BRICKS & MORTAR: Turkey's first mortgage firm launches into crisis

By bne IntelliNews February 25, 2009

Nicholas Birch in Istanbul -

With the global economy flung into recession by the collapse of the US housing market and some of the world's biggest banks bankrupted by reckless sub-prime lending, it would seem an odd time to set up a specialised mortgage lending company, not least in a country as traditionally crisis-prone as Turkey.

Yet Bahadir Teker, CEO of Turkey's first monoline mortgage lender Istanbul Mortgage, partnered by the US-based hedge fund York Capital, is unfazed. "I don't know of another market that could be worth $1 trillion in 10 years," he says, at the start-up's headquarters in Balmumcu, a mile or two down the road from the skyscrapers studding Levent, Istanbul's equivalent of The City. "In terms of long-term prospects, the only other developing real estate market that can rival Turkey is Brazil."

He tots up Turkey's advantages on his fingers. Like foreign direct investment, which ballooned from $1bn annually during the 1990s to more than $20bn in 2006, real estate values have increased exponentially. Rapidly growing trade has increased the need for office space. Recent years have seen the feverish construction of hotels and resorts to keep up with tourist numbers that have expanded by 300% in the past five years. "Turkey is at the centre of the new world," Teker says. "Immediately to the north, Russia. Immediately to the south, the Gulf. To the east, India."

But there is also a domestic motor pushing the Turkish real estate market. While Europe's population has stabilised, Turkey's continues to grow by 1.5% a year. That growth has been accentuated by an ongoing influx to cities from the countryside and a concomitant change in social habits: in the past five years, average Turkish family sizes have fallen from 4 to 3.4. According to Turkey's Association of Real Estate Investment Trusts (GYODER), domestic demand for new houses was 600,000 last year. It expects that figure to rise to 730,000 in 2015, and 810,000 in 2020.

But Turkey's biggest joker is its new-fledged mortgage market. Put off by years of double-digit interest rates, Turkey's lawmakers only got round to passing a mortgage law in 2007. Some 18 months on, mortgages total a meagre $30bn, just 4% of Turkish GDP. In the EU, which Turkey hopes to join, they are worth 50% of GDP.

Rocky road

Turkey's slowness off the blocks in the housing loan sector may go some way towards explaining the striking resilience its financial markets have shown so far to the global slowdown. Despite the government's apparent decision to put off a new agreement with the International Monetary Fund until after local elections mid-March, Turkey's currency remains spookily stable. Though they slipped slightly late last week, five-year Turkish bonds remain 400 basis points (bps) inside Latvia and Lithuania, 250 bps inside Estonia and 100 bps inside Croatia.

And while their much bigger colleagues in Europe and the US are sinking under the weight of bad loans, Turkey's banks appear to have learned the lessons of the huge domestic banking crisis in 2001, with capital adequacy ratios averaging 17% and minimal (though increasing) non-performing loans (NPLs). "Of course nobody in their right mind would take out a mortgage today, when the immediate future is so unclear," says Teker. "But Turkey's banking sector already has the capital to support a much larger mortgage market. There's more than $250bn turning through the system every month. The difficulty banks here have is that almost all of that is very, very short term."

This, he adds, is Istanbul Mortgage's biggest advantage. "With time and growing trust in the system, the average length of Turkish investments will get longer. Ten years ago, Turkey didn't even have six-month credits. Now it has 10-year mortgages. Right now, though, banks continue to face the threat of mismatches. We don't have that problem."

Yet for all his optimism, Teker is in no doubt that the immediate future of Turkey's real estate markets will be rocky. House prices in Istanbul have plunged roughly 30% over the past six months. According to Sabri Ates, head of the Istanbul Chamber of Estate Agents, 400,000 luxury flats in the city have yet to find a buyer.

Teker's concern is that the excessive supply in some segments of the market threatens to damage the idiosyncratic system Turkey developed to compensate for the lack of a proper mortgage market. Lacking credit, Turkish constructors have traditionally offered owners of land they want to build on a share of sales profits rather than cash up front. In many cases, down payments by the future inhabitants of the houses they are building allow them to reduce financing needs to zero. "In a country like Turkey where credit is scarce, the system is indispensable, but it puts buyers at considerable risk in a downturn," Teker says. "Why? Because constructors often use down payments from one project to finance others, leveraging themselves to dangerous levels in search of potentially huge profits." Banks have capital adequacy ratios and escrow accounts to limit this. The Turkish construction sector doesn't.

"No system is perfect, not even the mortgage system," Teker adds. "The secret here, as everywhere, is good regulation. Consumers need to be protected."

One of the drafters of Turkey's mortgage law, Teker no longer has time for anything but his new company. If all goes well, he says, loans will begin in March. It's a lonely path he's travelling: 18 months back, 30 internationals were considering setting up mortgage companies in Turkey; today, his company and another are the only two left. "For me, the lack of competition is another reason to feel optimistic," he says. "Of course, Turkey cannot grow in an unstable global environment. But once the world settles, and I'm expecting things to get clearer by the end of 2009, we can decouple. I think the future is bright."

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