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Why Istanbul's luxury property is in a bear market now

Dubai - Expanding middle class, access to home mortgages, to anchor realty values in affordable segment

I have visited Istanbul a dozen times since the late-1990s, captivated by the exquisite atmospherics of the ancient Byzantine/Ottoman city on the Bosphorus Straits. Istanbul, with 15 million inhabitants, the Turkish Republic's financial and banking capital, was a magnet for foreign investors in the past decade. Saudi Arabian, Kuwaiti, Russian, Iraqi and German investors led a tsunami of foreign money investing in new condos and even villas in the Beyoglu, Levent, Bebek and Nisantasi districts of Istanbul, triggering a construction boom that spelled speculative disaster to me.
This is exactly what happened. In 2014, oil prices crashed, ending the Gulf petrocurrency bonanza. In 2015, a Turkish F-16 shot down a Russian warplane in the skies above the Syrian border and triggered a diplomatic crisis in Ankara-Kremlin relations. In 2016, an abortive coup d'état horrified all of us Istanbulphiles with its scenes of violence on the Ataturk bridge. In 2017, Turkey's constitutional referendum and rifts with the West caused economic and political turmoil. I remember buying Turkish lira at 1.20 to bid for the Turkish Telekom IPO. The Turkish lira now trades at 3.96 as I write, the worst-performing emerging-market currency of 2018.
While Istanbul property tripled in the past decade, most Gulf investors were aghast to see the Turkish lira lose 70 per cent of its exchange value against the US dollar. Russian investors fared even worse, as Putin's annexation of Crimea and military intervention to save the Assad regime in Syria has led to a crisis in Turkish-Russian relations that reverts to historical patterns during the reigns of the Romanov tsars and Ottoman sultans. The Russian ambassador to Ankara was gunned down by an assassin at an art gallery. The unsettled politics of post-referendum, Turkey have also unnerved foreign investors. When I hear Erdogan accuse his central bank chief of "treason" if he dared to raise interest rates or fulminate against bankers as "evil forces in the economy", I know the Turkish lira will continue to depreciate against the US dollar. Yet this is an absolute disaster for the stratospheric prices in Turkey's luxury property development projects.
There is no doubt that Turkey's expanding middle class, access to home mortgages, migration from Anatolia and the Black Sea/Aegean coastal towns and the lowest ever interest rates will anchor Istanbul property values in the affordable segment. Yet the Turkish lira is one of the most volatile currencies on the planet and it is difficult to hedge currency, let alone geopolitical risk, on the Bosphorus. Terrorist bombings by Daesh and the PKK secessionists in Istanbul have also hit prime property values. There is no sense investing in a Trump Tower in Sisli at a time when the Turkish military confronts a US allied Kurdish militia in the Syrian border town of Afrin.
The exceptional political instability seen in Turkey since General Kenan Evren's military dictatorship in the 1980s means its middle class prefers investing in homes and gold rather than traditional financial assets such as stocks and bonds. Yet this has also meant that 50 per cent of new houses built in Istanbul have been designated for investment, not for owners to live in. I avoid investing in any property market that is dependent on foreign money, not local demand, as it is invariably prone to speculative boom-bust cycles.
Istanbul will remain one of the world's fastest-growing property markets, despite the current fall in the prices of its prime developments. It is also crucial for Gulf investors to remember that high risk currencies like the Turkish lira (or the Malaysian ringgit, Pakistani and Indian rupees) can and do lose 50 per cent of their value against the US dollar in a decade.
As long as Turkey's current account deficit, the largest in Europe, is financed by offshore hot money, the lira will remain one of the most volatile currencies in the world. The rift between President Erdogan and the Ankara central bank does not exactly reinforce investor confidence. I also worried about the political (and financial) cost of 3 million Syrian refugees, Kurdish secessionist violence in eastern Anatolia and the inflation's rise to 12 per cent its highest pre-Lehman levels. The AKP's draconian response to the failed coup has seen 150,000 Turks either arrested or losing their jobs.
Wealthy Turks are major investors in Portugal's golden visa programme. None of this is positive for the long term outlook of Istanbul property prices.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.