Having bounced back from its own profound financial crises in 1994 and 2000, Turkey is well prepared to ride out the current global economic storm, according to Bahadir Teker, CEO of Istanbul Mortgage. In an interview with Knowledge at Wharton, Teker noted that the stability of Turkey’s banking system and its dramatic rise in housing demand will help to temper any slowdowns in the country’s real estate industry over the next couple of years.
An edited version of the conversation follows:
Knowledge at Wharton: Our guest today is Bahadir Teker, CEO of Istanbul Mortgage, a mortgage lending firm in Turkey. Bahadir, thank you so much for joining us today.
Bahadir Teker: Thank you.
Knowledge at Wharton: For people who may not be familiar with Istanbul Mortgage, could you tell us a little bit about your company and your role?
Teker: Istanbul Mortgage is the first monoline mortgage lender in Turkey, a partnership of [U.S.-based] hedge fund York Capital, and I am the CEO of the company. Our business is mainly in residential lending or primary lending in Turkey, and [we were the first] company in Turkey in the mortgage business.
Knowledge at Wharton: In the U.S., of course, the mortgage lending business is in deep trouble because of the subprime mortgage crisis. To what degree has Turkey been affected by what is happening globally in the world of real estate finance?
Teker: There have been several direct effects on the Turkish market. Because Turkish banks are borrowing money from the international markets, if the international markets go down then there will be problems in the Turkish financial system, too. But the good thing about the Turkish market’s financial system is that, because we [just got over] our last crisis very [recently], in fact four years ago, our banks are very prepared for this kind of environment. And nowadays, the capital adequacy ratios are more than 17% — that means Turkish banks are very liquid and stable in this market condition. But that does not mean that the real market — not the real estate market but the market as a whole — [will experience] some slowing down in Turkey. But the good thing is because the big companies are very stable and the financial system is not broken, there will be a step up just after the period of crisis.
So, we believe that especially the market dynamics are very good in Turkey. Even though this crisis will affect [Turkey] on a two-year basis, after that [we] believe that the Turkish market will grow very fast.
Knowledge at Wharton: You referred to the direct effects — are there any indirect effects as well on the Turkish real estate finance market?
Teker: Sure. You know, the supply of credit is a function of real estate growth. So, if there is a diminishing supply of liquidity to the real estate market, then of course there will be price decreases in the real estate market, too. And also, we have very big numbers of exports to the developing countries; we will be affected indirectly by exports diminishing. [In addition], Turkey is a tourist center for both Europeans and Asians. On that side, the Turkish market will be affected by a lot, I suppose. So, these are the indirect affects. But directly, as I said, the financial system is not broken in Turkey, and that means that things will continue. That is very important for this kind of period.
Knowledge at Wharton: To what degree have real estate and real estate finance companies in Turkey had to change their strategies to adapt to the new financial realities?
Teker: In fact, for 30 years [prior to 2001], Turkey had a very big inflation problem. Just after 2001, we had single-digit inflation, and still we have never had very good credit conditions. So, we are used to — very familiar with — this kind of environment. This crisis environment happens [all of the] time in Turkey.
For the first time in Turkish history, we are very ready to deal with this kind of credit crunch, and our legal system and our [finance] companies are very resistant. They have several other methods of financing — not only getting credit from the banks, but [also] they have seller financing, they have partnership structures, they have family solidarity. So, Turkey will not be affected as much as the U.S., because we are not [solely] dependent on the liquidity of the banks.
Knowledge at Wharton: To what degree has Turkey been successful in attracting international capital, and what are the main barriers you see to attracting more investment from abroad?
Teker: The most important problem was, as I mentioned, two-digit high inflation numbers in Turkey. It is very difficult to make an investment assumption in this kind of environment. But just after 2003, because of the political stability, because of the financial market stability, and because of the global liquidity there were several investors coming to Turkey. I can give some numbers. In the last 30 years, up to 2003, we had only $5 billion or $6 billion in [foreign] direct investment. But, after 2003, we have had more than $15 billion to $20 billion in direct investment as equity.
Why is that? After waiting [a long time] for political and financial stability, investments are coming, [and we are seeing] the rewards of the last several years…. We [also] have some stories to tell. One of them is Turkey’s entrance into the European Union. The second is the integration of several countries…. Our neighbors are rich countries. [They include] the Gulf countries and another is Iran, another is Iraq, another is Russia; [they] are emerging markets and have made very good developments and capital accumulation [over the] last couple of years.
Turkey is at the center of the new world, in fact. On one side is Russia, on the other side is the Gulf countries, on the other side is the Central East Asian countries. This is a tourist and financial and investment center of this region.
Knowledge at Wharton: What kind of challenges has integration into the EU created for the Turkish economy?
Teker: This is a good story for the investors, especially. In fact, we do not need access to the European Union because, first of all, we have very good demographics in Turkey; our population is very big and growing very fast, productivity is very good, educated people are very near to the European standards and our [business environment] is very dynamic. More than 60% of the companies are small or medium companies. They are very flexible.
The European economy, as you know, is slowing down very fast and although they have a very good legal structure and a very good environment and they have capital accumulation, Turkey is growing very fast…. Because of that, there are very good synergies to go into the European Union, but on the other hand, there are some cultural differences, of course. We are a secular Muslim country. Europeans are Christians; some of the countries from Europe think that it is a problem…. We do not have any problem with integration with the European Union, and we are a secular Islamic country, not an Islamic country.
So, I think the main barrier for the next couple of years [is that] some countries do not believe or do not want to [see] the globalization of [their] culture, so it is a problem for Europe, not Turkey.
Knowledge at Wharton: One last question: In addition to your role with Istanbul Mortgage, I understand you also represent an association of real estate companies. Could you tell us a little bit about that role and how you see the future of Turkish real estate in the next couple of years?
Teker: I am a board member of a Real Estate Investment Trust in Turkey, and I also represent the Real Estate Investment Trust Society in Turkey.
In Turkey, with 75 million people and a population growth of 1.5%, there is a huge urbanization taking place every year; 2% of the population is coming to the cities. There is a need for earthquake-resistant homes in Turkey. There is a need for urban regeneration projects and there is a need for several new developments, homes for the small — or becoming small — families. They are just becoming smaller, [with] one child.
The average family size was four, five years ago, and now it is 3.4. That means that there is a huge demand for new houses in Turkey. And the other thing is that because Turkey has a very big commercial industry, especially export and import industries, we are in need of several logistic centers. We are in need of several facilities to make these exports happen. We have a need for several offices.
And on the other side, there are some other dynamics related with tourism because over the last five years, tourist numbers, especially in Istanbul, have grown five times. Nowadays, around eight million people are traveling to Istanbul, and 25 million people are coming to Turkey every year. And it is becoming bigger and bigger, this number, so real estate investments [are up] in tourism — the resorts, hotels, city hotels. And also the second home market, which is very important. As you can imagine, Spain, which [meets] the pensioner or the second home needs of all Europe, today is the new center for Europe for buy a new [retirement] house.
Turkey — southern Turkey, in fact — is the California of Europe and Asia — not only Europe, but the Russians are very fond of the Turkish South Coast. That means that there are several new investment alternatives in the south of Turkey. So, Turkey is full of opportunities on the real estate side.
And maybe you saw the study by Goldman Sachs saying that in 2050, Turkey will become the 9th biggest economy of the world, ahead of Germany and France [and] just behind the UK. It shows that there is a great potential in both the economy and of course in the real estate industry — not only domestically, but also [for Turkey to be an] international real estate investment center in coming decades.
Knowledge at Wharton: Thank you so much for speaking with us today.
Teker: Thank you — it is a pleasure.
