Where to invest in Istanbul and what to avoid

  Date posted: 4th of December 2014

Contrary to common belief, Istanbul is not the capital of Turkey, however, it is the largest by population (19% of total population in Turkey live in Istanbul), contributes 38% of Turkey's industrial workspace, generates 55% of Turkey's trade, 45% of the country's wholesale trade, and 28% of Turkey's national product.

The population of Istanbul in 1960 census was around 3 million.  Today, this figure is expected to be in the region of 16 million.  During the period from early 70’s to late 80’s, Istanbul attracted unprecedented urban migration from central and eastern Anatolia.   Migrants came in search of better lifestyle and job opportunities, hence the expression ‘road to Istanbul is paved with gold’.    As of 2011, Istanbul is believed to have the 4th highest number of billionaires in the world after New York, London and Moscow.  Having said that there is a major divide in income distribution between the better off elite and the general work force of the city.  This disparity is evident in lifestyle choices, living conditions and social aspects of Istanbul’s residents.          


Demand and supply of affordable accommodation in Istanbul

With fast growing population in Istanbul, there is significant demand for affordable accommodation for the city’s lower income bracket dwellers.   During the height of urban migration, Istanbul saw a haphazard development of its outskirts in the shape of shanty towns, which left a lot to desire in terms of infrastructure and general facilities.   In the last 10 years and with plenty of incentives from Turkish government, private sector teamed up with public sector in providing quality but affordable accommodation on the outskirts of the city, creating satellite towns.  Prime examples are Beylikduzu, Esenyurt, Bahcesehir, Kurtkoy.  These, previously shanty towns, are now being regenerated as high rise affordable homes and offered to domestic market with extended payment terms and low interest payment plans. 

It is expected that around 2.5 million new homes will be constructed within the next 5 years along the outskirts of Istanbul.  These satellite towns are gradually being integrated into the city’s transport links via extensions to existing metro systems and motorways.   Due to availability of land to expand outwards, acquisition costs are being maintained at affordable levels in line with inflation thus supporting the initiative of ‘housing Istanbul’s work force’.     

Central regeneration projects
Inner city ghettos are being face uplifted at a fast pace since 2007.   This is an ongoing process in Istanbul, where significant funds are channelled.  Prime examples are backstreets of historic Beyoglu district such as Galata, Cihangir, Tarlabasi, certain Bosphorus districts such as Ortakoy, Balat and developing financial districts such as Macka, Mecidiyekoy and Levent.   Old dilapidated buildings are renovated to their former glory and a new contemporary-fusion look is replacing tired central Istanbul. 

The inner city regeneration process is likely to take at least 5-7 years if not more.  We are already seeing notable increases in prices per square metre of inner city properties subject to regeneration and redevelopment projects.   Regenerated areas are fast becoming city’s new trendy living quarters for artists, celebrities and young professionals.  These areas are also the centre of attention for domestic and foreign travellers, hence increasing demand for quality hotel and residential accommodation.         


Prestigious Bosporus  

Districts along the Bosporus have always been home to Istanbul’s elite and wealthy.  Some of Istanbul’s most expensive properties are located in areas such as Bebek, Arnavutkoy, Baltalimani, Istinye and similar districts with access to either sides of Bosporus, European and Asian continents.   It can be argued that prices per square metre in these areas may not be sustainable in the long run and a ballooning effect may be setting in.   Having said that recent change in law allowing Middle Eastern nationals to purchase property in Turkey is likely to give a further boost to Bosporus property prices due to a significant number of prestige home buyers from the Middle East, who seem to have switched from London, New York and Paris to Istanbul in recent years. 

 

What’s a viable investment and what is not?

Having reviewed the above, let us now look at what’s viable and what’s not for investment in property in Istanbul.

1.       Low entry level properties in satellite towns.  These are most heavily marketed to foreign investors.  Nine out of 10 Istanbul projects offered to foreign investors, particularly by international brokers, fall into this category.  In addition, they are packaged with rather seemingly attractive features such as rental guarantee schemes and buy back options, etc.  In our opinion, investors should take a very close look at such offers before being tempted by low prices and capital growth promises.   A great majority of rental guarantee schemes are cash-back offers and not genuine rent.   Investors are overpaying to start with, thus eating into their future growth prospects upon purchase.  

The fact that these types of properties are built for Istanbul’s lower income brackets and supply is unlimited means potential for growth is actually pretty limited.  We calculate capital growth to be in line with inflation in Turkey, which is currently around 8%pa, down from 20% in 2006.   If we take into account that most foreign investors would have overpaid to start with, their chances of capital growth will be minimal.  Having said that, there are few areas developing as more attractive and high-end suburbs, Bahcesehir to name one, where investment may be viable provided investors access the market at local prices.  Areas to avoid - Esenyurt and Beylikduzu to name a few.  (Overall investment value – low)

2.       Investment in central regeneration areas.  This is where investors can expect very healthy returns in short to medium term, which we classify as 3-5 years.  Having said that finding the right area and right type of property is of utmost importance.  Unlike the projects in satellite towns that are properly marketed and easily accessible, property options in regeneration areas are not marketed in an orderly manner and most foreign investors would have a hard time screening the market for viable deals.   This is where local knowledge and expertise are essential.  It is important to know the next-on areas so investors can get in before prices start rising.   In addition, it should be noted that investing in regeneration areas requires larger disposable funds than investing in apartment units in satellite towns.  This is due to the fact that viable investments are usually blocks as opposed to single units.  We recommend the following investment strategies

a.       Residential renovations – acquiring old dilapidated blocks and converting them into luxury apartments. 

b.      Apart-Hotel projects – acquiring old dilapidated blocks in high foot-hold areas such as Beyoglu and converting them into hotel suites, ideal suite number not to fall below 15 for viable operation.  With careful planning, it is possible to achieve in excess of 10% annual return on investment. 

c.       New build luxury residences – generally speaking these are rather high cost to start with therefore investment potential may not be as high.  Having said that, there are a select number of options offered at competitive prices in areas that still require several years to mature.  These do make good investment sense for there is always high demand in Turkey for new luxury residential complexes in city centres.     

(overall investment value – high)
 

3.       Investing in Prestigious Bosporus districts.  In our opinion, there are two types of sellers of Bosporus properties.  There is the speculative seller, who does not really need to sell but if someone offers ‘the right price’, then he will sell.  And, then there is the genuine seller, usually an established family or business that has come into hardship.   The former will demand significant premiums for the sake of location, sometimes for properties that do not even have proper facilities and require major upgrades.  The latter needs to sell, therefore there is a real potential for upside for the lucky buyer.  (overall investment value – moderate)

 

Final note - yes, you can do very well investing in Istanbul, however, do not go buying low entry level properties in unattractive suburbs such as Esenyurt, which will have very little chance in developing into anything more than poorly built and badly structured towns.