those who can are jumping into the market.


4. (U) Economic changes, however, are perhaps the most
significant factor in rising real-estate demand. First,
Turkey suffered a severe economic crisis in 2001, depressing
housing prices and halting new construction. The ensuing
economic recovery and reforms instituted by the GOT, however,
created a virtuous cycle of declining inflation and declining
interest rates. Cash investments thus became less lucrative
and real estate relatively more attractive, leading to a
resurgence in the market.


5. (U) Second, changes in bank requirements for housing loans
(reftel) are also giving more Istanbul residents access to
financing. By the end of 2005 housing loans averaged $35,000
and totaled approximately $9 billion, representing 2.5% of
GDP. Money is flowing into the sector, spurring heightened
demand for existing housing and driving new construction.

--------------
Tremors To the Good News
--------------


6. (U) Since mid-May 2006, however, market volatility has
slightly discolored this rosy picture, leading to an increase
in interest rates. Prior to the turbulence, banks charged
around 1.07% per month (corresponding to an annual compounded
rate of around 14% ); at the end of May, banks are charging
around 1.30% per month. Until this turbulence settles,
demand may be dampened as higher interest rates discourage
potential investors.

--------------
Still Room to Grow
--------------


7. (U) Nevertheless, there remains great upward potential in
Istanbul,s real estate market. Current bank-provided
housing finance can only be used for legal structures. Yet
GOYER estimates that 52% of housing in Istanbul was built
without permits. This limits the number of properties for
which a bank housing loan can be used, placing further upward
pressure on prices. New construction, however, is now
generally carried out with permits, thereby qualifying for
bank housing loans. This change in practice is also
contributing to an expanded pool of available housing that
prospective home-owners can purchase through financing,
adding to the real estate boom.


8. (U) In addition, financing options are evolving.
Legislation modernizing the mortgage market is expected to
soon be passed by Parliament (reftel). Yasar Buyukcetin,
Chairman of RealtyWorld in Turkey, predicts a perfect
mortgage system, will be in place within one and half years.
If this happens, even more prospective home-owners will have
access to capital and invest in real estate, so long as
interest rates remain affordable. Experts see these forces
causing the upward trend to continue at least through 2010,
if not 2015.

--------------
The Scaffolding Removed
--------------


9. (U) Looking forward, market experts foresee real estate
prices continuing to rise, though perhaps with smaller annual
increases, especially following the recent interest rate
increases. Fatima Umut, a city planner by training and head
of Research and Investment for Remax Inc. in Turkey,
estimates that growth in property prices and in property
registrations should be around 10% per annum for the coming
years. She cautions, however, that prices in some places
have already soared as a consequence of the hype and market
revaluations.


10. (U) Housing remains accessible, however, to only the
relatively affluent. Market analysts predict the next stage
in real estate development will come from housing destined
for the middle and lower economic echelons. This will be
possible once the mortgage market comes in line with
international standards. Real estate developers see this
segment as having the most growth potential, with the market
for luxurious residences gradually becoming saturated.


11. (SBU) Comment: This is a time of immense change in
Istanbul,s housing market. So long as the recent increase
in interest rates does not dampen the market too much, prices
are expected to keep rising dramatically. At the same time,
such a surge in prices brings with it the risk of greater
social and economic disparity. If those at the lower end of
the economic spectrum are left behind, it could cause growing
friction between the new housing haves and have-nots. End
Comment.
JONES