Keith’s Weekly Property News December 25-2022

This week we will give a short review of the year that was 2022, an eventful and somewhat chaotic year on the Istanbul and Turkey property front.
As is perhaps to be expected, there seems to be a seasonal lethargy settling into the market, which I would expect to last for at least a few months, which I have noted a few times previously. I do see this as a window for buying. Many properties will not see good traffic in terms of viewings, so it might increase our bargaining power, which was vitiated for much of the past year. Developers, as well, will be under pressure to move product and that might result in price drops. Ones who are having trouble selling may have to even sell at a loss considering their increased construction costs. As always, one has to be careful. Deep discounts may be the result of a flawed project, either in terms of concept, quality or location. Many developers are still trying to cash in on the 400K CBI by offering packages of properties to reach the 400K mark. Although we still have interest in the new build market, we will be limiting our engagement to projects in areas we feel fully confident in (Kagithane, Zeytinburnu, Golden Horn jump into mind).
We have also noted a shift away from large renovation projects by clients, particularly CBI clients. Of course, this is largely due to the fact that it pushes their minimum spend up beyond the 400K mark. This could create more opportunities for non-CBI buyers to compete for those types of projects, which typically offer higher yields and at least initially, higher capital gains.
To sum up, for those who have been on the side-lines waiting to enter the Turkish property market, the upcoming months represent a real opportunity, especially if you can isolate and close on a property under market price. Those usually have a way of standing out from the rest, but also take some patience and open-mindedness in terms of investment approach. It is pretty rare to get a pristine Cihangir or Moda sea view at anything less than full market price due to the intense demand for such properties. Also, we are not seeing many good investment opportunities in the under 100K mark. People always ask me if they can find a property for under 100K in Istanbul. My answer is invariably yes, but with a caveat. Would you want such a property? In my view, 75K is not sufficient to find a property that is worth taking your hard-earned money and investing in an overseas property. Of course, if it is just a first step to building a portfolio, that is something different. But a one-off investment of 75K does not make too much sense to me. Perhaps in Izmir you can still find something worth buying, but we even see there the mark increasingly being 100K and above for a property that has decent characteristics.
Wind back to the beginning of 2022 and we were still newly trying to regain our feet and composure after the great lira crash of the late Fall 2021. It was a disorienting and challenging period as the sands seemed so rapidly be changing under our feet. The pattern that began to emerge initially did not make sense. Prices surged, even in USD terms, and rents began to sky rocket. Initially, I was concerned that yields would be a victim of higher prices, but for new buyers that really was not the case. People who bought newer properties and were tenanting them in the Spring and Summer months probably easily achieved 5%, which historically for a newer property, is actually higher than average. Those who went the reno route probably were looking at 607% and even beyond in some cases. The Airbnb story has become very familiar with most properties shining with great yields, often those in our stable getting in excess of 10% net after all costs. Very good performance (a bit more on that later).
So with the skyrocketing rents being a big surprise story it also brought with it its fair share of headaches. Now, almost any property that is tenanted is very difficult to sell. We still consider them, but only if we can get a notarized agreement stating tenant departure date. Obviously, many tenants do the math and dig in, refusing to go easily. Sometimes the seller will incentivize them with cash and we often chip in by offering some months of free rent, typically anywhere from 3 to 6 months if they agree to sign to vacate the property. Others refuse to even show the properties or make it so difficult that we basically have to pass. This creates a choke on the flow of new properties. This was not a problem 2 or 3 years ago as we were easily able to incentivize the renters perhaps by helping with moving costs or giving a few months free rent.
IN USD terms, the market surged a minimum of 20-30% in the first half of 2022. That also came as a surprise, but after time passed, it actually began to make sense. Rents up, demand for property in light of skin-burning inflation, up. Construction costs way up. Under the wight of these forces, the old price regime disappeared. Gone are the days when we can speak of decent, unrenovated properties in decent downtown locations for under 1K per SQM. It really was under-valued, so in retrospect, it was just a matter of time. I mean, we were literally half the price of cities like Sofia, Athens, Bucharest, not to mention other, more expensive cities like Budapest. It was a mis-match and well done to those who seized the opportunity. I still feel that if you compare to most European cities, most segments of Istanbul real estate, apart from luxury, which world wide always seems to have more compression in prices, is still very fair value.
Of course, the CBI moved from 250K to 400K. That was always going to happen and was just a matter of time. Many thought the government need for hard currency would outweigh the political pressure of housing costs, but in the end, the CBI became the scapegoat for high housing costs (even though it was only a part of the story), and the amount was raised. The future of the CBI at the end of 2022 looks uncertain. My view is that it will more or less remain in place as it is until the June elections at least. After that, it is anyone’s guess.

AIRBNB and a ‘flight to quality’

It is always a bit of a pet peeve of mine to write so much about Airbnb. It also irked me to notice that their fees have gone up a lot from the days when I used to personally manage several. But perhaps more so, is my deeply felt belief that you can miss the forest for the trees if you too myopically pursue yield and yield alone. Airbnb can be a fair-weather friend to sub-par properties, but when the wind changes direction, it can leave you exposed. A good, solid property purchase will tide you over in hard times and a point or two extra on yields might not mean much in those times. As impressed as I have been about the Airbnb story of the past 2 years, there is no doubt that the word is out and there are manifold new entries on the scene. Airbnb in Istanbul is also unique in many ways, as the locations where it works are much more diverse than they used to be. It used to be pretty much Beyoglu-centric, with a few here and there in Sultanahmet etc. Now it is much more pan-Istanbul. The over-crowdedness of Beyoglu makes it a bit less appealing for those who may be on stays of longer than a week. Locations that are decently connected to transportation are in vogue. The important thing is, as always, if you want to run an Airbnb, it had better be top flight, with review average a minimum of 4.25 and hopefully above 4.75. When and if the market gets crowded out, there will be a purge on the wannabees, those basement places that have been dolled up and photograph well, but somehow fall short in overall customer satisfaction. Again, when the sun is shining, those probably get an impressive yield, but when things get nasty, those kinds of marginal properties get the axe when the consumer has more choice. You might be left with a property that is suddenly under-performing and that is also less liquid when it comes time to sell. Also, a lot of companies may not even take on such properties, with nightly charge being too low for them to make money on commission. As always, when things get nasty, there is a flight to quality. Make sure the property you purchase meets the minimum on those terms. Pay attention to natural light, local demand for purchase and rental, a little view helps, as does excellent maintenance on the property. Don’t let things slide, as it is always easier to deal with issues as they arise rather than later. “A stitch in time, saves 9”. Deep cleanings of the properties should be conducted regularly, even if you have to pay 50 bucks extra every now and then for a focused cleaning. Tenants are more likely to respect the property if they see care has been taken and things are more or less pristine. Also, it makes it easier to identify damage if it occurs. Personally, I am always reluctant to take on property management duties on a property that looks like it has suffered neglect.
In any event, back to 2022 for a moment and a small nod to 2023. The second half of 2022 started to show signs that the property market was getting over-heated and that was supported by declines in housing sales so far in late Fall and early Winter. The trend will continue. Still some hack realtors will be peddling over-priced rubbish, but those properties will languish on the market as the appetite for such extravagance dwindles. Deal seekers will be out in full force at some point, yet overall transactions will remain in a slump, causing further downward pressure on prices. However, the absolute necessity of young Turks necessity to escape the rental trap will create a competitive environment. Think Argentina World Cup. There are a lot of gritty and savvy young Turkish people out there looking to get on the ladder. In fact, I regularly implore any young Turkish person who is willing to listen to cobble together whatever money they can to get a property that meets the ‘minimum livability’ requirement. They often reply that they need a 2 or 3 bedroom, so their parents can visit or for future children, etc. I usually tell them to be flexible on points and just buy, such is the necessity for survival in Istanbul. People who live in major global cities will know exactly what I am talking about.
For 2023 we of course wish for a return to manageable inflation, a break in surging housing costs and some solutions on the long term rental market. It is hard to imagine 2023 being as tumultuous a year as 2022. Be that as it may, we may anticipate some ‘normal’ volatility as we proceed about our business in the New Year. Inshallah.

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