In the past decade, developers are building homes, malls and office buildings at a record pace. The real-estate industry has anchored a 5% average growth rate in the $800 billion economy since 2002, accounting for 30% of GDP over that period, according to Intes, Turkey's union of construction-industry companies.
But a sharp decline within the Turkish lira and rising mortgage rates, coupled with political turmoil since a year ago, are threatening to slow that growth engine. Investors are reluctant to obtain real-estate throughout a 16-month election cycle that can chart Turkey's path for an additional decade.
Already, apartment for rent have slumped because buyers should pay higher rates of interest on mortgages, now at the normal 14% compared to record lows around 7.4% in May 2013.
"Higher rates and a weakening currency are negatively impacting property sales because people can't prepare and ... have zero trust," says Fulya Kenber, a 58-year-old Century 21 broker in Istanbul's central Besiktas neighborhood.
Emlak Konut GYO, EKGYO.IS -0.45% the biggest Turkish real-estate developer, said home sales plummeted 39% in January in contrast to the last month. Analysts said the exact property giant is forecasting sales of 10,000 units this year, down from 15,175 not too long ago.
"Only said there's high demand the ones aren't scared, We would be lying," says Burcu Alim, a sales rep at developer Agaoglu's headquarters in Atasehir, a former pasture on the Asian side of Istanbul which has been transformed into a dense district of soaring apartment blocks.
Meanwhile, the lira's slump—up to 30% to your record low contrary to the dollar—is making it tougher for some commercial tenants to spend rents. Most retail leases in Turkey require stores to cover rent in euros or dollars, but sales are typical in lira.
Because of this, numerous landlords were forced to supply emergency price cuts that can help tenants make ends meet. Turkey's second-biggest developer, Torunlar GYO, said hello fixed the exchange rate at 1.95 liras per dollar in January—then an 18% discount—for tenants at Mall of Istanbul, a landmark project in just moments clear of Turkey's biggest airport.
The plummeting lira has created headaches for most developers, whose foreign-currency debt due within one year surged more than fourfold to $101.3 billion in 2013, central bank data show.
Investors have taken note, punishing real-estate companies with large external debt no foreign-currency income. Sinpas GYO's shares have dropped 56% because the lira selloff started in May following U.S. Federal Reserve signaled an end to its monetary easing. Turkey's benchmark BIST 100 Stock market index fell 34% in the same period.
Because the lira fell, pushing prices higher, the central bank more than doubled a vital rate to guide the currency and convince investors it's going to fight inflation. Analysts say the move will hamper the economy.
"I can't think the development industry can set the framework for and continue to support economic growth," says Gulay Elif Girgin, chief economist at Seker Purchase Istanbul.
Without doubt, the slowdown may be a short lived hiccup.The country's young population, having a median ages of 30, supports interest in roughly 400,000 new homes per year, analysts say. Rising incomes that tripled to over $10,000 since 2002 in addition have stoked interest.
Also, while mortgage rates have jumped from record lows, they're still below historically prohibitive rates that had been all the way to 50% in 2002. Premier Recep Tayyip Erdogan's Justice and Development Party, or AKP, continues to embrace real-estate development as being a driver of growth and contains unveiled plans to support property prices.
But GDP growth is forecast to fall by half to 2% in 2010 and doubts are growing about several megaprojects promoted through the government, including turning a huge swath of Atasehir into a global financial center along with a $30 billion decide to develop Istanbul's third airport.
Also, sales and leasing must perk up for the real-estate engine to hold humming. Which could get harder as skyscrapers rise on the Asian and European hills lining the Bosporus.
Some developers for example Agaoglu have resorted to zero-curiosity about-house financing to slice overall loan rates for investors and close sales. Almost all the firms offer deep discounts of up to 40% to lure buyers before construction starts.
Turkey's government continues to be using land sales and discounted loans to spur homeownership for at least three decades. Question the AKP located power in 2002, the federal government has stepped about the gas, boosted by strong demand.
Since 2007, property values have jumped by 36% nationwide, as outlined by emerging-markets real-estate data provider Reidin. Demand am strong that perhaps the 2008 collapse of Lehman Brothers Holdings Inc., which triggered a global financial meltdown and dragged Turkey in a recession just last year, didn't hurt local home buyers' appetite.
But supply has been catching up with demand. In the four years before the economic turmoil, new apartments averaged 558,000 annually. That compares approximately 200,000 as Mr. Erdogan's government located power.
Meanwhile, investors are actually spooked by persistent political unrest that first boiled over in June with protests over Mr. Erdogan's decide to build a mixed-use building using a retail center in Istanbul's central Taksim Square.
The environmentalist sit-in became nationwide antigovernment demonstrations when police used tear gas and water cannons to disperse activists. And recently, Mr. Erdogan's allies are ensnared in a bribery investigation mostly linked with construction deals, forcing a cabinet shuffle in December and threatening the AKP's antigraft record right before elections.
Turkish officials hope that political turmoil will calm once elections are no longer, and home buyers will get back to the marketplace.
"Property would be the biggest money generator for your government and possesses been a decisive element in generating wealth, which has spread all through the people as property prices rose," said Bertug Tuzun, an analyst at Ak Investment in Istanbul. "The us government is sustaining real-estate demand having its projects."
A digger works over a plot that may host a dentist's office tower in Atasehir, an Istanbul neighborhood the us government wants to turn into a worldwide financial hub. Emre Peker/The Wall Street Journal
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