Turkish Delight at Mortgage Market

Interesting to see that McDonald’s is planning to expand business by 20%-25% in Turkey, targeting to open 31 new restaurants in 2010. McDonald’s Turkey Director, Hakan Serim, said the company opened 19 new restaurants last year as the total number reached 134. Serim went on to say that in 2009, nearly 76 million customers visited McDonalds restaurants and that the company was targeting 89 million customers in 2010. McDonalds has clearly identified a huge opportunity for growth in a country that is set to play an ever-increasing role on the international stage. So I was bit surprised to hear that GE was in talks to sell its 20% holding in Turkey’s Garanti bank and that Santander had been named as the leading contender to acquire the $3.3 billion stake.  GE has publicly acknowledged that it intends cutting back its finance arm so that it can concentrate on core business, which on the face of it seems fair enough.  It does however seem like a strange time to exit a rapidly growing developing market with ever-increasing standards of living and a population bigger than the UK. It’s no wonder Santander is interested in joining the party.

Turkey, as a potential market to do business in, first came to my attention back in 2006, the year the Turkish Parliament had been expected to enact legislation that would open up the mortgage market. The Turkish mortgage law that was finally adopted the following year contained a broad legal framework designed to clarify issues relating to mortgage contracts, foreclosures, protection for borrowers and securitisation to create a secondary market for mortgages. At the time some people criticised the new mortgage market system as premature and unlikely to succeed until Turkey was enjoying economic and political stability. In fact the very same sort of things that had been debated in respect of Turkey’s proposed entry to the EU.     

The EU began membership talks with Turkey in 2005 but the process has been slow due in part to opposition from some countries, particularly France and Germany. Turkish Prime Minister Recep Tayyip Erdoğan, recently blasted French and German resistance to Turkey's entry into the European Union. “What France and Germany are doing with us is not right. They are changing the rules in the middle of the game,” he said. “They are imposing conditions that are not part of European norms so that we cannot enter the EU,” he said, adding that Turkey is already part of the EU in an “unofficial capacity" as there are "5 million Turkish citizens in Europe.” For those of you that don’t pay too much attention to this sort of thing, Istanbul is the 2010 European Capital of culture. “Hang on! I didn’t think Turkey was in the EU” I hear you say. It isn’t but the European Parliament allows three cities to call themselves European Capital of Culture and one of these can be outside the EU. I suppose the intention is to get potential new members “engaging” with the established members of the club so they can get a feeling as to all the benefits of actually joining the club. It’s a bit like joining a new golf club! But like all established clubs, the existing members get an opportunity to determine who is allowed to join and who isn’t.

The political debate surrounding Turkey’s accession to the EU will take many years to unfold. In the meantime, banks and mortgage lenders around the world including possibly Santander have, just like McDonalds, identified an opportunity for sustainable growth in a brand new market. 65% of the Turkish population is under the age of 35 and the 2030 population is estimated to be some 90 million people. The mortgage market really only started in 2007 and total lending as at today stands at $29 billion which represents approximately 5% of Turkey’s GDP. The past five years has seen some significant players enter and leave the market. ING bought Oyak bank and Fortis acquired Disbank. BNP has taken a 50% stake in TEB and Dexia purchased Denizbank. The National Bank of Greece bought Finansbank and Citibank acquired 20% in Akbank. Despite the increase in new entrants, it is fair to say that State Lenders and Turkish controlled lenders continue to dominate this new sector and the top 8 mortgage lenders account for 80% of all new mortgage originations. That said, HSBC has now carved out 2.8% of the total market and ING has secured 4.2%. Significantly, for the first time in its history, Turkish interest rates fell below 1% per month (around 14% APR).  

Clearly, there have been many drivers behind the recent increase in mortgage activity but one of the reasons lenders are prepared to advance mortgages is because the underlying security is relatively safe. Turkey has a reliable land records system that dates back to the 1850’s – the time of the Ottoman Empire. The biggest obstacle we ran into when we carried out due diligence was not the absence of good title but the lack of any strict building controls. According to the industry advisors we spoke to at the time, up to two thirds of the properties were actually in breach or potentially in breach of zoning permits. This had forced mortgage lenders to under value the properties even though there was very little chance (or evidence) that the local authority would ever take action against the homeowner (well at least that’s what I told our underwriters!). There is no doubt in my mind that the Turkish mortgage market has a lot of growing up to do. But this is a market that is poised and ready for further growth. The sector grew by 13 percent last year over 2008 and the trend is expected to continue this year too.  Given the current fragile state of the US and Western European economies it is easy to see why Turkey remains such an attractive market.