Real Estate Development Process in Turkey

Master of Science Thesis No 313

Real Estate Development Process in Turkey Author Supervisor Meric Tuhral Kurt Psilander Stockholm, December 2005

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Master of Science Thesis Title: Real Estate Development Process in Turkey with some

differences from Sweden. Author: Meric Tuhral Department: Department of Infrastructure, Division of Building and Real

Estate Economics, Royal Institute of Technology, Stockholm Report Reference: Master of Science Thesis Number Supervisor: Kurt Psilander Key words: Real estate, development, Turkey, Istanbul, process,

developer. ABSTRACT In the last three decades Turkish economy has suffered from revolutions, war and terrorism, and many economic crises. These incidents have been active getting weaker economically. The poverty in rural areas has led the immigration to urban areas. Especially Istanbul began attracting immigrants 30-35 years ago. With this high scaled migration, illegal and unsecure real estate development started to come up. Today unsystematic development has been a problem in most of the big cities of the country. In the earthquake of 1999 in the region of Marmara, it was seen that many apartment buildings had been built without strickt inspections. This was another result of unsystematic development. Today there is a more positive picture of the country. With the elections in 2003 one party regime has been appointed to establish the government after many years. In 2004 Turkey was promised to start the meetings of EU entry in October 2005. These changes and the economic performance of the country are expected to attract foreign investments. By coming mortgage system the market will be well-formed. In order to get rid of these untidy images of metropolitan cities in Turkey, many different development companies have been getting in the urbanisation process with different projects. The purpose of this thesis is to analyze widely used development procedures of main developers of the country.

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ACKNOWLEDGEMENTS This master thesis has been carried out for the Department of Infrastructure at the Royal Institute of Technology in Stockholm, Sweden. First of all, I would like to thank my supervisor, Professor Kurt Psilander at the department of Building and Real Estate Economics, for his guidance, discussions and comments in different questions. I would also like to thank Husnu Diken from Diken Construction Company, Zafer Eguven from Yapi Kredi GYO and Mahmut Demir from Alarko GYO, for sharing their precious experiences and information. Finally thanks go to my wife and my parents for their lovely support during my stay in Sweden. Stockholm, September 2005 Meric Tuhral

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TABLE OF CONTENTS Abstract Acknowledgement CHAPTER 1. INTRODUCTION 6 1.1 Background .6 1.2 Problem Formulation and Purpose .6 1.3 The Method and Scope of the Study .7 1.4 Objectives .7 1.5 Limitations .7 1.6 Disposition .7 CHAPTER 2. DEFINITION OF REAL ESTATE DEVELOPMENT AND THE ELEMENTS OF PROCEDURE 9 2.1 The Team Members of Real Estate Development11

2.1.1 Architect ..11 2.1.2 Engineers ..12 2.1.3 Surveyors ..12 2.1.4 Land Planner ..12 2.1.5 Landscape Architect ..13 2.1.6 Contractors ..13 2.1.7 Environmental Consultant ..13 2.1.8 Transportation Consultant ..14 2.1.9 Parking Consultant ..14 2.1.10 Appraiser ..14 2.1.11 Attorneys and Accountants ..14 2.1.12 Real Estate Brokers and Leasing Agents....14 2.1.13 Property Manager ..15 2.1.14 Market Researcher ..15 2.1.15 Regulators ..15 2.1.16 Final Users ..15

2.2 Financial Players ..16 2.2.1 Construction Lenders ..16 2.2.2 Permanent Lenders ..16 2.2.3 Long Term Equity Investors ..16 2.2.4 Joint Venture Partners ..16

2.3 The Real Estate Developer ..16 CHAPTER 3. STAGES OF REAL ESTATE DEVELOPMENT 18 3.1 Inception of an Idea ..20 3.2 Refinement of the Idea ..21 3.3 Feasibility ..24

3.3.1 Market Study ..25 3.3.2 Design ..25 3.3.3 Cost Estimate ..25

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3.4 The Contract Negotiation and Formal Commitment26 3.4.1 Negotiating the Construction Contract..26 3.4.2 Negotiating for Obtaining Finance.27 3.4.3 Negotiating for Design 27

3.5 Construction and Formal Opening 27 CHAPTER 4. ENTERING THE PROCESS 30 4.1 Land 30 4.2 Capital 31 4.3 Knowledge 33 4.4 Tenant 33 CHAPTER 5. OVERVIEW OF TURKEY 34 5.1 Overall Economy 34 5.2 Real Estate in Turkey 35 5.3 Overview of Istanbul 36 5.4 Residential Market in Istanbul ............37

5.4.1 Demand ........37 5.4.2 Suppply 38 5.4.3 Forecast 39

CHAPTER 6. DEVELOPERS IN TURKEY 40 6.1 TOKI (Toplu Konut Idaresi) 40 6.1.1 Procedure in TOKI 43 6.2 KIPTAS: Example of Municipalities 44 6.2.1 Procedure in KIPTAS 46 6.3 REICs (GYOs) in Turkey 47

6.3.1 Procedure in GYOs 50 6.4 Cooperatives in Turkey: Example of Batikent Project..51 6.4.1 Procedure in Cooperatives 53 6.5 Construction Companies ........55

6.5.1 Procedure in Construction Companies.......55 6.6 Gecekondu: Illegal Housing Development in Turkey57 6.7 Urban Transformation Projects 58 CHAPTER 7. CASE STUDIES 61 7.1 Yeni Umut Evleri Project 61 7.2 Dort Mevsim Evleri Project 64 7.3 Istanbul-Istanbul Project 67 CHAPTER 7. RESULTS AND ANALYSIS 72 CHAPTER 8. SUMMARY AND CONCLUSION 74 REFERENCES 76

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1. INTRODUCTION 1.1 Background Turkey is a country which is geographically divided into two parts one of which is included in Europe and the other in Asia. With the population of 65 million people the country is accepted having a great economical potential. Over the past five years, the financial markets in Turkey have been subject to two major crises. The country experienced an enormous earthquake catastrophe in 1999. Dynamics on both the international and domestic levels have contributed to a significant contraction in the construction and real estate sectors. In addition to the share of the construction sector in GNP having fallen from six to three percent, retrenchment in that sector has affected some 240 sub-sectors, resulting in such problems as unemployment, which has had an impact on tens of thousands of Turks. On the other hand, the insufficiency of institutionalization in the real estate development sector, the fact that only 62 percent of housing being constructed has building licenses, and only 35 percent of completed houses have received housing permits all point to the disarray in which the sector finds itself. Commitment to abiding by the 2003 IMF Stabilization Program and the presence of political stability have contributed to an important degree of success in the areas of interest, inflation and exchange rates. This success has had a positive impact on housing loans both in terms of amounts and interest rates. However, the interest rates are not low enough for applying a mortgage system. But considering the positive economic figures of the last three years with one party government regime it is expected to initiate the mortgage system. Even the speculations about coming mortgage system have doubled the prices by increasing demand before the system comes. One other reason of increasing demand is the new legislation allowing many foreign country citizens to purchase real estate in Turkey. This new legislation has especially affected the holiday resorts which are on the coast of the Mediterranean and the Aegean. By joining EU in 10-15 years time these figures of Turkey are expected to increase further. 1.2 Problem Formulation and Purpose The purpose of this thesis is mainly giving an idea about real estate development procedure and some different developers who dominate the market in Turkey. Istanbul as the metropolitan city of the country has been mostly inspected in the study since the city is the major market in Turkey. Mostly the residential real estate development is researhed in order to narrow this research. Therefore other markets such as office or retail market has not been studied deeply.

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1.3 The Method and Scope of the Study The method used in this study is a research among different models applied in Turkey. How the process in Turkey correspond with the theory which means how it should be. The main sources of information were the general literature for the first part of the thesis defining the general aspects of real estate development process. Journals are magazine articles were also used in this part. In the second part of the thesis the mostly used information is from internet sources of especially large institutions of Turkey which are active in the market, and some interviews with the authorised managers of different scaled companies. Finally in the last part, internet recourses and articles were generally used for brief information of Sweden System. 1.4 Objectives The objectives of this thesis are as follows:

Describe the general real estate development process Describe the types of developers in Turkey Describe the processes applied in Turkey Conclusions and future expectations

1.5 Limitations It was not the intention of this study to include all information of development processes from Turkey. Although the development in Turkey is mainly studied, the lack of literature about the sector has limited the thesis. The undeveloped internet sources about Turkish economy finance and all other sectors was also a limiting factor. Another difficulty in Turkey is that there is limited possibility of reaching the experts in the sector for related interviews. 1.6 Disposition The thesis work is divided into nine parts Chapter 1: Introduction- definition of the purpose of research, its background, the method and scope of the study, objectives and limitations. Chapter 2: Real estate development process- definition of general process and the elements of development process. Chapter 3: Stages of Real Estate Development- defines the eight stage model of real estate development in theory Chapter 4: Beginning Developers- defines the needs of developers who are getting in the process. Chapter 5: Market in Turkey- presents Turkey, the economic performance of the country, residential market and the city of Istanbul, demand supply and price figures.

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Chapter 6: Players of the Sector in Turkey- presents the types of players and institutions that are active in the market. Chapter 7: Case Studies- defines some case studies from Turkey (all the studies are from Istanbul) presenting the procedure of the subject development projects. Chapter 8: Results and Analysis- Analysed results from the study about the situation of the market in Turkey and comparison of Swedish and Turkish markets in brief. Chapter 9: Summary and Conclusions- results from the study and suggestions.

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2. DEFINITION OF REAL ESTATE DEVELOPMENT AND THE ELEMENTS OF THE PROCEDURE

According to the literature Real Estate Development is defined as the continual reconfiguration of built environment to meet society needs1. Structures such as roads, sewer systems, houses, office buildings, and urban entertainment centers must be constructed and developed by someone or some institutions. Someone must motivate and manage the creation, maintenance, and eventual re-creation of the spaces in which we live, work, and play. The need for development is constant; because technology, population, tastes never stop changing. New generations and revolving immigrant groups, technological evolution/revolution, drive economic changes in consumer tastes and individual preferences. Real estate development is a multifaceted business, encompassing activities that range from the renovation and re-lease of existing buildings to the purchase of raw land and the sale of improved parcels to others. There may be various institutional procedures, in which the developer follows the same steps in order to form the Product. Beginning developers must control at least one of four assets land, knowledge, tenants, or capital. The real estate development process starts with the inception of an idea and ends by completion and the formal opening of the subject property. Then it shifts to property, asset and portfolio management phase. The development business includes a great deal of uncertainty. The supply and demand moves up and down. It is a complex business thus; it requires attention to all the different aspects of creating the built environment some of which are, politics, economics, physics, sociology and so on. Timing with respect to the real estate cycle is highly crucial especially for beginning developers. Success in financing the project depends on the timing in regard to the general economic climate and the real estate cycle. Real Estate development process changes from the concepts of Build-Sale to Sale/Release-Build. Finance, market focused approach and professional project management have a great importance in these models. Up to the Build-Sale model (Figure 2.1), the developer makes a commitment from the end product to the landowner for the purchase of the land, finances the development, with an acceptable level of risk, leases or sells the property either during the construction or after the completion of the construction.

1 BERENS Gayle, Mike E. Miles and Marc A. Weiss; 2001. Real Estate Development: Principles and process. Third Edition. Washington, D.C.

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L a n d O w n e r

C o n tra c to r/F in a n ce

A rch ite c t

E le c tr ic s

S tru c tu re

M e ch a n ic s

C o n s tru c t io n M a n a g e m e n t

S a le s

Figure 2.1. Build-Sale Development Model (HASOL E.) Up to the Sell/Lease-Build model (Figure 2.2), the developer exists with his idea, finance and land. A project manager, an architect, construction management staff, appraisers are involved in the process where real estate project is planned, marketing is performed, property management firm is involved and relationship with regulators are developed. The project manager undertakes a central role in the process and coordinates the efforts of whole disciplines. Many disciplines such as landscape architect, traffic, and security may be involved in the process. It is possible to add many various disciplines to the process that continues till the stage of property management. Within the structure, optimization of cost, quality and cost should be taken into account. Providing proper expenditure of money and time within the process is crucial for the desired quality.

Entrepreneur

Idea

Land

Financor

Appraisal

Feasibility

Business Plan

Land Owner

Financor

ProjectManager

Marketing

PropertyManagement

Municipal/Public

Construction Management

Construction Audit

Architect

Poperty ManagementConstruction

Mechanics

Structure

Electrics

Infra-Structure

Environment Others

Landscape

Traffic

Fire

Security

Figure 2.2. Sale/Lease Build Development Model (HASOL E.)

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2.1 The Team Members of Real Estate Development Stakeholders of development are individuals and organizations who are actively involved in the project, or whose interests may be positively or negatively affected as a result of project execution or successful project completion. Many different skills are needed to develop the kind of space society needs and wants and developers can not provide all the expertise. Their task is to select, motivate, and manage the team to get a job done. They also must be aware of the fact that, feasibility of the subject property and feasibility of participants are crucial for the project. Conflicting goals among stakeholders can be a problem that must be considered for the whole development project. The stakeholders that are involved in a real estate development project are; Developer Architect Engineer Surveyor Land planner Landscape architect Construction contractor Environmental consultant Transportation consultant Parking consultant Appraiser Attorney and accountant Real estate broker and leasing agent Property manager Market researcher Regulators Final users

2.1.1 Architect Drawing the developers or his own ideas, producing a set of obtaining construction bids, guiding the construction process are some of the main activities ,that the architect of a development project mostly perform. The responsibilities of architect to the project are, mainly based on the subjects of, aesthetics, physical safety, political and market risk. Architects can also help developers in securing planning and zoning approvals, working with community groups to understand their needs and preferences for proposed projects, performing related site studies in selecting a site for a specified use or develop alternative concepts for a site and head the land use team to bring a concept to fruition. In Turkey, architectural projects are reviewed by municipalities for all privately owned construction projects and by the Turkish government contracting agency for all publicly owned projects.

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2.1.2 Engineers Structural, mechanical, electrical, civil engineers have a vital role in the development process of a project. They are required to ensure that the design can accommodate the required physical systems. Effective project coordination relies on upfront communication and should be coordinated early in the process. Experienced developers generally facilitate a series of meetings with all architectural and engineering project personnel to define scope and communication channels and to discuss each disciplines goals and objectives in depth2. In Turkey engineers play a crucial role in both preparing the development project and on the site. A whole construction development process is coordinated by either an architect or a construction engineer. Mechanical and electrical engineer are only needed in related sections of the whole process. Project manager who has the whole responsibility of a project is generally an architect or an engineer with also an economical background. Most developers have construction engineering education in Turkey. 2.1.3 Surveyors Surveyors determine a propertys physical and legal characteristics- existing easements, right of-way, and dedications on the site-and prepare a site map plotting these characteristics. This critical information reveals how much of the site can be built on and the allowable square meter. Developers commonly use two types of surveys: a boundary survey, which determines the boundaries of the site (easements and other legal requirements affect ownership of the property being plotted on a map); and a construction survey, which plots the location of relevant infrastructure- water, sewers, electricity, gas lines, and roads-to assist in planning connections to utility services2. They are involved at each stage of the development of property and land, from initial planning to completion. They advise their clients on planning issues, obtain planning permission from local authorities and prepare reports. 2.1.4 Land Planner A land planner is responsible for deciding the suitability of the land for a proposed development, working with input from engineers, marketing consultants, architects, and some other team members. He is needed in the phase of devoloping the master plan, which locates objects on the site according to their physical properties. The land planner works with the developer to emphasize the important elements of the site.

2 PEISER B. Richard and Anne B. FREJ; 2003. Professional Real Estate Development: The ULI Guide to the Business. Second Edition. Washington, D.C.

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2.1.5 Landscape Architect Today, most communities and potential buyers or tenants are very concerned with the elements of the landscape that help define the character of the development. Especially in residential and mixed-use development projects, where the landscape design can help unite and define areas for the various uses. However the major role of the landscape architects is, to help create places that capture the imagination of the public, they can also provide consulting services for wastewater management, wetlands, mitigation, the preservation of wildlife habitats, ecosystem management, irrigation, sustainable site design, and land reclamation. 2.1.6 Contractors Contractors are builders and managers of builders who turn ideas on paper into enduring physical forms3. Construction contractors take the responsibility of the physical construction of a development project and its elements. Each contractor is required to complete the proposed service to a development project on time and within the budged which are explained in detail in the contract. Jonathan Rose, principle of Jonathan Rose and Companies, suggests keeping in mind three points when choosing contractors,

Find someone who is experienced in the product type being considered for the project.

A specialist in assisted living facilities will likely not be an appropriate choice for multifamily housing.

Be certain that your project amounts to no more than one-third of the contracting firms total workload, a good benchmark for organizational and financial stability. That is, if you have a $20 million project, look for a contractor with at least $60 million in total business at the time the contract is signed.

Ask for and check references to understand how the contractor has performed for past clients.

2.1.7 Environmental Consultant Depending on the complexity of environmental regulations, a developer might need help of environmental consultants who are responsible for environmental site reviews in the process of deciding to build. Deciding whether a development is worthwhile or nor, or whether purchasing a land for development is too costly is crucial before initiating a project. The role of the Environmental consultants is, to help developers identify the regulatory approvals needed for a proposed project and also, they can prepare environmental impact statements or reports often required up to the regulations of countries. 3 BERENS Gayle, Mike E. Miles and Marc A. Weiss; 2001. Real Estate Development: Principles and process. Third Edition. Washington, D.C.

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2.1.8 Transportation Consultant Transportation consultants can also be included in the process, by providing needed expertise and estimating important figures of traffic, such as how many cars and trucks will enter and leave the site at specific times of a day, what the capacity is of existing roads, highways, and intersections and how the existing streets will accommodate new levels of traffic. Most cities in the world require traffic impact studies for development over a certain size. Communities now actively assess whether or not the potential increase in traffic is worth the jobs that may be created. 2.1.9 Parking Consultant Parking is sometimes a limiting factor for development projects. Especially in urbanizing areas, Increasing land values and restrictive parking ordinances require a well-plotted parking plan. The parking consultant -if needed in a development project, should be included early in the design process so that the architect can incorporate parking recommendations in the overall design. 2.1.10 Appraiser Appraiser is the member who is responsible for estimating the value of a project. He may be needed in every stage of the development process-before, during and after project completion. Appraisers can also evaluate a project as input to market studies, marketability studies, and feasibility studies. Appraisal is especially needed when the ownership of a development project is transferred to another developer. When developer seeks financing and credit, has problems with tax matters, and in the situation of compensation in condemnation proceedings, an appraisal is needed. 2.1.11 Attorneys and Accountants In every stage of the development process there may be need for consultancy for legal interactions. Buyers and sellers, lenders and borrowers, contractors and sub-contractors and final users always have complex legal interactions. Lawyers and accountants get into the process in these conditions. 2.1.12 Real estate brokers and leasing agents Real estate brokers and leasing agents are needed for leasing or selling a project to tenants and buyers. An experienced salesperson can serve developers by selling or leasing their projects more quickly than the developer himself. Developer decides whether to sign an agreement with a real estate broker or to place an agent on the payroll. This decision usually depends on the type and magnitude of the project.

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The use of in-house agents is appropriate for larger projects and large development firms that can carry the cost. The benefit of an in-house staff is that the developer hires the staff during initial planning and the agents become very familiar with the project, providing input design and merchandising. Small development firms may find it useful to retain outside brokers who are knowledgeable about the local market and who have lower carrying costs. The working relationship between developer and broker is defined in a contract referred to as a listing agreement. Under an open listing agreement, the developer may recruit several brokers and is responsible for paying a commision only to the one who sells or leases the property. In addition, if the developer completes a transaction without the brokers assistance, no commision is necessary4. 2.1.13 Property manager After finishing the construction two most important goals of developer are, maintaining real rental rates and high occupancy rates. Most large developers manage their own properties through dedicated in-house staff or a wholly owned subsidiary. Smaller and/or beginning developers generally choose to use an outside source4. 2.1.14 Market researcher A major part of the development process which affects the decision of realising a project market study. Developer can get help from market researchers for deciding whether sufficient demand for the project exists in the market. 2.1.15 Regulators Local zoning requirements and subdivision regulations are also limiting factors for development projects. Developers must comply with these regulations and should obtain approvals locally for site plans and special use permits before the project is initiated. 2.1.16 Final users Final users are the consumers of a finished project. From the beginnig of a project developer mostly considers the needs of final users. The final users determine the success of a project by accepting or rejecting the finished product as it is delivered to the market place5.

4 PEISER B. Richard and Anne B. FREJ; 2003. Professional Real Estate Development: The ULI Guide to the Business. Second Edition. Washington, D.C. 5 BERENS Gayle, Mike E. Miles and Marc A. Weiss; 2001. Real Estate Development: Principles and process. Third Edition. Washington, D.C.

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2.2 Financial players 2.2.1 Construction Lenders Construction lenders (mostly commercial banks) are lenders financing a development project construction costs. They also need to make sure that the project that they finance is constructed depending on the time schedule and within the budget which should be presented before initiating the subject project. They face the risk that costs will exceed the loan that they provide. The developer of the project is required to cover the difference. If the developer is unable or unwilling to cover the difference, construction lenders usually either foreclose on the property or extend the size of the loan. 2.2.2 Permanent Lenders Permanent lenders, like construction lenders, try to initiate safe loans for the maximum possible return. However permanent lenders, have no takeout commitment with developers, unlike construction lenders. The projects value is a function of the expected cash flow, investors required rates of return, and the projects expected economic life6. 2.2.3 Long-term equity investors Long-term equity investors are the investors who may get involved in the project. They might purchase the proposed property before the construction is initiated, during the construction period or after the project is completed. Long-term equity investors are often passive investors during the development period or do not share development risks. 2.2.4 Joint Venture Partners Joint venture partners are simply the needed partners to a development or a construction project in the phase seekin credit for construction costs. They are needed especially in large scaled projects for financing these projects. In some cases, especially in developing countries, it is a must to establish a partnership with an international bank or fund for getting the credit needed. 2.3 The Real Estate Developer Finally the developer is the most important player in the process. According to Richard B. PEISER, no generally accepted definition exists to determine who is a developer and who is not, but a developer can be defined as the person or firm that is actively involved in the development process and takes the risks and receives the rewards of development.


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Developers are the coordinators of those activities, converting ideas on paper into real property. They create, imagine, fund, control, and orchestrate the process of development from the beginning to the end. Developers take the greatest risks in the creation or renovation of real estate and receive the greatest rewards7. The developer should have the ability to give proper investment decisions in an environment of uncertainty and, should be flexible enough to give respond to the continuous changing conditions of market. Developers must have a clear vision of what they want to do; they must also provide strong leadership along with that clear vision. Developers by nature have strong egos and opinions, but they must be good listeners. They depend on many other people; they cant possibly be authorities on all the many different fields of expertise involved in a project. Like most good business people, developers seek the maximum possible return with minimum commitment of time and money and, the return may consist of several components such as;

Profits on any sale to long-term investors A long-term equity position Personal and professional satisfaction in advancing a new concept or improving the

urban environment Enhanced reputation, which creates future opportunities for development


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3. STAGES OF REAL ESTATE DEVELOPMENT Development process follows a sequence of steps from the beginning of the process to the time that physical construction is completed and ongoing asset management initiates. By the end of development process, the property management initiates involving new project environments. Real estate development process is an interactive process involving many activities and disciplines related to each other. Stages, relations between stages, timing activities can vary with regard to the preferences of each project. The development process includes two main steps, predevelopment and construction8. Predevelopment covers the period from the first identification of the development site to the start of construction. The primary purpose of the predevelopment is to give the developer the necessary confidence to move forward. The Eight Stage Model, formed by Mike E. Miles, Gayle Berens and, Marc A. Weiss, will be used in the study to guide an understanding of development by freezing the discrete steps of development process that is hardly straightforward. The steps and the sequence of steps can change frequently in development process. Each step in the process depends on the quality of previous steps. Badly negotiated or written agreements with lenders, contractors, tenants, or professionals will come back to haunt the developer. Feasibility study has a major role in the decision making process. The developer uses the feasibility study in the process of contract negotiation to pursue financial players for allocating a loan. That is why the developer should examine the study from the perspective of financial players and, decide on whether the project worth making an investment or not.


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Figure 3.1 Eight Stage Model of Real Estate Development Process (BERENS G., 2001,Real Estate Development:Principles and process, Third Edition, Washington, D.C.)

Developer with extensive background knowledge and a great deal of current market data looks for needs to fill, sees possibilities, has a dozen ideas, does quick feasibility tests in his head Developer finds a specific site for the idea; looks for physical feasibility; talks with perspective tenants, owners, lenders partners, professionals; settles on a tentative design, options the land if the idea looks good Developer conducts or commissions formal market study to estimate market absorption and capture rates, conducts or commissions feasibility study comparing estimated value of project with cost, processes plans through government agencies, demonstrates legal, physical, and financial feasibility for all participants Developer decides on final design based on what market study says users want and will pay for. Contracts are negotiated. Developer gets loan commitment in writing, decides on general contractor, and determines general rent or sales, requirements, obtains permits from local government. Contracts, often contingent on each other, are signed. Developer may have all contracts signed at once: Joint venture agreement, construction loan agreement and permanent loan commitment, construction contract, exercise of land purchase option, purchase of insurance and prelease agreements. Developer switches to formal accounting system, seeking to keep all costs within budget. Developer approves changes suggested by marketing professionals and development team, resolves construction disputes, signs checks, keeps work on schedule, brings in operating stuff as needed. Developer brings in full time operating stuff, increases advertising. City approves occupancy. Utilities are connected tenants move in. Construction loan is paid off, and permanent loan is closed. Owned (either developer or new owner) oversees property management, reconfiguring, remodeling and remarketing space as necessary to extend economic life and enhance performance of asset; corporate management of fixed assets and considerations regarding investors portfolios.

One: Inception of an Idea Not feasible Feasible

Two: Refinement of the idea Not feasible Feasible

Three: Feasibility Not feasible Feasible

Four: Contract Negotiation Cannot reach binding contracts Can reach binding contracts

Five: Formal commitment

Six: Construction

Seven: Completion and Formal Opening Eight: Property, Asset, and Portfolio Management

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Marketing through out the whole development process and market research is one of the major tasks of whole marketing effort. More information results in more accurate modeling figure. Figure 3.2 represents the cost and value of market information to the overall development process. Figure 3.2 Cost and Value of Market Research [TOKOL T.]

Cost

Value

Cos

t and

Val

ue o

f R

esea

rch

Duration of Research

Net Value

Max. Value of Information

Projects go through several stages of risk. The risk money is typically limited to what is spent on feasibility studies, analyses of soils, and the market design. Developers need to be able to live and work in risky environments. According to Gayle BERENS, successful developers price all risks and accept only when costs justify it. He defines six basic ways to reduce risk;

Avoid risk by stopping in stage one, two, or three before much money is committed Increase the research and know more about the possibilities by completing a more

substantial feasibility study in stage three Engage in some form of loss prevention the most obvious of which is a competent

development team assembled in stages four and five Transfer a potential loss to other players through the contracts negotiated in stage four Combine and diversify to reduce the pain of large losses by buying insurance for

stages six through eight Assume risks. Even after adopting these five strategies, the developer must assume

some amount of residual risk 3.1 Inception of an idea Generating ideas for projects should be the most creative part of the real estate development process. The excitement of identifying human needs and creating a solution for these needs are crucial for the motivation of whole process.

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Developers need to have a background to create good ideas. Although generating development ideas might often be thought of as unpredictable, a portion of generating ideas is methodical and calculated. Market research, experience and general knowledge of urbanism, construction, finance and real estate law are the inputs for generating the development idea. Some tools and techniques are used to get the development idea which is the output of this stage. These are strategic planning, construction cost modeling and some techniques like brainstorming, environmental scanning and surveys. In order to reach a successfull devlopment idea, developers generally use one or more of these techniques. Idea for development needs one or more of the following;

1. A site looking for a use. 2. A use looking for a site. 3. Capital, looking for a development.

In all three cases, the developer who has experience and familarity with the latest changes in the industry, can generate a succesful idea. Curiosity, interest, and observation are the main characteristics which a successful developer need to have. Although developers unconsciously perform market research, the regional economy and local population growth, employment figures, zoning provisions, traffic counts, occupancy rates, and consumer surveys are analysed for a structured market research. Market research has an important role in providing background for brainstorming. Developer needs market research for generating successful development ides and determining a technique to generate this idea. At this stage, developer cannot justify the expenditure of a great deal of money to analyze each ideas preliminary feasibility9. A rough estimate of income per square meter and operating expenses per square meter are used for decision making. The projects leasable square meter is then multiplied by the estimated revenue per square meter and that gives estimated revenue for whole project. The developer then subtracts the projected operating expenses and multiplies by ten in order to find a rough estimate of value. This value is then compared with a rough estimate of cost which at this point consists of the cost of land, site development cost and construction costs. Construction costs are generally calculated using m based cost model which gives an approximate idea without any calculation cost. If the rough estimate of value is higher than the rough estimate of cost, the idea is applicable. 3.2 Refinement of the idea The objective of this stage is to acquire a site and make initial determination of legal and physical feasibility. It must be decided that the idea generated in the first stage will evolve


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into a particular project. Otherwise it should be abandoned before extensive resources are committed to the concept9. At this stage identifying the right use of the right site is crucial and many activities that are carried out simultaneously are involved. The inputs that will be used are the development idea that is generated at stage one, market research and general knowledge of construction, urbanism, real estate law and finance. Strategic planning, construction cost modeling, concepts of site selection and specific market research for refining the idea are the tools and techniques, that are used to produce refined idea which is object to feasibility and preliminary project design. In stage two, developers must acquire land, make contracts with general contractor, sub-contractors and other members of the development team, and undertake initial project design. They also bear uncertainty and risk as they try to bring the subject idea to physical reality. At this stage financial feasibility of the idea and search for the strategy in order to capture the greatest market share should also be refined. Following activities are involved in stage two. Market Research Scanning the environment; public policy environment, macro environment and

competitive environment Analyzing local market; demographic, economic and sociocultural Analyzing competition; companies, comparable projects, potential competing sites

Site Selection Establishing site selection criteria; market, physical, legal and political, Evaluating alternative sites Negotiating contract for site

Negotiation with players Public sector Contractors Tenants Architects and Engineers

Project Specifications Preliminary project design Determining feasibility; go, revise or dont go

Market search is the core activity of this stage. There are three major activities of market research, those are;

Scanning the environment Scanning the environment is the activity of searching possible competitors, government jurisdictions, and political power base. Developers need to have strong relationships with city officials, politicians, and the general public.

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Analyzing the local market Analyzing the local market is the activity of searching an area within the market that might offer an appropriate site. Analyzing competition Analyzing competition is the activity of scanning competing development companies and competing projects and, refining the subject development to maximize its competitive position.

Using the collected information, the developer establishes the site selection criteria that have four different variables;

Market criteria The selected site should be capable of generating the assumed income, and the aimed tenant should be wiling to pay the rent assumed, for the project in the selected site. Physical criteria Size, build-able size, soil conditions/load bearing capacity, hazardous wastes, utilities (Such as sewage, water, and electricity.), topography and hydrology are the variables that developers should consider. Legal criteria Current zoning, permitted intensity of use, the surrounding parcels, the flexibility of current zoning and the possibility of major changes are legal criteria for the site selection. Political criteria The way developers work with the city within the existing rules or to change those rules and the way developers of competing sites influence the legal/political process are important considerations10.

Establishing the site selection criteria, the developer should acquire the site that best satisfies the criteria by negotiating for the alternative sites. Figure 3.3 shows major factors to consider in site selection.


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Figure3.3 Factors in Site Selection [BLAIR P. J.]

Factors In S ite S e lectionZoning

- Lega l use o f the s ite- R estiric tions on density and layou t- C ontiguos land uses- L ike lihood o f ob ta in ing va riances

- So ils

- H ydro logy (floodp la ins, subsurface w ater)- Topography

- S izeP hysica l Featu res

U tilities- Sew age- W ate r- C om puter lines, fiber op tics, cab le te lev is ion , te lephone gas, o il, e lectric ity

Transportation- T ransporta tion linkages- T ra ffic- Ava liab ility o f pub lic transporta tion- Especia lly im portan t in determ in ing access and in eva lua ting ingress, eg ress, and v is ib ility o f a lte rnative s ites

P ark ing - U sua lly needed on s ite , the re fore , com petes w ith the bu ild ing fo r land- If s ite cos t per square m ete r is less than cost o f s truc tu red pa rk ing , su rface park ing is w arran ted ( and v ice ve rsa )

- Popu la tion grow th , trends, and pro jec tion

- Incom e d is tribu tion and probab le change

D em and and supply

- Em ploym ent

- C om petitive env ironm ent- Ex is ting and p lanned supp ly

- O ther a reas o f concern , inc lud ing h is toric d is tric ts , pa rks, open space , trees, w ild life hab ita ts

- Am ount and type o f w aste p ro ject w ill genera te- Adverse im pacts on a ir, w a ter, and no ise leve ls

- Schoo ls, hea lth fac ilities, and o ther governm ent serv ices- Im pact fees, p roperty taxes, and perm it fees

- D efensive ( H ow pow erfu l a re antideve lopm ent fo rces? )- N eu tra l ( W hat soc ia l costs does the p ro ject im pose? w ha t are the benefits to the loca lity? Is the pro ject in the pub lic in te rest? )- O ffens ive ( W hat a re loca l a ttitudes tow ard g row th and how can they be used to he lp shape, re fine , and specify the p ro ject to be bu ilt? )

- C ost o f land , inc lud ing acqu is ition and s ite deve lopm entP rice o f the land

G overnm ent S ervices- Po lice and fire serv ice- G arbage co llec tion

Local A ttitudes

E nvirom enta l Im pact

If the specific site seems feasible, the developer should negotiate for the acquisition of the site. It is also possible to include the landowner in the development process. In stage two, the developer also should answer some questions. For example will the tenants be interested in the project or not, will the lenders want to invest on the project or not and will the developer be able to find the general contractor who can construct the project or not. The developer should also introduce the project to others players of the process for deciding whether the idea is worth taking to stage three or not. If the refined idea still seems feasible, the developer takes it to stage three. Outputs of this stage are,

Idea linked to a specific site Preliminary design Startup capital

3.3 The Feasibility At this stage developers need to perform more detailed analyses along for the viability of the idea. Developer can still give up the idea at the end of this stage but obviously with a higher cost than stage two11. Refined idea which is the output of stage two, market research, acquired site and conceptual design are the inputs of this stage. The formal feasibility study and preliminary project design


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are the possible outputs of this stage using market analysis, construction cost modeling, discounted cash flow, sensitivity analysis, and value management as the tools and techniques. Following are three basic inputs essential for the viability of feasibility study;

Market Study Design Cost Estimates

3.3.1 Market Study The market study consists of three basic steps to follow. The first step is an examination of national economic conditions and long-term trends in the characteristics of the region, locality, neighborhood, and site. Market analysts project operating numbers for a specific site and they must consider that a project has at least two to five year time horizons for planning, sales and leasing which increase the importance of forecasting12. Second step is that the developer specifies the key features of the subject development project up to the knowledge of the value. Third, the market study should segment the market by defining the features, the functions and the benefits of comparable projects. How many units at what price over what time period will the target market be likely to absorb? Then it is possible for the developer to predict the overall absorption rate for the market segment. The developer can then estimate the projects capture rate and expected rents. The result of the market study is an estimated schedule of leasing or sales for the proposed development.

3.3.2 Design If the developer decided to go on the project after stage two he has to spent more money to get the final design plans that the formal feasibility study requires. The developer must then decide on the quality, quantity, and timing of design talent. 3.3.3 Cost Estimate The cost of a development project includes marketing, financing, taxes, insurance, and other administrative costs as well as physical costs which are cost of land, needed infrastructure, improvements to the land, and hard costs of construction. The developer may acquire the cost working with a consultant firm of cost estimate, negotiating with a general contactor or via an in-house staff. Stage three also includes forming the feasibility study and, negotiating financial options with lenders and investors. By using sensitivity analysis, the developer should examine every major decision and every significant feature, function, and benefit of the subject project and a feasibility study becomes a dynamic planning tool. 12 BERENS Gayle, Mike E. Miles and Marc A. Weiss; 2001. Real Estate Development: Principles and process. Third Edition. Washington, D.C.

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The feasibility study is the formal demonstration that a proposed project is viable or not. a typical feasibility study includes executive summary, maps, pictures, and resumes, a market study, preliminary drawings, cost estimates, information about terms, sources of financing, government considerations, time line and the estimate of value. The major output of the phase is the feasibility study, which is an important management tool providing multiple forms of risk control over several subsequent stages of the development process. The formal feasibility study is both a sales tool and also an organization tool. The preliminary project design is also an important output of the phase and demonstrates the physical structure. Up to the result of feasibility study, the developer decides to continue with the task, revise it or to stop it. 3.4 The Contract Negotiation and Formal Commitment The feasibility analysis from stage three serve as a sales and negotiating tool and a coordinating device in stage four of the development process, contract negotiation. During stage four, contracts are arranged to implement the decision to proceed with the project and, during stage five, contracts negotiated in stage four are executed. The feasibility study and preliminary design which are the outputs of stage three are the inputs that are used in stage four. Finance, detailed design, environmental impact study, construction contract, budget and construction schedule are the outputs that the developer need to get at the end of this stage. Stage four and five are the last opportunity to give up the idea of the development project before major construction costs are incurred. In this stage the developer initiates negotiating binding contracts to ensure that all the different aspects of the project are covered by the collection of individual contracts and that the various relationships among players are clearly defined. It is important for the contracts to be properly drawn and consistent with one another, reducing the risk of the development project.

3.4.1 Negotiating the Construction Contract

If the developer doesnt have the relevant staff and equipment to construct the development project which is the usual condition, he must search and find a proper general contractor. The developer and the general contractor reach agreement on a construction contract. Arrangements between the developer and the general contractor can be price based or cost based.

A fixed price contract may seem to cost less to developers. However it may be more accurate for a developer to negotiate with only one general contractor who the developer knows well and to obtain a not-to-exceed price, based on the contractors estimate of cost plus a reasonable profit margin.

If the cost of the work plus the reasonable profit margin comes in below the not-to-exceed price, then the developer and contractor can share any such savings. In such

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situations, developers who have established long-term relationships with quality contractors might find it preferable to negotiate directly with one contractor13.

3.4.2 Negotiating for obtaining finance

Most lenders look at the feasibility study, and then adjust it to the market. Permanent lenders maintain an extensive database on the markets in which they lend money. They finance the cost of the proposed project investigating the demand for the project based on community needs. The fever uncertainties mean less risk to the lender lower interest rates for the financing to the developer. Negotiations end when the developer and construction lender agree on their contract.

3.4.3 Negotiating for Design

The developer need to get final design of the subject project at the end of this stage. After stage three in which the preliminary drawings of the project are prepared, the developer needs to make final arrangements with the architects, engineers and other design professionals of the development.

To complete the financial arrangements, the permanent loan commitment must be signed and the fee paid; similarly, the construction loan agreement must be signed and that origination fee paid. Following the arrangement of finance, the contract with the general contractor is signed, while the general contractor signs a series of contracts with the subcontractors13. The developer also needs the development equity which is the difference between project costs and the supplied finance. There are three alternatives to provide the needed equity13;

To provide the necessary equity from the own funds of the firm, To bring in an outside equity investor for the development, To establish a joint venture with the lender

When developers are financially strong enough it is usually more profitable to construct the development project using own funds. Lacking the resources for equity, developer might prefer either some outside investors or establishing joint venture partnerships with the lenders of the project. 3.5 Construction and Formal Opening During stage six which is the construction phase the physical structure of the project is constructed. Developer coordinates most of the players of the process in this stage. Once the construction phase is initiated it is very costly to give up the project to make major modifications. Even if the developer tries selling the project to another developer, he will probably incur serious financial consequences.


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The feasibility study, detailed design, budget, construction contract, supervision agreement, financial arrangement, sales or leasing arrangement are the inputs of stage six and seven. The objectives of these stages are building the physical structure of the subject property formal opening of subject property with property management plan using some tools and techniques like construction method, cost control techniques, time management, and feasibility study. Stage seven, completion and formal opening requires public sector, tenants, operations personnel, and financing to long term investors. This stage is actively the last phase of the development process and sets the stage eight which is asset and property management of the development. In stage six once the construction initiates, the developer must concentrate on the construction management. He must control the time, the quality, and the budget as the stage processes. Controlling these items means that he must control that the players do their jobs on time with the needed quality, considering and monitoring the costs of these jobs. Because the previous stages have created binding obligations, it is hard and expensive in this phase to implement changes to the project. In the process of construction the developer needs to charge someone for controlling and coordination of the construction. The architect who designed the project, an in-house project manager who is an architect or a construction engineer, or a team from a consultant firm can be appointed to that responsibility on the construction site. During the construction so many players are involved making coordination and collaboration on the focus of the process. On site supervision is one of the major tasks that the developer must consider. Scheduling the subcontractors work and maintaining that schedule are other major tasks for which the general contractor is responsible. The general contractor must be able to force subcontractors adjusting their schedules as necessary. He must manage the subcontractors having the needed time and resources for the job. He must be flexible enough to hire an extra subcontractor for the same job when it is needed. While the general contractor manages the subcontractors, project manager manages the general contractor representing the developers interests. He is the one who is responsible for making changes and modifications. Periodic inspections are made by the project manager, to pay the general contractor in the same periods. Lenders for construction may also need these inspections about the construction work. If the tenant space is not totally leased before the construction phase, it must be marketed during construction. At the same construction is coordinated with marketing effort. The construction phase needs also to be financially managed and that management involves managing the budget, payment of the bills and ensuring that insurance coverage is exactly what is required. The financial management should also estimate the cost of any changes in the construction phase and determine whether the lender or the equity investor can be convinced to cover the additional costs implemented in the project. Lenders generally provide funds up to the progress of construction.

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Similarly the developer pays the general contractor once the work is performed. Payment to general contractor is based on periodic payments up to the work progress. The developer pays the amount retained only upon satisfactory completion which must be accepted by the project manager and the developer. The financial management involves the management of construction costs, development insurance, property taxes, interest on the construction loan, marketing costs and general administrative overhead. Construction lender claims a total figure of all these costs. Formal opening of the subject property constitutes the closing process of the construction phase. Training the operations staff, connecting the utilities, beginning the on-site operations, final marketing of the development, the grand opening, tenants moving in, and a transition in financing from the construction loan to the permanent loan are involved in this part of the phase.

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4. ENTERING THE PROCESS The ideal job for entering the development field is to work as a project manager with full responsibility for one project in a large company or to work for a small company that provides the opportunity to see and do everything. Many developers start as homebuilders, beginning with small apartments and gradually changing to non-residential development or by constructing projects for other developers and then for their own clients.

To get started, the developer must control one of these;

Land Capital Knowledge Tenants

4.1 Land

Buying land for development is just one integral part of the planning process; however it tends to be the focus of most start-up developers. Before starting the process of selecting and buying land for development, the developer need to decide who or what legal entity is going to buy the land. For instance is it going to be in your personal name, in you and your partner's names or a company name? Answering that question is important because developer need to decide who or what entity is going to borrow the money to purchase of the land, but also borrow the money for the total development. Land capacity is important as it affects the land cost per unit. A developer must know the capacity of the land for his subject development project. Local authorities decide that capacity. For example if the developer buys land in order to put eight units for $100,000 and the local authority says that he can only put four units, this doubles the developers land cost per unit. Landowners might be partners especially in a beginner developers early projects. They dont only supply equity for the deal but also make it possible to tie up to obtain the necessary approvals and financing. This type of partnership is common in small development projects in Turkey. Developer promises to landowner a specific percentage of the outcome with respect to land on which the subject development project is going to be built. In Turkey provision of new settlement and public-use areas are carried out by municipalities. Using regional plans, zoning plans are prepared and implemented for local urban development. The rapid urbanisation, especially, requires readily built-up areas in suburban areas. Hence, the provision of new sufficient lots, streets, roads, green areas, play gardens and parks are the main objectives of local land planning authorities. In Turkey when a landowner wishes to obtain a construction permit to build a house the basic principle is to fix and define the limits of existing cadastral parcel boundaries according to the

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rules of zoning plans. In regard to zoning requirements, the suitability of a cadastral parcel is examined by the municipalities. The public in Turkey supplies the development control with the subdivision control and building permission and control. The subdivision control is to be limited the subdivisions that cause to the irregular urbanization. The aim of the subdivision control in urban areas is to supply the development of the plots in the types of land use proposed according to the decisions of the local physical plans. The aim of subdivision control outside of urban areas is to prevent the unplanned development and to protect the agricultural areas. In Turkey, the subdivisions are carried out as voluntary or without the consent of owners. In the voluntary subdivisions, these transactions are controlled whether the subdivisions are carried out according to the decisions of the local physical plans and whether the size of plots is suitable to the decisions of local physical plans or by-laws. Where is separated to areas as road, square, park areas, car parks in the local physical plans, subdivisions are not accepted by municipality or governor office. Then subdivisions have to be approved by the committee of municipalities or province administrative committee. The subdivisions without the consent of owners are carried out the land readjustment method. Land readjustment in Turkey is directly linked with an adopted urban plan defined in Title No.18 of Reconstruction Law (Law No. 3194) and its accompanying regulations14. The aim of this method is to achieve a development or reorganization of built and un-built areas, produce urban plots of suitable location, shape and size for building or for other utilizations within the framework of the detailed local plans and to supply land for primary and secondary public areas. This title authorizes implementation to be carried out by the municipality without the consent of owners with the delimitation of project area determined by municipalities depending on the detailed local plan. In Turkey, the subdivisions are usually realized as voluntary. Especially, because of legal, administrative, technical and financial problems in the implementation of the land readjustment method, this method is not often used by municipalities. The subdivision control in Turkey cannot be supplied sufficiently in squatter areas. In these areas, sub standard commercial subdivisions have often emerged.

4.2 Capital Even the smallest property development projects require a considerable amount especially for beginner developers. A developer never should begin a project without at least twice as much cash available as seems necessary to get the project to the point where other funding is available. Most lenders require a developer to invest cash equity to cover 20 to 30 percent of the total project costs.

14 The Use of Land Acquisition Methods in Turkish Urban Areas, Sevkiye Sence TURK, Turkey 2003

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Developer might need financial assistance for;

Purchase of land Site development costs Design fees (architectural and engineering) Hard construction costs (labour and material) Permitting costs Infrastructure and services Capitalisation of interest Conversion and refurbishment. Marketing costs Pre opening and operating costs Accounting costs

Developers may prefer borrowing from banks or private companies that provide especially development funding. Property finance in the form of mortgages, is a method of acquiring financial assistance for land and buildings. Since land and buildings are tangible assets that can be sold reasonably quickly, loans secured on them are fairly easy to arrange. However, it is important to understand that there will be monthly mortgage payments for a long period of time, which means that future cash flow calculations are very important. Mortgage interest payments are tax-deductible expenses in many countries. In order to borrow from a company or a bank it should be considered that the quality of the project and management team employed is important. Lenders are normally comfortable lending to experienced individuals and established companies. In Turkey there isn't a developed mortgage system, which makes the business harder to enter. For a development company a common method of finding capital and reducing risk for especially large projects in Turkey is to establish partnerships with REITs (GYOs) of large banks such as Is Bank, Yapi Kredi Bank or Garanti Bank Which are some of the largest banks in Turkey. For smaller projects it is a widely used method to construct co-operatives. Co-operatives find members who pay monthly fees and sometimes higher amounts once or twice in a year to finance their projects. But this requires marketing before or in the middle of the construction phase. However in the last 20-30 years most households have suffered from this type of co-operative applications by not getting their homes on the promised time. This general condition has created lack of confidence in the market. When we think about public as a developer, finance is more easily financed for real estate development projects. Traditionally the biggest finance source of municipalities is real estate tax. It is very important for the land and property owners to pay their taxes. Tax revenues supplies financial independence to the municipalities. A research made in 1997 showed that only 50% of all real estate taxes is paid regularly due to the unsufficient tax system used in Turkey. Since there is not a developed e-government system in Turkey, tax evasion exists in all areas making a huge hole in the tax system.

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4.3 Knowledge Development is a risky business investing the first money in a project taking the last money out. At the low extreme developers may work for a fee managing the development process as agents for other investors to incur a small degree of risk. Beginning developers must accept greater risk than experienced developers do because beginners lack a strong bargaining position to transfer risk to others. As developers prefer partnerships with lender to get financed, lenders prefer experienced developers to get into the business. The motivation behind partnerships in development process is the multifaceted and multidisciplinary character of the business. Knowledge or experience for land acquisition, market analysis, financial feasibility, design, finance (equity), construction and management (sales) is needed for the period of a whole development.

4.4 Tenant

Tenant is the entity who tries to evaluate facility needs and to make responsible financial, functional and aesthetic decisions that will serve the organization in which he is a tenant in the future. A development process can begin with the decision to evaluate requirements for an individual tenant. In such a development process, to meet the needs of the tenant is essential for the developer. Unless the entire tenant space remains un-leased before the initiation of the process marketing must continue during the development process. If the developer can control the tenant factor before the process, he can also create financial sources for the development by presenting cash flow reports. On the contrary it is difficult to continue the process until all space is leased. The real estate development sector in Turkey is generally dependent on the people who purchase property units but not the tenants who pay regular mothly fees. Developers prefer selling the units because of higher profit margins. Only the cooperative system and Public comanies such as TOKI or KIPTAS which are studied in Chapter V let the tenants pay monthly fees. However when one partner of a development project becomes the landowner, he may prefer leasing his units, because he is not a professional in the profession and he will not need capital (since he is not a property developer) for future development projects. Due to the lack of a developed mortgage system in Turkey, purchasers of property mostly suffer from being forced to pay the entire price to the developer without using a credit opportunuty. Propety is mostly financed by the savings of households. Considerably higher interest rates, higher inflation rates and uncertainties in the economy make it harder to use financial tools. However, since the beginnig of the decrease process in interest rates, its been planned to apply a mortgage system for the people who wants to buy their houses. But the banking infrastructure of Turkey has not been sufficiant yet.

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5. OVERVIEW OF TURKEY 5.1 Overall Economy Industry and commerce along with a traditional agriculture sector constitute a complex mix of Turkey's dynamic economy. Although the government has a major role sectors such as industry, banking, transportation and communication, the private sector has been growing rapidly. Private sector runs almost entire textiles industry which has been the largest and most important exporting industry in the last 20 years. In recent years, the economic situation in Turkey has been pointed out by unstable economic growth and crucial imbalances. Development in the GDP has exceeded 6% in many years, but this strong expansion has been interrupted by sharp declines by economic crises in 1994, 1999 and 2001. After the last crises in 2001, however, Turkish economy took significant steps towards a rapidly growing economic environment. The table below lists some of the key economic indicators for Turkey between 2000 and 2004: Year 2000 2001 2002 2003 2004 Real GDP Growth (%) 7,4 -7,4 7,8 5,8 7 Nominal GDP (USD billion) 197 145 181 242 310 CPI (%) 56,4 53,5 47,2 25,5 9,3 Unemployment Rate (%) 8,3 8 7 7 10 Weighted Average Interest Rate for 1-year Deposits (%) 45,6 62,5 48,2 28,6 18

Exports (USD billion) 27,8 31,3 36,1 47,1 62,7 Imports (USD billion) 54,5 41,4 51,6 68,8 97,1 Trade Balance (USD Billion) -26,7 -10,1 -15,5 -21,7 -34,4

Table 5.1: Key Economic Indicators of Turkish Economy Source: Colliers Resco The reform process that is initiated by the IMF in the single party regime with the advances in EU negotiations, led to a stable development procedure in the economy. The table above shows that, Turkeys real GDP growth in 2002 and 2003 was 7.8% and 5.8%, respectively. These growth numbers indicate that Turkey has outperformed most of the EU and Central and Eastern European countries in this period. The growth in 2003 was mostly observed due to the high performance achieved in industrial, trade, transportation, tourism and communication sectors. The inflation rate in Turkey also decreased significantly from 56.4% in 2000 to 9.3% in 2004. It is expected to continue to decrease to a single digit in 2005. From these numbers and the positive environment, it is possible to say that Turkeys chronic high inflation trend has been closing to an end and the numbers of inflation are closing to numbers of EU countries. The table above shows that the tough fiscal policies of the government also lowered the interest rates. The 1-year interest rate decreased from 62.5% to 18% between 2001 and 2004. The real interest rates are still high compared to the EU countries, but policies of the single party regime target further reductions in interest rates.

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In addition to these developments, by dropping six zeros off the currency a redenomination has been made for the Turkish Lira. This procedure started to take effect in January 2005 and the transition period is supposed to be completed by the end of 2005. This redenomination is also expected to have positive effects on the economic indicators. As of September 2005, the Turkish currency exchange rate on the free monetary market was 1.33 Turkish Lira (YTL)/1 US Dollar (USD). The Key Economic Indicators table also shows some important numbers of the foreign trade in Turkey for the period between 2000 and 2003. According to these figures, Turkeys exports growth rate accelerated at a significant pace after 2000, increasing from 27.8 billion USD in 2000 to 47.1 billion USD in 2003. Turkeys imports, on the other hand, declined by around 25% in the year 2001, as a result of the general economic crises. In the following years, however, imports started to grow in line with the recovering economy. More than 50% of Turkeys exports and imports are traded with EU countries which are the most important trading partners. Especially in the last 4 years trading with the USA has also been in an increasing trend. The other important regions for Turkeys exports are the CIS and the Middle East countries. In terms of a share in Turkeys imports, the EU countries are followed by the CIS countries, as a consequence of crude oil and natural gas imports from that region. The inflation rate which was 9,3% in 2004 is expected to decrease further in the future year to the averages in EU countries with the successful monetary policy that the central bank applies, the appreciation of the Turkish currency and low increases in the prices of public goods, agriculture ad energy sector. Single digit inflation has not been seen for three decades. The GDP growth rate is expected to level off around 5% in 2005. All of these macroeconomic figures and expectations show that Turkey is on the way to have a stable and growing economic environment after efforts of many years. This economic environment will provide favourable conditions for the foreign investment. Except for the stable economy, Turkey had many of the advantages for attracting foreign investment, such as dynamic, young and low cost labour and special geographical location before the specified period. 5.2 Real Estate in Turkey Real estate sector in Turkey is a labour-concentrated sector and feeds about 200 sub-sectors. The sector has a great role in the fight against unemployment and increasing the aggregate production and income. Because of this great role, when the national economy comes into crises and booms, real estate sector is one of the first sectors that are affected. Since the fourth quarter of 2003 the general economy in Turkey is in a developing process. Present economic activity and increasing income levels, make people claim higher quality projects that can serve them a life style. The decreases in the interest rates and the profits in other investment tools have made the real estate sector more and more attractive recently. Increasing demand for real estate shows that the sector is getting in a developing process.

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According to the data from DPT (State Planning Organization) 1 unit of investment into real estate sector comes back to the national economy as 2,5 units. This makes real estate sector as a sub-sector of construction sector a great employment tool. Today %58 of construction activity in Turkey consists of real estate investments. When we look at the residential property market an excess of 2,6 million units exists in the sector. On the other hand, according to the 8th 5-year development plan of DPT, 2 714 000 units are needed to be built by the end of the year 2005 (the plan has been made for the years 2001-2005). At the same time there is an excess in supply and a deficit in demand. It seems like a paradox is coming out. The reason is that the most of the units of this excess are old, insecure for living in or illegally constructed without needed permits from public. This paradox shows that the main problem of the sector is not with the number of units, but it is with the standards of housing. 5.3 Overview of Istanbul as the Metropolitan City of Turkey Because investment opportunities into the real estate markets in developed regions are limited due to the settling prices, international funds and investors are expected to be gearing towards developing countries such as Turkey. The economical figures after the 2001 economic crisis and the regulatory reforms in the banking sector enabled the improving Turkish economy to get on a better level compared to last years. The decrease in the inflation rate and the increase in the GNP growth rate are the most significant signs of the improvement in Turkish economy. Following these improvements in the economy, on December 17, 2004, the EU decided to begin membership negotiations with Turkey and presented October 2005 as the start date. This development has increased the foreign investment interest in Turkey. One of the indicators of this increased interest is the new activity in the real estate sector. When we inspect the Turkish real estate sector, we need to start with Istanbul, in which approximately 40% of Turkish economy runs and 20% of all country`s population lives. As the date for membership meetings is getting closer, a significant increase in the number and amount of foreign investments can be observed. Foreign investors have an increasing interest in the residential market because of the activities aiming to initiate the mortgage system in Turkey. The current housing credit system in Turkey addresses a very small high income group because the purchasing power in Turkey is relatively insufficient. The examples of Greece and Spain show that the implementation of the mortgage system increases the purchasing power because it is spread over a very long term and causes a substantial increase in the prices of residential buildings. For the mortgage system to be fully established, the interest rates need to decrease further. The economic performance in recent years has showed that it is likely that the interest rates will continue falling down. The interest rate levels required for an efficient mortgage system is expected to be reached in a couple of years. Foreign investors want to take positions before the interest rates drop further. In addition, the fact that in Turkey, a capital gain from a sale of real estate, for a period of 4 years, is tax-exempt makes such an investment advantageous. Most of the foreign institutional investors are currently adopting their strategies of investing into fixed income properties in Turkey. They are seeking to purchase office, retail and

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industrial buildings with long term rent leases by credible tenants. However, considering the last 10 years, the average growth rate of Turkey has always exceeded the growth rate of the construction sector. As a result, high quality office buildings are scarce and the existing supply consists of older buildings. Financial weakness of local construction companies has caused most of the current building stock to have low architectural and technical quality, compared to the EU countries` standards. For these reasons, high quality office property stock, hence investment alternatives for foreign investors are currently scarce. 5.4 Residential Market in Istanbul During the financial crises period between 2001 and 2003 the demand for residential property suffered significantly. The economy has been in a recovery process, accompanied by falling interest rates and inflation. Even though the interest rates are still high for the mortgage system, by considering the economic performance of the country, the government units started to prepare the infrastructure needed for the system. This system is also expected to provide many opportunities in the residential real estate market. There are comprehensive studies that both the government and SPK (Sermaye Piyasasi Kurulu Capital Markets Board) carry out. The current residential loan usage for housing in Turkey is interesting. According to the findings, only 3% of the population in Turkey uses residential loans whereas the ratio of total residential loans to GNP is only 0.3% in Turkey. This rate is 0.5% in Romania, 40% in the EU countries and 50% in the USA. There are some reasons behind this situation. First, the longest term for the existing residential loans is 60 months for loans in Turkish Lira and 180 months for loans in foreign currencies, which makes it impossible to have loan instalments as low as rent levels. Second, the application of variable interest loans are prohibited in the consumer legislation and fixed interest rate loans impose all of the economic and the political risks on the borrower. Third and most importantly, since 55% of the existing residential stock in Turkey has no construction license, many low income people are able to attain unlicensed housing without having to execute the legal transfer operations, which is an obligation in the use of residential loans. Potential use of mortgage credits is not very difficult to predict because of the facts that the residential demand in the country is about 350,000 housing units per year and that 60% of Turkeys population is under the age of 20. The mortgage system will allow people to purchase houses on long term credits with maturities of 20, 30 or 40 years and with instalments that are no higher than the rental rates of the houses. 5.4.1 Demand There are four major factors that affect the demand for residential real estate in Istanbul: closeness to transportation junctions, closeness to destinations where large holdings plan to invest, closeness to existing or planned shopping malls and closeness to office and production facilities that are supported with powerful sub-centers. The demand for residential real estate in Istanbul was affected significantly by Marmara earthquake of 1999. The fear for a future earthquake which is predicted to happen in the next 30 years, encouraged many residents of old buildings especially in the urban areas to search for newer buildings which are constructed after the 1999 earthquake complying with the earthquake safety regulations.

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The earthquake also had an effect on the demand in suburban residential areas. Especially the regions along the Marmara coast bear higher earthquake risk because of the earth structure of these areas. Due to the better earth structure in the northern region the demand in these areas increased significantly. Moreover, most of the suburban settlement models consist of 2-4 storey town house or villa type buildings, which are known to be more resistant to earthquake risks. Overall, Istanbul observed a shift towards suburban areas, because of the increasing prices and higher earthquake risks in urban areas. Recently, however, the residential demand started to shift back to urban residential areas once again. The recent recovery of economic factors have had a positive affect on both suburban and urban demand, but the demand in urban areas increased much more significantly. High living costs of suburban areas and closeness to the CBD for the urban areas have constituted this difference. 5.4.2 Supply

Suburban In suburban areas, some development projects have been initiated in recent years. These projects are mostly villa type housing or 2-4 store building projects which were mentioned above in demand part as the demand for these types of housing is higher in suburban areas. Projects having good construction quality with creative architecture, located in technically and socially well-developed areas, have been a successful investment model in these areas. Some of the most successful projects in Istanbul suburban areas: SUBURBAN PROJECT DEVELOPER/INVESTOR UNIT TYPE/ NUMBER OF UNITS

Istanbul Istanbul Yapi Kredi Koray REIC Town House + Apartment / 204

Olimpiakent Soyak Construction Apartment + Villa / 1550

My Country Agaoglu Construction Villa + Apartment - Duplex Flat / 271

Evidea Yapi Kredi Koray REIC - Garanti REIC Apartment / 450

Kasaba Is Koray Villa + Town house + Apartment / 750

Alkent 2000 Alarko REIC Villa

Kemer Country Kemer Construction and Tourism Villa Table 5.2: Major development sites in suburban of Istanbul Source: Colliers Resco

Urban The term of residence came into the Turkish residential market 10 years ago. Akmerkez Residence, Metro City, Elit Residence, Polat Residence and the newly launched Elysium Residence, Kanyon and Selenium Residence are examples of this concept in Istanbul. Most of these urban projects have had successful sale numbers especially in the recovery years of the national economy.

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Some of the most successful projects in Istanbul urban areas: URBAN PROJECT DEVELOPER/INVESTOR UNIT TYPE/ NUMBER OF UNITS

Metrocity Milennium Yuksel Construction Apartment / 203

Maya Residence Maya Construction Apartment / 284

Kanyon Project Is REIC - Eczabasi Construction Apartment / 157

Atasehir Residence Emlak REIC Apartment / 180 Table 5.3: Major projects in Istanbul urban areas Source: Colliers Resco

Prices In 2004, the prices for new constructed suburban villa and townhouse projects in Istanbul varied between 800 USD/m2 and 2,000 USD/m2. The new apartment projects in the city were on sale for 1,000 USD/m2- 1,500 USD/m2 and the high-rise residential projects were on sale for 2,000 USD/m2 - 3,000 USD/m2. The table below summarizes the selling prices of different types of units for the major suburban and urban projects in Istanbul: SUBURBAN PROJECT UNI

Documents

Real Estate Development Process in Turkey