Capital appreciation in Istanbul real estate
Capital appreciation is the all-important bottom line in any real estate investment. But what is it? And most importantly - how do you maximise capital gains?
A capital gain is the money you make from your property, explains Property Turkey director Cameron Deggin.
“It’s the positive difference between your property’s purchase price, and sale price."
However, for capital appreciation to be realised, you need a sale. “Capital appreciation is only as good as your exit strategy. Let’s say I purchased something for $100, and now it is worth $150. But until you sell that item, you have no growth.”
Unless something out-of-the-ordinary happens, most property will appreciate in value. “In the normal course of events, if you select your investments carefully you can attain decent capital growth,” Deggin explains.
However, the amount of appreciation can vary widely.
What kind of investment will give you good capital growth in Istanbul?
One of the most critical facets to an investment's success is the local market, Deggin says.
“Look at the Turkish market. Ninety-five percent of real estate transactions in Istanbul are among Turks; the foreign investors account for just a sliver of real estate purchases.”
For foreign investors, this means when you buy real estate in Istanbul, you’ll most likely sell to a Turkish buyer. With a capital gain only realised when a property is sold, having an exit strategy is crucial, Deggin says.
However, for some investors, the cultural differences around property represent a stumbling block.
“If you’re buying residential real estate, keep the Turkish home buyer in mind. Understand their needs and choices. The biggest weakness of foreign buyers is understanding the psychology of Turkish buyers,” Deggin says.
“Especially when you look at Middle Eastern investors. There are some very stark differences.”
For example, when Turks buy homes, they favour quieter roads, avoiding busy highways. But in many Middle Eastern cities, the infrastructure is geared towards large complexes on busy roads, so investors from these places seek out the same in Istanbul.
Another difference is complex size, Deggin says.
While large complexes are promoted to foreign buyers, the reality is that Turks tend to favour smaller housing projects.
“When Turks are buying a home they want to make sure their next door neighbour will be there for years to come,” he says.
“When they step out of their home they can say hi; if their children are in the playground their neighbours will keep an eye out.”
Another way to ensure your capital gain is favourable is to do your due diligence about the project’s composition, Deggin says.
In a larger project, it’s not uncommon for a developer to offer the land owner a portion of the resulting properties, in lieu of payment.
“For example, in a 1000-unit development, you might have 500 that belongs to the developer, and 500 that belong to the landlord.”
The developer will have their own list price, and discounts determined by payment terms.
The problems only arise when it’s time to sell, Deggin says.
“A couple of years down the line, you might wish to exit and collect profits. But when there are significant landlord units remaining, the landlord will start selling.”
The landlord might end up undercutting your price.
“The landlord has no costs, as he hasn’t spent a penny to build. Which means that even if he sells at a price significantly lower than what you paid, he has made a tidy profit.”
The all-important location
While there are good areas outside the central city, if you’re looking to maximise capital gains, Deggin suggests sticking to central Istanbul.
“Outside the central city, although there are some lovely areas, like Bahcesehir, there is too much stock on the market.”
In the city, real estate will always appreciate, because demand outstrips supply, he explains.
“But on the outskirts, newly developed satellite towns, in these areas you’ll find supply is higher than demand, and they have overbuilt in those areas. As an investor you should be careful.”
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