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News Release


Middle Income Group: Security to Potential Risks in Residential Market

According to JLL’s Cities Research output, the speed of change to our urban fabric and property markets is intensifying where urbanisation has 1 million people a week moving to a new city and globalisation has created a 2 billion strong middle class.

According to JLL’s Cities Research output, the speed of change to our urban fabric and property markets is intensifying every year where urbanisation has 1 million people a week moving to a city somewhere in the world and globalisation has created a 2 billion strong middle class.  Over the last 40 years, Istanbul also has got its share of urbanisation movement due to both Turkey’s local dynamics and global trends; and its population has almost reached the level of 15 million, having grown from a city of barely 4 million people in 1970s. 

Squatting until 1980s followed by “apartment buildings”, earthquake-resistant housing and middle income housing 

As a result of such a rapid urbanization, 'apartment buildings' since 1980’s; and after the Marmara earthquake in 1999 the need for earthquake-resistant housing became prominent on the city agenda while Istanbul priorly had been hosting slums in the newly established districts. Along with urban transformation, infrastructure, traffic congestion and middle-income housing have become the primary agenda items of the city in recent years. Herein it would be meaningful to refer to the Housing Development Administration (TOKI). TOKI, which was established for the purpose of social housing and healthier urbanization of the country, offers projects in two concepts: projects developed by TOKI and income-sharing projects with the aim of fund raising... While projects developed by TOKI are built in various cities across Anatolia, particularly in Eastern and South-eastern Anatolia, income-sharing projects are more common in Istanbul. For income-sharing projects, TOKI takes advantage of the land from its own portfolio (in other words, avoids the time loss that could be incurred by the project's ownership acquisition process) and cooperates with the private sector, leaving the development process and financial burden to the contractor and taking share of the income of the project. TOKI aims to close the gap between short-term capital expenditures and long-term receivables via this model. 

Two main factors affecting housing behaviour and driving housing demand: Pricing of housing and financing models for housing...

While the most important determinant of pricing in Istanbul residential market is the project’s location as in other metropolis around the world, the quality of houses namely physical features and social facilities also have impact on the housing prices. According to Zingat, the average sale price of houses in Istanbul is 3,550 TRY/sq m.     Looking at the district-based average sale price across the city, Beşiktaş is the only district, exceeding the level of 10,000 TRY/sq m, and 12 districts stand above the average. Sales price per sq m of rest of the districts range between 1,700 TRY/sq m and 3,500 TRY/sq m.

 graph residential.JPG

It is frequently mentioned that the asking price level – far above the physical quality of the projects - is largely driven by location and land costs. At this point, we suggest going on with the second dimension of the subject to return later for pricing.

Considering present conditions, it does not seem possible in the short term that the middle-income group can become homeowners by only making savings. Mortgage stands out as the most widespread financing model – with its various types particularly in the USA, Canada, UK, Denmark, Germany and New Zealand – especially for the middle income group.   TurkStat confirms this thesis with the data “37% of the houses sold in Istanbul throughout January 2017 were taken by mortgage” in the latest published residential sales statistics.

How could the availability of mortgage loans offered to consumers at different maturities and interest rates by public and private banks in Turkey be evaluated? LTV (loan to value ratio: the size of the loan against the value of the property), down payment and the monthly (or annual) payment to income ratio (mortgage payments as a percentage of gross or net income) stand out as concepts that are put into the table as criteria. While various countries bring lower and upper limits to these parameters with laws and legislations, an ideal mortgage is described as 70%-80% LTV (down payment as 20%-30% of real estate value) and 1/3 payment to income ratio, which lie on the motto “be a homeowner like paying rent”! 

Now we can tie pricing and financing together…

Across the well-conceived world cities, the residential areas of middle-income households are regarded as the surrounding districts which are accessible by public transportation on an average of 30 minutes from the city centre. The difference between Istanbul and other cities is the vertical and horizontal expansion due to geographical constraints instead of "a centre and surrounding peripheries"; therefore, it is subjective where resistance pinpoint of the compass should be put on. However, Besiktas, Beyoğlu, Şişli on the European side; Üsküdar and Kadıköy on the Asian side can be considered as the city centre, and chart above - covers sales price per sq m – supports this proposition. When we move away from the central districts by drawing circles, Kağıthane, Eyüp, Sarıyer, Fatih, Gaziosmanpaşa, Bayrampaşa, Bahçelievler, Güngören and Zeytinburnu on the European Side; Ümraniye, Ataşehir, Maltepe on the Asian Side are theoretically identified as suitable districts for the middle-income households. In this regard, we are faced with a wide scale from 1,900 TRY/sq m to 10,800 TRY/sq m.  Looking at the average price of selected districts and weighted average of these figures in general, it is possible to mention about 3,600 TRY/sq m for the housing sale prices.

On the other hand, the return on investment for a leased residence is one of the most important evaluation criteria for those who see the housing as an investment instrument, and it is calculated as 19 years according to Zingat’s data.  This period rises to 24 years in Sarıyer which should be regarded as one of the districts for middle-income housing.   

Considering a middle-income family of four needs a 100 sq m residence, the required amount to become homeowner can be calculated as TRY 360,000 on paper. 

The households, who are willing to be homeowners, have to save TRY 72,000 for down payment (80% LTV) and covers the remaining TRY 288,000 by the mortgage. Considering the common practice is 120 months for mortgage in the country, monthly payment is calculated at the level of TRY 4,000. At this point, two questions spring to minds: “Do any middle-income families earn income at the level of TRY 12,000, allowing them to cover TRY 4,000 monthly mortgage payment?” and “Is it actually possible to buy a house in above mentioned districts for TRY 360,000?”

The solution is to attract the middle-income group to the housing market through diversification in pricing and financing

The five main factors – land costs, infrastructure-construction-operation costs, developers’ business plans, public regulations and housing financing – allow for a healthier assessment while addressing the housing sector. 

Considering the specialization level of Turkish construction companies, there are no significant problems in raw material, construction and operation costs and business models; but high land costs are driving housing prices up. The high land prices in the city – a fact, expressing by almost all actors in the sector – are far above the acceptable level due to the limited supply of land suitable for residential construction in the central districts of the city.

Structural reforms should be introduced in the housing sector - supported by campaigns such as "Mobilization in the Housing", which started on February 1 and end on March 31 in Turkey - for the diversification of the financing models and making the residential market operation more healthier for the middle-class. Government regulations in UAE requiring developers to provide an agreed % of affordable units within master plan developments are one of the significant examples in this matter. Although intervention in housing prices under the free market conditions is a controversial solution, regulations such as setting the upper and lower limits for the rent and sales price for the houses – which meet the certain physical attributes - are important for public welfare and sustainability in the sector.

Given the fact that the rate of return on the rent reaches 28 years in the districts such as Bakırköy, Beşiktaş, Beykoz and Sarıyer; even the investors who are in a good financial position for housing investment are expected to act cautiously. On the other hand, it should not be overlooked that the residences in many districts have been renewed within the context of urban transformation. While many municipalities encourage the zoning improvement in urban renewal process, contractors receive their share without reflecting any financial burden on the homeowners thanks to the increased number of apartments. Considering thousands of households are able to replace their old buildings with new ones without any financial burden, there may be a demand shrinkage for the projects under construction in newly emerging districts. 

The "Mobilization in the Housing" campaign can be considered as a good example of the current situation of the sector as well as the diversification of financing models.  Within the context of the campaign, there is no interest on five-year loans. Although the maturity advantage, which is extended to 20 years, is being highlighted since the first day of the campaign, 5% down payment is the most dramatic change. Although almost all risks are on the developers and financial institutions due to the percentage of down payment, developers express their support and satisfaction towards the campaign. This gives us the tangible clue about the future of the industry.  

As a result, construction companies and investors, who have opted for housing as an investment instrument, seem to continue to have the possibility of entering into financial meltdown under the current circumstances; although we believe that it is not possible to talk about the existence of a housing bubble at the moment. The pricing in accordance with the physical quality, new regulations to look after middle-income households and diversification of housing financing models could avoid the construction sector – the locomotive of the Turkish economy – falling into a potential bottleneck in the future.