These may be trying times for Turkey, but its property market is still seeing the fastest rising house prices in the world. Just don’t mention the word ‘bubble’, to industry players.

According to a recent report by UK-based real estate consultant Knight Frank, Turkey saw a dramatic increase of 18.9% in house prices in the third quarter of 2015 compared with the previous year, while the global average was just 2.7%. “Strong levels of foreign investment, an expanding population and a slowdown in construction explain the upward pressure on prices,” Knight Frank cited as reasons for the large rise.

With an expanding population and a strong appeal to foreign investors, especially those from the Gulf region and Europe, Turkey’s real estate prices are expected to continue rising strongly in 2016.

One of those that is benefiting from this boom is Nurol Real Estate Investment Trust (REIT). Established in 1997, Nurol REIT is part of Nurol Holding, an Ankara-based privately held conglomerate with interests that span energy, banking, construction, defence and tourism. The REIT units are publicly listed on Borsa Istanbul, and the shares are up about 35% over the past five years, though are down about 50% from their peak of TRY9.04 hit in September 2012.

The company’s figures are are in line with the national trends. Turkish Statistical Institute (TUIK) data show that housing sales in Turkey started to drop in the first quarter of 2012 by nearly 19% compared with the previous year. One of the main reasons was a new VAT rate of 18% (up from 1%) that was introduced for houses of less than 150 square metres.

However, the picture has improved dramatically over the past few years, especially last year. TUIK said Turkey enjoyed record house sales in 2015 with 1.289mn units sold, up 10.6% from the previous year. Istanbul got the lion’s share with 18.6% (239,767 houses), followed by Ankara with 11.4% and Izmir with 6%.

TUIK also revealed that house sales to foreigners increased in the year by 20.4% to 22,830 houses, with Istanbul inevitably topping the preferences of foreigners with sales of 7,493 units, followed by the southern tourist province of Antalya with 6,072 units. Most of the foreign clientele were from Iraq, Saudi Arabia, Kuwait, Russia and the UK.

Nurol REIT said it saw a 40% increase in sales in 2015 to $120mn. This compares with a 20% increase in revenue to around $100mn in 2014. The company is targeting growth of 25-30% in 2016. 

The company sold about 250 housing units in 2014, and 340 units in 2015. This year it will start delivering its three flagship projects for business, residential and recreational purposes, namely Nurol Tower, Nurol Park and Nurol Life. The combined investment of these three projects covering 300,000sqm stands at about $1bn. All located in Istanbul’s European side, the projects are fully integrated into the urban transport networks to avoid the phenomenal traffic jams in the city, and will provide employment to thousands of people in the shops and restaurants.

In a bid to sustain its strong growth, Nurol REIT is looking to partner with investment funds and investors from the Middle East and Gulf regions for the mass purchase of their projects. Last year, foreign investors purchased about 10% of the sales of the company; while the target for this year is to take that figure to 25%.

Nurol REIT does not currently have any projects abroad, but another company in the group, Nurol Construction, has realized some large-scale construction projects in the Gulf region, with the volume of investment in United Arab Emirates stands at $1.8bn. “However, we are looking forward for investing abroad in the future,” Samim Hatipoglu, director general of Nurol REIT, tells bneIntelliNews in an exclusive interview, adding that it is looking at the Iranian market as the country slowly opens up following the lifting of international sanctions.

Forever blowing bubbles

Hatipoglu disagrees with growing speculation about the risk of a “housing bubble” developing in Turkey, arguing that the national housing trends are following a normal path. “We don't think that there is such a risk in our sector. In order to have a housing bubble, there should be a serious trend of house price inflation due to some factors like population or costs,” he says.

According to Hatipoglu, the increase in house prices in Turkey has been in line with the currency fluctuations over the last five years, and he agrees with the sector forecasts that house prices in Turkey will increase by 12-13% in 2016. “The construction sector constitutes both directly and indirectly to a quarter of Turkey’s economy, while the REIT sector has always been considered as a safe haven for potential crises in emerging markets,” he says.

Hatipoglu says that this increase is mainly related to the ongoing migration flows towards big cities and strong demand from foreign clientele. “Over recent years, the Turkish economy achieved strong growth. The continuation of the political stability in 2016 will be a motor for the sector in terms of predictability. The housing needs in Turkey will be around 7.5mn by 2023, which shows that economic stability and growth will provide significant opportunities for our sector,” he says.

However, others aren’t so sure. The rising instability from the low intensity war in the south-eastern regions and the suicide bomb attacks in tourist regions, combined with the Russian sanctions and outflow of foreign capital towards more stable emerging markets pose a real threat to the long-term health of Turkey's real estate sector.

While stressing she does not see a bubble in the real estate sector in Turkey, Zeynep Deniz Dervisen, an expert on the real estate sector from Kadir Has University in Istanbul, thinks that as a result of the political instabilities and the capital outflows, the sector will be affected adversely in the same way that most of the other sectors of the Turkish economy are being affected. “The effect will be more observable in the long run especially in the REIT sector, since both foreign and domestic investors will avoid investing in housing and REIT stocks trading on the Istanbul Stock Exchange, probably preferring alternative investment instruments especially abroad,” Dervisen tells bne IntelliNews.

But there is one major point upon which all commentators and investors agree: Turkey suffers weaknesses from its significant current account deficit, growing unemployment, depreciating currency, decreasing purchasing power and large private and public debt. When all these fragilities combine with an ever-expanding housing market, the real estate sector needs strong political stability and greater oversight on the systemic risks to circumvent possible financial difficulties and manage the fears about an inflating housing bubble.