Nicholas Watson in Prague -

With General Electric's real estate subsidiary completing its first investment in Turkey and the property markets in neighbouring Bulgaria and Romania going through the roof, it's strange that Turkey's real estate investment trusts (REITs) should be performing so badly. Analysts are looking for that to change, but perhaps not as fast as investors would like.

On Monday, Garanti Bank said it had completed the sale of 51% of its REIT called Garanti Gayrimenkul Yatirim Ortakligi AS to GE Real Estate Europe and Dogus Holding AS. The sale price was TRY1,928 per share and Garanti said it received TRY72.5m ($49m) for the shares it sold.

GE Real Estate said the purchase price is equal to a 36.9% premium to the REIT's net asset value (NAV) as of September 30.

"[We] view the Turkish real estate market as extremely dynamic with significant growth opportunities in the commercial, retail and residential real estate sectors," GE Real Estate said in a statement.

This is a view clearly shared by other foreign investors.

On October 30, Dogan Holding and Dogan Yayin Holding announced they would sell their respective 24.5% shares in Gayrimenkul Gelistirme ve Pazarlama Hizmetleri (Real Estate Development & Marketing Services) to Deutsche Bank. The price was based on the TRY1.6m book value of the company, meaning that Deutsche Bank paid TRY784,000 for its 49% of the shares.

Merrill Lynch has also formed a partnership with Turkish firm KREA Real Estate, which is acting as investment manager and advisor for Merrill's property investments in the country. One such project is in Yapi Kredi Koray's Neo Shopping Centre project in Eskisehir.

Yet such interest stands in stark contract to the relative performances so far this year of the country's REITs. According to Oyak Securities, 10 of the 11 REITs it covers have underperformed the Istanbul Stock Exchange by anywhere from 7% to 43% in the year to date. For example, the Garanti REIT that GE has just bought into has underperformed the overall market by 12%.

As a sector, the REITs' current discount to the NAV is 9% and on a historical basis since the beginning of 2004 this discount stands at 30%, Oyak Securities says.

This dismal performance is all the more surprising if the neighbouring Black Sea countries of Bulgaria and Romania are taken into account. The property markets of these two states, which are due to join the EU from the start of next year, are in danger of overheating, as businesses, retailers and home buyers pile in to take advantage of the hallowed effect of EU convergence.

"The prices for new [Romanian] residential properties should continue to rise as the expectation is that post-accession prices will align to the ones in the European Union," the consultancy PricewaterhouseCoopers (PwC) said in a recent survey.

Nicholas Spiro, the director of CEE capital markets research for real estate adviser DTZ, says that in pricing terms Bucharest is converging fast with the core CEE capitals. "Land prices have soared and the construction sector is a major contributor to GDP," he says.

In Bulgaria, there are currently 19 REITs listed on the stock exchange. Despite their growing numbers, Tsvetoslav Tsachev, head of research at Sofia-based ELANA Trading, cautions that few of these REITs are actively traded, with 15 traded so far this year with total turnover of BGN 26.8m.

Nevertheless, the general picture that emerges is a sector benefiting mightily from the improving economy and EU accession. Of the most traded REITs, so far this year Elana Agricultural Land Opportunity Fund is up almost 1.0%, Advance Terrafund is up 6.8% and Bulgarian Real Estate Fund is up 8.7%. The two best performing, though less traded, REITs are ERG Capital-1 up 34.6% and Intercapital Property Development up 157.5%.

Why the contrasting performances of REITs in Turkey on the on hand and Romania and Bulgaria on the other? Analysts caution there are both similarities and differences between the Turkish property market and those of its Black Sea neighbours.

Shared coastline

On one level, REITs in Bulgaria, Romania and Turkey are similar in that in general their total assets are on the rise, implying investors are looking for returns in the long term at least. In Bulgaria, the total assets of the 24 listed REITs amounted to BGN319.6m (€163.3m) by the middle of this year, up 147% since the end of 2005.

Likewise, foreign investment in the real estate market in Turkey's touristy areas on the coast, like that of its neighbours, is growing strongly.

However, unlike in Romania and Bulgaria where much of the investment, both foreign and domestic, is in commercial and agricultural real estate, most of the Turkish REITs' activities are focused on the residential sector, which took a big hit during the economic crisis in May and June on concerns the rise in the cost of loans would result in a delay in projects in the pipeline or the sale of existing housing stock. "Which is not unfounded, in my opinion," says Elvin Akbulut, senior analyst at Oyak Securities.

This focus on the residential segment should be a strength in the long term, if the market continues the kind of growth it recorded prior to the economic turmoil in May and June. Mortgages issued in 2005 totalled €6.15bn, a 600% increase on the previous year, and according to an official study there is urgent need for 2.5m new housing units.

"Mortgages have been one of the most attractive products of the banking system with the stabilizing economy, exceeding $10bn. The ratio of housing loans to GDP is currently around 3%, still lower than the 4.5-10% for its peers," says the Turkish brokerage ATA Invest.

With the forthcoming mortgage legislation, which will establish a secondary market for mortgage finance companies issuing asset-backed and mortgage-backed securities and should enable banks to provide long-term loans to far more people than currently benefit, housing loans are expected to keep outperforming the total loan growth, enabling Turkey to catch up with its peers at the lower end of the range, says ATA Invest.

Indeed, Deutsche Bank is looking to transform its recent acquisition of Gayrimenkul into a housing loan finance company in due course.

However, in the nearer term analysts aren't entirely sure whether REITs have even reached their lows given the risks from next year's general elections, the continuing uncertainty over the fate of its bid to join the EU and an aggressive 4% inflation target for 2007 where the expectations are closer to 8% at the moment.

"Unfortunately, we do not expect a decline in interest rates soon. The central bank plans to keep rates unchanged for a longer period than originally thought given the risks so we do not expect a rate-cut before the end of the third quarter 2007," says Akbulut

"I think REITs on the ISE are now at their lows assuming no significant impact from the [aforementioned] risks, but on the other hand they are likely to stay depressed until the market as a whole picks up," he says.

Even then, say analysts, REIT shares tend to lag any rise in the overall market so it's likely to be sometime before these shares start performing like their Balkan neighbours.

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