Gulf Construction Online - Turkey comes up trumps

Turkey Review

Turkey comes up trumps

Real estate development and infrastructure projects continue to propel growth in the construction sector, although the country’s current account deficit is a major cause for concern, says DHUSHYANTHI RAVI.

01 August 2012

TURKEY’S boom in 2010-11 has shaped it into one of Europe’s top investment destinations, with a $20-billion development programme now under way to sustain its growth over the medium term.

Prime Minister Recep Tayyip Erdogan last year pledged to propel the country’s $772-billion economy to among the 10 largest in the world by 2023 with the help of the ambitious construction programme.

Marketwatch, one of Wall Street’s biggest digital publications, has also given the nation its vote of confidence naming it as one of Europe’s two investment beacons for the next few years, the other being Poland. And none less than American business magnate Donald Trump voiced his confidence in the country: “Turkey is a perfect country for investment. I can say it will certainly be one of the countries we prioritise for investing in the coming period,” he said, when attending the opening of the Trump Towers shopping centre in Istanbul last March.

Turkey is looking to attract as much foreign capital as possible for construction projects worth $80 billion for the next decade.

The country’s growth has been largely driven by the construction sector, which grew 11.2 per cent in 2011, according to the Turkish Construction Industry Centre, with its economy expanding by 8.5 per cent the same year. And despite the turmoil in Europe, the economy is expected to grow by four per cent this year.

The construction boom has been propelled by Turkey’s focus on infrastructural development and the buoyancy in the real estate market. The demand for property in Turkey is huge with an average of 550,000 to 600,000 new residential units built per year for the past nine years, according to Erste Bank analyst Mehmet Emin Zumrut.

Sales of residential units rose by at least 17 per cent in 2011, mainly off deferred housing demand from the year before, he said.

Foreign direct investments (FDI) in Turkish real estate reached $578 million last year, up $166 million on the 2010 figure, according to the Istanbul-based Association of Real Estate Investment Companies (GYODER).

The association expects FDI in the property sector to grow into billions of dollars once the government passes a bill that will ease restrictions on property sales to foreigners.

Currently, most real estate purchases by foreigners are made by investors from Germany and the UK, said Zumrut. The changes mean Turkish real estate will be open for direct investment from Russia, Central Asian countries, and the Gulf states.

Turkey has also lined up ambitious infrastructure projects, which for Istanbul alone include a third airport, the Eurasia tunnel, the Marmaray rail tube tunnel, the Ankara-Istanbul fast train, a third bridge on the Bosporus, the Izmir-Istanbul highway and Canal Istanbul. These seven projects are expected to involve an outlay of TL55 billion ($30 billion). Infrastructural projects are also taking shape in other parts of the country such as a metro project being built in Ankara and airports developments like the newly-opened Bodrum Airport (see separate article).

However, experts warn the construction-led growth may be a bubble waiting to burst as imports used for construction projects have fuelled Turkey’s surging current account deficit, which is estimated to be about 10 per cent of gross domestic product (GDP).

Atilla Yesilada, a partner at Istanbul-based research firm Global Source Partners, said the real estate boom could end in tears. “There is not the foreign exchange to pay that bill. We need savings to flow into the financial system rather than residential property,” he said.

Standard Chartered’s research department meanwhile said that despite positive signs, significant risks remain.

The current account deficit is at unsustainable levels and higher oil prices are making it worse, it said in a report, adding that this leaves Turkey vulnerable to a sudden stop in capital inflows, and therefore highly dependent on the global economic cycle and developments in Europe. The EU, the report noted, is Turkey’s largest trading partner and largest investor.

The crisis in Europe has affected the Turkey’s ability to attract foreign investment. Banks in Turkey are unable to plug the financing gap for the projects as European lenders pull back to strengthen balance sheets threatened by the region’s debt crisis, according to Michael Davey, head of the European Bank for Reconstruction and Development in Turkey.
Among the ambitious projects that are facing possible delays is the Canal Istanbul, announced by Erdogan in June last year, which will cost at least $12 billion and link the Aegean Sea and Black Sea.

Nevertheless, Turkey has shown great resilience so far, especially in a challenging global economic environment. Even with its current account deficit threatening its growth prospects and its economy expected to slow down significantly in 2012, Turkey is still expected to emerge successful capitalising on its potentials such as a young population (6.3 per cent of about 75 million people aged 65 or older) and strategic location.

Marketwatch points out that Turkey enjoys a combination of strong economic fundamentals: its position as a regional trading hub, standing at the crossroads of several important energy markets as it borders Iran, Iraq and Azerbaijan; as a regional business hub with international corporations preferring to use Turkey as an export hub because of its political stability and large domestic market; and its status as one of the biggest tourism destinations of the world.

Bosphorus development

Ambitious plans have been drawn up for the Bosphorus Strait including the $2.45-billion bridge – the third over the strait, as part of the $6.5-billion North Marmara Highway project – and a $1.2-billion undersea tunnel in the strait.
Bridge: The Bosphorus Strait project is making headway with a Turkish-Italian consortium of Ictas and Astaldi having emerged winner in a tender for the construction the 414-km North Marmara Highway project.

The estimated $2.45-billion suspension bridge will take three years to build. It will be located at the northern end of the Bosphorus, and is expected to ease congestion in the bustling city of more than 13.5 million by diverting heavy commercial traffic to the far north artery and its connecting roads, skirting densely-populated areas now served by the First Bosphorus Bridge and the Fatih Sultan Mehmet Bridge in Istanbul.

The third bridge will be built on a build-operate-transfer basis between Garipce on the European side of the city, and Poyraz on the Asian side.

Tunnel: The Eurasia Tunnel Project, which is being built by Yapi Merkezi of Turkey, SK Engineering and Hanshin of South Korea, will connect Europe and Asia with a 5.4-km double-storey undersea tunnel in the straits. The project includes the construction of neighbouring highways.

Other key projects

Turkey and China are exploring the possibility of building a high-speed railway line between Edirne and Kars – the westernmost and the easternmost provinces respectively of Turkey – at a cost of $35 billion.

Officials are mulling over a possible deal for the Edirne-Kars project, which involves a planned connection of the Marmaray project under the Bosphorus to the Edirne-Kars railway, completing a train line from China to Spain and England.

In October 2010, China agreed to extend loans of $30 billion for the planned rail network, which is designed to pass through 29 provinces, connecting the east and west of Turkey and reduce travel time from 36 hours to 12. With the completion of the proposed Edirne-Kars line, the total length of high-speed rail in Turkey is expected to reach 10,000 km by 2023.

Meanwhile, Turkey’s national flag carrier Turkish Airlines (THY) CEO Temel Kotil said Chinese involvement is also possible for the planned third airport in Istanbul.

The airport is expected to have an annual passenger capacity of 120 million, making Istanbul the largest air travel hub in Europe, outpacing the 90-million passenger capacity of Frankfurt in Germany.