Stress shows in safest market
At first glance, the world's best-performing housing market bears few of the usual hallmarks of a bubble about to pop.
Reliance on mortgages is low, and Turkish homeowners reliably repay their loans, helped by house prices that rose faster than in any other country last year. The risk, at a time when construction has grown to make up a bigger share of the country's investments than in China, is with the builders rather than the buyers.
The share of Turkey's borrowing represented by developers is higher than at any time in the last decade, and represents almost a fifth of all corporate loans, according to the nation's banking association. An increasing portion of those debts is going bad, with the industry's portion of non-performing loans nearly doubling in the past five years.
"Mortgages are not the problem," said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. "Developer leverage is."
To keep sales brisk, builders are helping buyers defray their costs. For instance, at Istanbul's $1.5 billion Maslak 1453 development, whose name recalls the Ottoman conquest of Constantinople, the developer is offering to secure below-market interest rates and accept a 10pc deposit -- below the 25pc minimum required for a bank mortgage.
As rates on housing loans increase, "companies are taking the hit out of their own profits in order to make life easier for the buyer," said real estate mogul Ali Agaoglu, developer of the Maslak project, whose property portfolio and television presence have invited comparisons in local media to Donald Trump. "What's important for the sector is sales, so this kind of support is perfectly natural," Agaoglu told Bloomberg last month at an economic forum in the ski town of Uludag.
Turkish home prices doubled over the last five years and jumped 18pc in 2015, topping Knight Frank's global house price index. Demand benefited from Middle Eastern investors seeking a haven from turmoil there and strong population growth, the consultant said.
Builders, who depend on pre-sales for a portion of their financing, can't afford a perception that those gains might slow, said Toygun Onaran, who analyses property companies for TEB Yatirim, BNP Paribas SA's Istanbul-based unit.
Developers' prospects depend in part on the U.S. Federal Reserve. Its decision to raise interest rates for the first time in almost a decade in December drove up borrowing costs in Turkey and other developing countries.
Turkish bond yields have since declined on worries the pace of future Fed increases will be slower than feared.
"Even if the Fed has pushed back judgment day, ultimately that could even make the pain worse when it eventually hits because in the meantime money's continuing to flow into unproductive sectors." said Manik Narain, a foreign-exchange strategist at UBS Group AG in London.
The dangers of a weakening currency are exacerbated for builders, because they account for a disproportionate share of Turkey's foreign-exchange borrowing, Narain said. That mismatch may be creating a risk when their income is mostly in lira, a currency whose value eroded 20pc over the course of last year.
Developers made up a fifth of the companies gaining bankruptcy protection from creditors in the first three months of this year, the most of any industry, Uysal said, citing figures from sirketnews.com, which compiles the data.
That's raised the ire of bankers, who say the current bankruptcy law is open to abuse and makes it too difficult to reclaim debts. (Bloomberg)