It has been 6 days since it was announced that the required total amount for Turkish Citizenship by Investment was increased from 250,000 USD to 400,000 USD. Regarding this announcement, I would like to share my detailed analysis in:
1- Foreign Direct Investment in The World and in Turkey by Numbers
2- Real Reasons Behind The Increase in Real Estate
3- Turkey vs Canada: Foreign Investment Comparison Specific to Real Estate
Foreign Direct Investment in The World and in Turkey by Numbers
Foreign Direct Investment is one of the most valuable sources of income, not only in Turkey but also in the world. Today, more than 60 billion pounds of foreign real estate investments are made in London alone. The USA and European countries have also come a long way in this regard. In order to be a part of the globalizing world, Turkey should analyze foreign investments in positive regard, try and make them sustainable and not let this issue become political material.
The negative perception that has developed against foreign investors is spreading, especially on social media and has quickly become a trending topic. While all this is going on, I would like to share some data: Today, foreign investment is almost non-existent in Istanbul’s mega real estate projects, which have the highest prices. 95% of buyers are domestic investors. The prices of the 100 m² houses in these projects range from 6.500.000 TL to 10.000.000 TL. When all of those are considered, it would be an injustice to hold foreign investors responsible for increasing the prices of these projects.
The total number of sales to foreigners has a percentage that is too little compared to domestic sales. As exaggerated, it does not have the power to affect the general market prices. Covering 4% of the annual residential sales volume on a unit basis and 5-7% on a turnover basis; In Istanbul, however, there is no evidence to support the possibility that such a small percentage, which increases to 8-10% at the maximum, has such an impact on general real estate price increases.
In addition to all these, it is not right to give a bad name to a sector, which provides foreign currency inflows of nearly 10 billion dollars to our country. It would be a better decision to support foreign investment instead of criticizing it.
Main Reasons for Price Increases in Real Estate
Recent reports on some platforms have indicated that the increase in real estate prices is related to real estate sales to foreigners. The main reasons for this are:
1- Globally rising commodity and construction costs in foreign currency
2- High demand shock and supply problem
3- Turkey and Canada: Citizenship Comparison by Real Estate
1. Globally rising commodity and construction costs in foreign currency
Globally, rising commodity and construction costs in foreign currency are influencing the price of land. Today 1m² construction cost is between 6,000 TL and 8,000 T. When the land cost is included, the transparent construction costs go up from 16.000-20.000 TL. These numbers might change depending on some dynamics in future projects.
As an example, we know that concrete prices per cubic meter have increased from 350TL to 1000TL within six months, meaning a 100m2 house now costs 2 million TRY with both construction costs and land, including any finance, marketing and property service fees. So naturally, the sales target must be at least 3 million TRY. Therefore, it has been evident for a long time that the price of a 100m2 house cannot cost less than 2 million.
2. High demand shock and supply problem
For the past two years, high demand for real estate has accumulated due to pandemic-related incidents. Events like getting married or divorced, students changing cities, tourists coming on vacation, and foreign investment in our country are the main reasons for such a high demand. In opposition to this overwhelming demand in the sector, construction and property have gone to sleep mode as it’s been stagnant for two years. With the decrease of rick based pandemic and the start of the normalization phase, the market got activated again, and the stocks melted. Thus, it caused a “high-demand shock” cycle where products are low, but demands are very high, leading us back around with increased prices again.
New stocks have the potential to stabilize prices in real estate, but since it is not possible to reduce costs, a decrease in property values does not seem likely.
3. Negative Interest + Real Estate Investment Demand = Price Increase
When there is a negative interest rate, people invest more in real estate because they want to make money. Inflation rates are over 50%, and banks’ deposit rates are 17% at maximum. Therefore, it is evident that your investment will decrease in value if you deposit in a bank.
Investment areas such as financial investment instruments, crypto, and stocks can be very volatile for Turkish citizens who follow these markets, thus turning to real estate investments as safe ground. Real Estate sellers positioned themselves according to this situation and repriced their properties accordingly when people started investing more into them.
Turkey vs Canada: Foreign Investment Comparison Specific to Real Estate
The prohibition of citizenship by investing in real estate in Canada is easier to understand compared to Turkey. In Canada, foreign real estate investments might not be a vital source of income compared to the Turkish market since Canada has a dynamic and stable economy having 25-year income and cost projections. However, the role of foreign investment cannot be underestimated in Turkey. Thus, I do not support such a harsh transition in the required investment budget for Turkish Citizenship by Investment. A regulation regarding the relevant amendment might be more favorable for the real estate market.
I would like to remind our proposal of “transition with quota” once again.
Author: Hakan Bucak