Why real-estate investors should still steer clear of Turkey even as the lira rebounds

The devaluation of the Turkish lira USDTRY, +3.2826%  may make real estate in cities like Istanbul and Ankara seem like a bargain for foreign investors, but scooping up property in Turkey could still be a fool’s errand even as the currency stabilizes.

Concerns about Turkish President Recep Tayyip Erdogan’s leadership and the country’s worsening relationship with the U.S. and the European Union sent the Turkish lira EURTRY, +3.8916%  reeling to historically low values at the start of the week.

Amid these dramatic fluctuations, some pointed to Turkish real estate as a major buying opportunity. Foreign investment in Turkish real estate has surged in recent years.

Developers sought to capitalize on renewed interest in Istanbul and the improved tourism industry in the country, particularly along the Black Sea. The number of tourists visiting Turkey increased 31% year-over-year during the first five months of 2018, according to data from the country’s Culture and Tourism Ministry.

The lira has recovered some on the news that the Qatari government plans to invest $15 billion in Turkey. But Turkey imposed tariffs on U.S. imports after President Trump placed sanctions on the country for not freeing a pastor facing prison time over terrorism charges. Either way, buyers may still be better off turning their attention elsewhere.

Here are some reasons why Turkish real estate may still be too risky a gamble:

Housing in Turkey could be a bubble

There is some disagreement as to whether the Turkish real-estate market shows signs of a bubble ready to burst or if it is just displaying isolated pockets of over-valuation.

Nevertheless, observers have been warning of a bubble since last fall. One of the main concerns is how Erdogan funneled money toward property developers in an effort to boost economic activity and housing construction in the country.

But with home prices falling due to the devalued lira, and construction costs soaring thanks to a stronger dollar, many Turkish homebuilders have been facing the threat of bankruptcy, English-language publication Ahval News reported.

Last May, Turkish lenders were lowering mortgage rate, the government cut certain taxes and real estate firms slashed prices in an attempt to spark more home sales. At that time, the country had around 2 million unsold homes.

Moreover, many properties, particularly in popular markets like Istanbul, are owned by foreign investors who may be inclined to cash out if the economic situation worsens. That could trigger a scramble to the bottom, which could erase the strides the country’s real-estate market had made.

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“When I hear Erdogan accuse his central bank chief of ‘treason’ if he dared to raise interest rates or fulminate against bankers as ‘evil forces in the economy,’ I know the Turkish lira will continue to depreciate against the US dollar.” Matein Khalid, a Dubai-based global equities strategist and fund manager The currency could remain unstable for the foreseeable future

Turkey’s economy rests on a shaky foundation. Erdogan has pressured government officials to avoid taking measures that could combat the inflation risk that has plagued the country, raising alarm among observers. “When I hear Erdogan accuse his central bank chief of ‘treason’ if he dared to raise interest rates or fulminate against bankers as ‘evil forces in the economy,’ I know the Turkish lira will continue to depreciate against the U.S. dollar,” Matein Khalid, a Dubai-based global equities strategist and fund manager, wrote earlier this year in the Khaleej Times, an English-language publication in the United Arab Emirates.

Despite maintaining one of the largest trade deficits in Europe and the Middle East, Turkey’s Treasury and Finance Minister Berat Albayrak said he won’t impose capital controls during a call with investors earlier this week, Bloomberg reported. That prompted economists such as Mohamed El-Erian, chief economic adviser to Allianz SE, to call for a reduction in Turkish investment. An exodus on high-net worth investors though could only cement the country’s financial strife.

Consequently, those who were to invest could find themselves facing a long haul. “A stronger dollar does tend to put emerging-market economies under stress, so we could see more currency volatility,” said Danielle Hale, chief economist at Realtor.com. “You might have to end up keeping that investment for a longer term than you anticipated.”

Turkey’s political situation is very tumultuous

The Trump administration has continued to threaten to institute more sanctions on Turkey if the country does not release an American pastor who is currently being held in custody. “You don’t want to tie your money up in a country that could be facing very serious sanctions and potentially the continued devaluation of your money,” said Edward Mermelstein, a real-estate attorney who specializes in foreign and luxury real-estate investments.

The political risk in Turkey doesn’t just stem from the country’s foreign relations. Kurdish separatist groups and extremists aligned with ISIS have perpetrated multiple terrorist attacks across the country over the past few years. And these attacks, if they continue, could threaten the value of properties located in the areas that are targeted.

But perhaps the biggest political risk lies with Erdogan. Following a failed coup in 2016, Erdogan has consolidated his power and made gestures that suggest he could be setting himself up to rule the country for the remainder of his life, Mermelstein said. Already this has soured the country’s relationship with European governments.

“It’s not looking any different from what we’ve seen at the Kremlin or in Venezuela,” Mermelstein said. “It’s a political situation that leads to tremendous economic instability.”

Also see: Only one generation of Americans has fully recovered from the housing crash

The political risk in Turkey doesn’t just stem from the country’s foreign relations. Kurdish separatist groups and extremists aligned with ISIS have perpetrated multiple terrorist attacks across the country over the past few years. And these attacks, if they continue, could threaten the value of properties located in the areas that are targeted. Cronyism may thrive at the local level if Turkey becomes more autocratic

As Turkey becomes more insulated from the international community, local officials will gain more sway and could become emboldened to profit off the misfortune of foreign investors. For instance, in Russia Mermelstein said his clients have been denied approval to redevelop real-estate holdings by local governments.

“The local government refused to allow construction, and then you had local competitors come in and make lowball offers saying that you’ll never be able to do anything with this property unless you accept this offer,” Mermelstein said.

Moreover, Turkey could institute laws that make it more difficult to pull money out of the country if the financial exodus escalates, which could tie up investors’ assets that might otherwise have been more liquid if they had invested in another country.

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