Turkey has been in the spotlight over the last decade with its prominence in current affairs. After plenty of elections, a coup attempt and a gliding devaluation of the Turkish Lira, investors are left with many questions regarding the future of the Turkish economy and property in Turkey.
My name is Berkan Ozyurt, and I am the director of Kingsman Estates Antalya.
Having completed my master’s degree in Global Financial Trading and having worked in the Global Financial Markets and banking, I will seek to briefly explain and alleviate some of the concerns our current and future investors might have when it comes to their investments regarding the property in Turkey.
Albeit not a full-time economist, we are avidly monitoring the global markets as well as developments in Turkey as it directly impacts property in Turkey, which is our main subject at Kingsman Estates Antalya. Thus, please duly note that this is not an academic study. Nonetheless, certain prospects and outlooks regarding the current and future Turkish economic climate will be analysed.
The Devaluation of the Turkish Lira
Foreign Exchange markets have extremely complex mechanics. Singling out one factor to explain the demise of the Turkish lira, therefore, will not suffice in grasping the current climate. However, the fundamental reason for the depreciation of the Turkish lira is due to its current account deficit. Ultimately, Turkey’s imports exceed the value of its exports. There are a number of reasons why that is the case, one such variable is that the Turkish economy is dynamic and is home to a much younger demographic relative to other industrialised economies.
The young populace is active consumers looking to get the latest products, cars and other services. The second reason comes down to the fact that, while the Turkish economy has a strong production economy, many components that make up the end products, as well as the machinery that are required to produce these end products, are imported. A major contributor to the current account deficit is the fact that Turkey is not an energy-independent country.
Total energy and bi-products of energy comprise an astonishing %50 of the total yearly imports each year. All these variables place Turkey in a position whereby it is constantly in need to purchase dollars to complete these transactions, most notably in the energy sector. As a result, there is massive pressure on the lira, making it less valuable relative to the US dollar over time.
Another reason is the uncertainty and political turmoil regarding the Eastern Mediterranean oil reserves. Turkey has a bold desire to have a claim in its Exclusive Economic Zone within the East Mediterranean, and drill the oil and or natural gas reserves which are believed lay beneath the continental shelf. The Turkish government advocates that the Turkish nation, both in the mainland as well as those residing on the Island of Cyprus, have a rightful claim to access to those natural resources. Whether Turkey’s EEZ encompasses the fields in the East Med remains under contention and is beyond the scope of this blog. In our opinion, Turkey has a right to gain access to the natural resources as it has the biggest coastline in the Mediterranean, which sits comfortably within the 200 nautical miles or EEZ granted to every state.
An agreement should be agreed upon through dialogue in a harmonious manner, and in conjunction with other players in the Mediterranean such as Libya, EU, Greece, Egypt. In an ideal world, you would expect these negotiations to be finalised in a harmonious way, however, the dynamics of international relations are very complex. There are much tension and disagreement between the Military establishment in both countries and their respective governments. In addition to the dialogue within the European Union, there is persistent pressure from Greece and Cyprus to impose sanctions on Turkey.
We do not believe this will materialise, and it is just one of the cards EU would like to play as the Turkish market is extremely important for the EU and its member states, thus a sanction on Turkey will economically do more harm to the EU in the long run. The Turkish government has many options to counter this threat from the EU, one of which is permitting the four million refugees residing in the country to cross the Turkish border and enter the EU.
This would exacerbate the pressure on the heads of the EU governments as there is clearly a migrant crisis in Europe, which resulted in the biggest seismic political change in European politics and resulted in Brexit. All this commotion and uncertainty puts further pressure on the Turkish lira.
The third reason for the depreciation of the Turkish lira is the change in the monetary policies of the Turkish Central bank. In 2019 the interest rate was increased to %24 following the currency crisis the Turkish lira had in 2018. This had certainly alleviated some of the pressure on the Lira and halted the spike.
However, the increase in the interest rates to such levels has resulted in a massive decline in consumption which inevitably lead to the slowdown of the Turkish economy as borrowing became increasingly expensive and the incentive to take risks by investors become unfavourable. Over the last 8 months, however, the Turkish central bank has gradually reduced the interest rate to %8.25 which again puts further pressure on the Lira.
Future of Property in Turkey
Undoubtedly the COVID-19 pandemic has had a huge impact on emerging markets, and Turkey is no exception. Although the Turkish health system has performed remarkably since the outbreak, the tourism sector was expecting to receive approximately $60 billion in 2020. Due to travel restrictions, the forecast has been downgraded drastically to less than half the initial estimate. Tourism is one of the big dynamics of the Turkish economy as earning hard currencies like the dollar is essential due to the current account deficit that Turkey has.
As a result, the future of the Turkish economy vis-a-vis the property in Turkey will be explained. Please be aware, however, that this is entirely speculation, notwithstanding years of experience. Evidently, the situation regarding the lira is blatant to everyone in the Turkish government. The central bank of Turkey has already increased the interest rate by %2 last week making its first adjustment.
Nonetheless, this has not resulted in the intended impact as the interest rate still remains below the actual inflation rate. As we are approaching the end of 2020, we are expecting the interest rates to go up to around %16, placing it firmly above the breakeven point between the inflation and interest rate. This will cause investors to take their money back to the banks due to the handsome reward of doing so.
When the Turkish central bank reduced the interest rate to %8.25 back in 2019, they also subsidised the property in Turkey by offering much lower interest rates for mortgages. Although banks had strict rules for taking mortgage loans, people were still able to proceed through government guarantees with the state-owned banks.
Therefore, despite the fall of the Turkish lira and the pandemic, this has caused an increase in sales within the property in Turkey, causing prices to go up dramatically. To conclude, the upcoming 2 or 3 months are extremely exciting for property in Turkey as there are now fantastic opportunities to enter the real estate market with the superb intellectual gamesmanship we provide at Kingsman Estates to make great gains within a mere 5 to 7 years.
Expectations from the property in Turkey should not be for short term gains, although with some exceptions like Dubai back in 2001, there are no places on Earth that gain significant short-term profits. Turkey is an incredibility dynamic country with a young population.
The Turkish economy will recover over time, particularly with the developments from the Black sea, where new gas reserves were discovered. Thus far, the discovered gas reserve is expected to suffice Turkey’s energy needs for 400 years, whilst making Turkey a net exporter of energy in due time. Turkey has also been making huge improvements in its defence industry which is now %70 self-sufficient.
If you are interested in purchasing a property in Turkey-Antalya, please contact us directly and our dedicated team at Kingsman Estates Antalya Investor Centre will be more than happy to help you with all your needs.