Published: August 20, 2018, at 12:43 PM.
The devaluation of the Turkish lira may seem attractive to foreign investors when it comes to real estate in cities like Istanbul and Ankara. However, purchasing property in Turkey can still turn out to be a futile endeavor, even when the currency stabilizes. Concerns about the political leadership of Turkish President Recep Tayyip Erdoğan and the deteriorating relations between the country and the United States and the European Union have led to the collapse of the Turkish lira, which reached historically low values at the beginning of the week.
In light of these dramatic fluctuations, some are pointing to Turkish real estate as a great buying opportunity. Foreign investments in Turkish real estate have sharply increased in recent years. Developers have sought to take advantage of the renewed interest in Istanbul and the improved tourism sector in the country, especially along the Black Sea coast. The number of tourists visiting Turkey increased by 31% compared to last year in just the first five months of 2018, according to data from the country's Ministry of Culture and Tourism.
The lira recovered slightly with the announcement from the Qatari government about plans to invest $15 billion in Turkey, but it fell again on Friday. However, Turkey imposed tariffs on imports from the U.S. after President Trump imposed sanctions on the country due to the detention of a pastor accused of terrorism. In any case, buyers are likely to find it more profitable to invest their funds elsewhere.
Here are a few reasons why Turkish real estate might be a too risky bet:
- Housing in Turkey could be a bubble.There is an opinion that the Turkish real estate market shows signs of a bubble ready to burst. However, there are also those who believe that these are just isolated pockets of overvaluation. Observers have been warning about a bubble since last fall. One of the main dangers is that Erdogan directed funds towards the development of the construction business in the country to stimulate economic activity and housing construction.
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But with the decline in housing prices due to the depreciation of the lira and the rise in construction material costs due to a strong dollar, many Turkish builders are facing the threat of bankruptcy, reports the English-language publication Ahval News.
The currency may remain at an unstable level for an indefinite period of time.The Turkish economy is built on a fragile foundation. Erdogan is pressuring government officials to avoid measures that could combat the inflation risk plaguing the country, which raises concerns among observers. "When I hear Erdogan accuse the head of his Central Bank of 'treason' if he dares to raise interest rates or criticizes bankers as 'evil forces of the economy,' I know that the Turkish lira will continue to depreciate against the US dollar," wrote Matein Khalid, a global equity strategist and investment fund manager in Dubai, earlier this year in the Khaleej Times, an English-language newspaper in the UAE.The political situation in Turkey is very turbulent.The Trump administration continues to threaten new sanctions against Turkey if the country does not release an American pastor who is currently in custody. The political risk in Turkey is not only caused by the country's external relations. Separatist Kurdish groups and extremists linked to ISIS have carried out numerous terrorist attacks across the country in recent years. And these attacks, if they continue, could threaten the value of real estate located in targeted areas. But perhaps the biggest political risk lies with Erdogan. After the failed coup in 2016, Erdogan consolidated his power and took actions that suggest he may establish his rule in the country for the rest of his life, said Mermelstein. This has already strained the country's relations with European governments.Clientelism may thrive at the local level if Turkey becomes more autocratic.As Turkey becomes more detached from the international community, local officials will gain more influence and will be bolder in taking advantage of the failures of foreign investors. For example, in Russia, Mermelstein's clients were denied permission to redevelop their properties by local authorities. "The local authorities refused to allow construction, and then local competitors offered low-cost proposals, saying that you will never be able to do anything with this property unless you accept this offer," Mermelstein said. Moreover, Turkey may enact laws that will make it much more difficult to withdraw funds from the country if the financial situation worsens, which could freeze the assets of investors that would have been more liquid had they invested in another country.
