THE COMMERCIAL REAL ESTATE MARKET IN THE

THE COMMERCIAL PROPERTY MARKET IN GREATER ISTANBUL Beginning of Year 2004 Review April 2004 Nazmi Akbacı Ticaret Merkezi NO: 192 Maslak Istanbul 34398 TURKEY Tel + (90-212) 286 18 45 Fax + (90-212) 285 06 69 www.kuzeybati.com.tr CONTENTS Page Part I Part II Istanbul : The City The Turkish Economy The Country and Political Situation Part III Part IV The Overall Real Estate Market of Istanbul The Office Market A. CBD B. West End (European) C. Suburban (Asian) Part V Part VI Part VII Part VII I Part IX Part X The Retail Market The Industrial Market The Residential Market The Investment Market The Hotel Market Forecast Real Estate Rates in Istanbul Part XI Real Estate Legislation Property Taxes Property Transfer Tax Capital Gains Depreciation Rental Income Government Legislation Municipal Legislation 3 5 7 9 10 10 10 11 12 13 14 15 16 17 18 19 20 20 20 21 21 21 21 Prepared by Kuzeybati Worldwide Real Estate Services 2 I. Istanbul : The City General Outlook The greater city of Istanbul is one of the most crowded cities of the world. Metropolitan Istanbul consists of 32 counties and 1 Greater City Municipality and is located on 2 continents: Asia and Europe. One of the world’s busiest straits, the Bosphorus, separates the two continents. This strait is a very busy waterway and provides the only water passage between the Mediterranean and the Black Sea. European side is basically considered to be the commercial district while the Asian side is basically residential. The city covers 5.712 sqkm. Istanbul is an attractive location for any business and a catalyst for Turkish economy with its workforce, accessibility and inciting market. Istanbul serves as a transportation hub and infrastructure of the metropolitan is one of her greatest strengths. Istanbul boasts to have 2 international airports: Ataturk International airport on the European side of the city and Sabiha Gokcen on the Asian side. Flights are handled to nearly 300 destinations, from Ataturk International Airport including all major destinations of the world from New York to Tokyo. Ataturk Airport’s new International Terminal has been opened in 2000 and been planned to serve 14 million passengers and this number is to reach 20 million in the near future. Sabiha Gokcen Airport has a capacity of 3.000.000 passengers/year. Ataturk International Airport serves as the hub of Turkish Airlines, Turkey’s flag carrier airline. There are 2 express roads circling the city. The older one called E5 is mostly used for inner city traffic while the more recent TEM highway is mostly used by intercity or intercontinental traffic. Bogazici Bridge and Fatih Sultan Mehmet Bridge respectively, provide the Bosphorus Strait passes for these two highways. The central business district of Istanbul lies along the northbound Buyukdere Caddesi between Mecidiyekoy and Maslak on the European side of the city. Other suburban business districts are Altunizade, Kavacik and Kozyatagi on the Asian side and Yenibosna neighborhood (West End) near the Ataturk International airport. The original industrial zones of the city used to concentrate around the E5 highway. As E5 corridor is under a quick transformation from industrial to commercial usage, the industry now accumulates basically around the TEM highway. Istanbul’s industrial zones are being used more for warehousing needs than for production purposes. Production plants are moving away to neighboring cities or to other major Asian cities of Turkey. Retail business concentrates in the shopping malls such as Akmerkez, Galleria, Carousel, Carrefour Icerenkoy, Carrefour Umraniye, Capitol, Migros Beylikduzu, Olivium, Nautilus, Metrocity, Flyinn and Profilo. However high streets of Rumeli Caddesi, Abdi Ipekci and Bagdat Caddesi will maintain their attraction. AIR PASSENGER TRAFIC (ATATURK INTERNATIONAL AIRPORT) YEAR TOTAL INTERNATIONAL DOMESTIC 2002 11.357.691 8.506.204 2.851.487 06/2003 5.104.789 3.771.527 1.333.262 2003/2002 - SEMIANNUAL COMPARISON 4,50% 2,50% Prepared by Kuzeybati Worldwide Real Estate Services 3 Istanbul is and will continue serving as the national and regional hometown of multinational companies from all sectors. The city offers attractive residential, accommodation, transportation facilities to all companies that want to be operational in Turkey, Balkans, Middle East and other Turkish speaking states. The restructuring of the city continues in terms of both economy and infrastructure. The two projects serving this purpose are Galataport project and recent rehabilitation of old city center, Galata Tower and its vicinity. The Galataport project includes mixed-use of hotel, convention and exhibition centers, aquarium, shopping center and offices on the shore of Karakoy where current cruiser ship dock is present. The rehabilitation Galata Tower region covers infrastructure investments such as new pedestrian ways, restoration of the buildings as well as economical improvement of the region. Istanbul, though not the administrative capital of Turkey, is the economic and cultural heartland of the modern Republic of Turkey. Projects that open Istanbul towards the world are candidacy for Olympic Games in 2012, hosting the Eurovision Song Contest 2004, Nato Summit in 2004 and opening of the Formula One race track in 2005. Galataport Design of the F1 racetrack Prepared by Kuzeybati Worldwide Real Estate Services 4 II. The Turkish Economy General Outlook Turkish economy continued its rapid improvement in 2003. Turkey adopted a new IMF program in the spring of 2001 after the crises in November 2000 and February 2001. After the approval of the 6th review of the program, the 7th review has been completed and the institution is confirming what markets perceive. The main aims of the program established in 2001 were to eliminate speedily the crisis of confidence and instability that emerged as a result of floating the exchange rate, and simultaneously to create a framework for restructuring the public administration and economy in a way, which will prevent the re-emergence of this situation. In accordance with the current economic program, Key laws relating to banking reform, fiscal transparency, deregulation, tax reform and the independence of the Central Bank of Turkey (CBT) have been enacted. Several other independent boards such as Banking Regulation and Supervision Agency (BDDK), Turkish Competition Authority (Rekabet Kurumu) have been established. Turkey also accepted the governance of international arbitrage in case of international disputes. The economic performance of 2003 has demonstrated the Turkish economy’s ability to improve quickly and the responsiveness of the economy to sound policies. Market confidence is clear in the decrease of the interest rates on the domestic debt. These interest rates are now at a record low level of 25% per annum, reflecting not only the past improvement but expectations that the central bank will be able to cut ref rate even more rapidly in 2004 as inflation expectations are dropping and all monetary indicators are under control. Source: State Institute of Statistics (SIS) The original macroeconomic objectives for 2003 have been well exceeded. Inflation (CPI) fell to 18.4% at the end of December while the target was 20% and it is expected to decline to 12% in 2004. The Central Bank’s independence played an important role in reaching the inflation target, and the Government will continue to ensure the Central Bank’s independence and support its goal of price stability. GDP growth reached 4.8% in the third quarter thanks to an 8.1% growth of industrial production. This strong growth is boosting imports and the trade deficit is worsening but the final impact on the current account has been limited by a strong performance of tourism. For 2004, the central bank will pursue its inflation targeting policy and will keep the flexible exchange rates system although it will intervene if needed to limit fluctuations. Government’s tight fiscal policy was able to turn around the gloomy inflation expectations in the beginning of the year, stemming largely from the war prospects in Iraq and rising global commodity prices. As agreed with IMF, the government aimed at a primary public sector surplus of 6,5% of GNP. The target is in line with the ultimate objective of stabilizing (and even decreasing) the debt-to-GNP ratio. As a result, the government has brought down this ratio to 70% by the end of year 2003 from 92% at the end of 2001. In line with program commitments, the Central Bank of Turkey (CBT) met the structural performance criterion on reorganizing its internal audit unit. As structural reforms are also going on (there is a reform agenda for the public administration, a bill to improve transparency in public institutions and a new law to amend the banking legislation) it will help to confirm the positive results of the economic program in the longer term. 5 Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services Source: Central Bank of The Republıc of Turkey Source: Central Bank of The Republıc of Turkey The structural reforms increase also the chances of Turkey to have closer relations with EU, which praised the country for its reforms and progresses. Finally, the fact that there is a government in Northern Cyprus keen to find a solution to the reunification problem is very positive for Turkey. German Government’s recent support for Turkey and the growing interest of German investors also reveals the positive intention of the European decision makers on Turkey’s membership. An ambitious privatization program will unfold to increase productivity and efficiency in the manufacturing sector while providing the funding for the socially desirable structural reforms such as restructuring the social security system. Largest state corporations such as Petkim and Tupras (petrochemicals), Tekel (tobacco) and Turkiye Seker Fabrikalari (sugar production) are among the major privatization planned for 2004. Turkey has a vibrant young population of over 70 million people-over 73 percent of which lives in urban centers- and a reputation for private sector entrepreneurship. In 2003, Turkey's GNP is estimated as about US$239 billion equivalent-or about US$3,383 per capita. Agriculture accounts for some 11,8% of GNP; industry for 24,9% and services for 63,3% in 2003. Turkey's investment rate is in the range of 24% of GNP, while imports and exports together represent about 48,4% of GNP. Turkey signed a customs union agreement with the European Union in 1996 and became a candidate for EU membership at the Helsinki summit in December 1999. Turkey is in the crossroads of major energy lines such as Baku-Tbilisi-Ceyhan and IraqiTurkish petroleum pipelines as well as Russia-Turkey gas lines. Turkey’s strong sectors of production are textiles, automotive and agriculture related industries. Tourism revenues are becoming a very important source of revenue for Turkey in recent years. Source: Central Bank of The Republıc of Turkey Source: State Institute of Statistics (SIS) Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services 6 The Country and Political Situation The Turkish political landscape has undergone changes as a result of the parliamentary elections of 3 November 2002. For the first time after decades of coalition governments, Turkey has a single party government formed by the Justice and Development Party (AK Party) enjoying a large majority in Parliament. Financial markets reacted favorably to the election of a strong single-party government, helping to reinforce trust in Turkey’s economic th prospects. The local elections held on 28 March of 2004 also ended with governing party’s success. The decision of the European Union leaders at the Copenhagen Summit in December 2002, which will open negotiations for EU membership of Turkey if the political criteria are fulfilled, also provided impetus to stabilization and reform efforts on the way to full membership. The basic requirements for European Union membership were clearly stated at the Luxembourg (1997), Helsinki (1999) and Copenhagen (2002) summits. At the Copenhagen European Council of 12-13 December 2002, the EU took decisions of historic significance concerning its next enlargement. It was decided that ten candidate countries (Hungary, Poland, the Czech Republic, Estonia, Latvia, Lithuania, Malta, Cyprus, Slovenia, Slovakia) would be members to the EU as of 1 May 2004. Concerning Bulgaria and Romania, the European Council reaffirmed the objective to welcome these two states as members in 2007. Turkey believes that the EU should pursue an enlargement policy, which would embrace the entire continent. The argument that Turkey’s EU membership would bring stability and prosperity to southeastern Europe and the continent in general is verified by the West Balkan countries’ EU alignment with likewise concerns. Source: Undersecretariat of Foreign Trade, SIS INTERNATIONAL TRADE VALUE (IN MILLIONS US DOLLARS) EXPORTS IMPORTS, CIF 1997 26.261 48.559 1998 26.974 45.921 1999 26.588 40.671 2000 27.775 54.503 2001 31.334 41.399 2002 36.059 51.553 2003 47.068 68.808 Source: State Institute of Statistics, SIS Prepared by Kuzeybati Worldwide Real Estate Services 7 The Turkish government has declared repeatedly that its main objective is to meet the Copenhagen political criteria in time to allow a positive assessment by the Commission and thereby pave the way for a decision by the European Council in December 2004 to start accession negotiations with Turkey. As of the date of this report, seven major packages of political reform have been adopted over the years, introducing changes to different areas of legislation. Some of the reforms carry great political significance as they impinge upon sensitive issues in the Turkish context, such as freedom of expression, freedom of demonstration, cultural rights and civilian control of the military. The Government has also taken steps to ensure effective implementation of the reforms such as the setting up a Reform Monitoring Group. Turkey is expected to become a full member of EU in the timeframe between 2007 and 2010. In 2003, the issue of Iraqi war created difficulties between the Turkish and US governments. On 1 March 2003, Parliament rejected a government motion permitting the deployment of US troops in the southeast of Turkey and the deployment of Turkish troops in Iraq. The government presented the motion once again and it was adopted by Parliament on 7 October. Recently, detailed talks are under way in Cyprus on a tight UN timetable with the aim of reunifying the Mediterranean island in time for its entry into the European Union on 1 May. Turkey is keen to find a resolution in order to end the political isolation of Turkish-speaking northern Cyprus and to further its own attempt to join the EU. Solution in Cyprus issue would majorly comfort Turkey's membership expectations and it is also expected to affect the decisions to be taken in the second half of 2004 although this was not an official condition. Foreign Capital Entry Number of Years Companies 1991 267 1992 207 1993 224 1994 276 1995 331 1996 421 1997 486 1998 465 1999 417 2000 378 2001 513 2002 470 2003* 480 * As of July, 2003 Incoming (Million USD) 907 911 746 636 934 914 852 853 813 1.707 3.288 549 150 Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services 8 III. The Overall Real Estate Market of Istanbul The economic crisis of 2001 in Turkey showed its effects on the real estate market in years 2002 and 2003. However, 2004 is expected to be an ongoing recovery year for all property markets. Vacancies increased and rates dropped. Rates decreased by as much as 30 % in USD terms in the period between 2000 and 2003. Towards the end of year 2003, vacancies tend to decrease but the reflection of this movement on the rates came late. However, it is possible to talk about small increases of rates especially in retail and industrial property markets. Istanbul is basically an overbuilt market for the time being. The end users of the market are international Turkish and foreign companies while the significant majority of investors are local. An exception to local investments is the retail sector where many German, British and French international investors are already present. The market is expected to attract many foreign investors after 2005 when the EU membership will be within closer reach. Prepared by Kuzeybati Worldwide Real Estate Services 9 IV. The Office Market A. CBD The CBD of Istanbul is centered on BesiktasLevent-Maslak corridor. The total Class A office space in Maslak and Levent districts is 748.118 m2. The Class A office vacancy rate as at March 2004 is 22.17%, reaching the lowest figure of the last two years. The office demand, which has been effected negatively by the past economical developments, has not recovered yet. With an insignificant increase in demand, the rental values are still low in Levent District. Decrease of rental values to the levels desired by office end users ended with a slight increase in office demand. However, opening of Tekfen Tower and evacuation of the HSBC Bank building has increased the vacancy rate in Levent. In contrary to Levent, the vacancy rates in Maslak have decreased with HSBC’s relocation and the rates have slightly increased. Although we expect to see an increase in office demand in CBD in the coming months, the vacancy rates are forecasted to only gradually decrease along with the introduction of new office buildings to the market. Other than all the expectations mentioned above, the economical improvements may have positive impact on the foreign capital entry to the market resulting with a significant office demand. Recent major leases in Istanbul’s CBD came from Mitsubishi, Pepsi Cola, Link/ McCannErickson, Dogan Hayat Emeklilik, Aydin Saatcilik, HSBC, Consulate of Poland and Hugo Boss. Source: Kuzeybati Worldwide Real Estate Services B. West End (European) As of date there are many low-rise office buildings with very low rates along the connection road between E5 and TEM. The vacancy rates, which have reached a level of 60% in the last two years, dropped to 38,5% as of date of this report. The total office stock as of this report is 248.529 m2. Istanbul’s largest office park development (i.e. major new stock) at The World Trade Center is one of the reasons for the office rates to drop in the region. Another reason is infrastructure, which remain as a major problem of the area. This region is still far from attracting high quality tenants. New construction starts almost came to a halt because of immature demand. Prepared by Kuzeybati Worldwide Real Estate Services * June 2002 rental value is forecasted. Source: Kuzeybati Worldwide Real Estate Services Source: Kuzeybati Worldwide Real Estate Services 10 C. Suburban (Asian) Suburban Central Business District of Istanbul’s Asian Side is located on E5 and TEM highways. The districts forming Asian Class A office market are Kozyatagi, Altunizade and Kavacik. Umraniye district, which is a newly developing business community, is also added to these districts. As of date total class A office supply in Asian Side is 536.542 m². In Kozyatagi district, which covers the major part of Asian Side office stock, the vacancy rates has declined to 37.8% according to the latest research. The rental values in Kozyatagi district that were between asking gross rents of 13 and 15 USD/m²/month two years ago, seem to stabilize with an average level of asking gross 12.9 USD/m²/month in March 2004. Kavacik, a recently developing business community, has been poor in attracting high quality tenants. Along with infrastructure problems like transportation, power, parking and telecommunications, lack of quality housing around the district is one of the main reasons of increase in vacancy rates in the district. The vacancy rates in Kavacik district, which were above the level of 40% in last two years, have declined to the level of 36.9%. In the following periods in Kavacik district, it is forecasted that the increase in the office stock will be relatively small and the decrease in vacancy rates will continue. Recent major leases in Istanbul’s Suburban Central Business District came from Gural Porselen, York, Kalder and Bunge Gida. In Altunizade district, in year 2002 a new office supply is generated by the users that moved out of the district. This caused an immediate increase in vacancy rates. But latest research showed that the vacancy rates have declined to the level of 25.4%. The district seem to regain its popularity. In the following periods it is expected that the increase in office stock will not have significant impact on this declining vacancy rate. Source: Kuzeybati Worldwide Real Estate Services Source: Kuzeybati Worldwide Real Estate Services Source: Kuzeybati Worldwide Real Estate Services Prepared by Kuzeybati Worldwide Real Estate Services 11 V. The Retail Market In spite of the overbuilt real estate markets of Istanbul, retail is still the best developing market of all. The consumerist behavior of the inhabitants of Istanbul and encouraging activities of retailers such as promotions and activities such as Istanbul Shopping Fest 2004 make good reasons for the success of this type of development. However, recently new projects realized and underway are bringing market into the state of saturation. Peak rents are stabilized at the level of 1.200 $/m2 and average rents are around 540 $/m2 for shopping centers. Nisantasi and Bagdat Street maintained popularity and the rents have tendency of a slight rise. Nisantasi continued its improvement in the Abdi Ipekci Street direction. Key money is expected to return towards the end of year in all districts. In 2003 and at the beginning of 2004, five new shopping centers opened in Istanbul: Maya Uptown, Bayrampasa CarrefourSa, Maxi City Cengelkoy, Town Center and Flyinn. As of date, there are 27 shopping centers operational in Istanbul with a total GLA of approximately 650.000 m2. There are 10 further centers under construction. There are also numerous stand alone retail establishments. Of the active retailers, Zara, Mango, Praktiker, Metro Group, Çarşı, Toys-R-Us, Migros and Carrefour are worth mentioning. Foreign supermarket operators like Metro Group and Carrefour are expanding their investments in Istanbul as well. The British supermarket operator Tesco, which bought majority shares in a regional supermarket chain Kipa last year, is expected to expand operations to Istanbul in the near future. Also, new operators such as Ikea are expected to join market in 2005. Outlet developments in Istanbul tend to accumulate around the major exits of E5 and TEM highways and in the shopping centers of Olivium and Aymerkez. Source: Kuzeybati Worldwide Real Estate Services Source: Kuzeybati Worldwide Real Estate Services Prepared by Kuzeybati Worldwide Real Estate Services 12 VI. The Industrial Market The impacts of general positive climate generated by the recent economical developments have started to be observed in the industrial sector as well. The capacity usage and production amount have increased in 2003. The industrial property market, which was the most injured market of all during the economical crisis, has started to recover. Rents, which decreased sharply by as much as 40 %, have stabilized and are expected to increase towards the middle of year. New constructions that almost stopped have recently restarted. Starting from end of 2003 we are witnessing some industrial real estate acquisitions. The most popular industrial zones in and around Istanbul are as follows: Gebze Organized Industrial Zone, Dudullu Organized Industrial Zone, Hadimkoy and Samandira. The Asian side of Istanbul still attracts more industrial investments since land is more readily available and infrastructure is higher in quality. Organized Zones are still more popular for industrial investments since government subsidies can only be obtained in these zones within the province of Istanbul. Due to pressure from multinational companies moving into Turkey, recent industrial developments are higher in quality. Source: Central Bank of The Republıc of Turkey Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services 13 VII. The Residential Market Multifamily Housing/Apartments is still the most common form of residential development, especially in the Asian side of the city or along the Marmara shores of the European side. Upscale condos are common around Yesilkoy, Etiler, and Ulus areas and along the shores of Bosphorus. However, the rising trend in housing is the master planned (gated) communities. Today’s Istanbul offers to homebuyers more than 100 different master planned (gated) community options, which are especially located at the northwest and northeast of Istanbul in regions such as Kemerburgaz, Zekeriyakoy and Omerli. Typical average sales price of a condo is in the 400 – 1.000 USD/m2 range and might easily go up to 1.750 USD/m2 in upscale areas. The rents are usually in the range 500 – 1500 USD per month. Single-family houses could be purchased at a price range of 600 – 2.500 USD/m2. The recent market conditions can be described as an oversupplied market. Although the market experienced difficulties in general sense, developers over a certain caliber always attracted attention and maintained desirability. Values on reseller markets as well as first hand sales market have dropped by as much as 30 % in all developments in the last 3 years. Similar figures are also mentioned in the internal marketing reports of all major upscale housing developers. Major projects like Atasehir and Bahcesehir satellite city developments of moderate sales value still keep their popularity and value while the traditional trendy waterfront areas like Erenkoy and Yesilkoy are more likely to lose value. Major new residential developments, which have been planned to start in Riva, northeast of Istanbul seem to have stopped for the time being. Kemer Country Source: Central Bank of The Republıc of Turkey Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services 14 VIII. The Investment Market Although the number of transactions in real estate has increased, 2003 was not a properly good year for construction and housing sector, which have made up approximately 5% of the 2003 Gross National Product. The real estate sector still operates with low profit margins (particularly where modern housing and commercial centers are concerned). Real estate has traditionally been an important area of investment in Turkey and together with the recently decreasing inflation and interest rates, investments especially in housing sector are expected to speed up. The investment market currently comprises mainly of private investors, some corporate investors, and Real Estate Investment Companies (REICs) - the equivalent of the US Real Estate Investment Trusts. Foreign investors are generally available in the retail sector and partially in hotel sector. Transactions are still way below the desired numbers today, as alternative financing sources are not yet available in Turkey. However, the financing alternatives are expected to increase towards the end of year. In 2003 yields have stabilized and are expected to slightly decrease in 2004. There are still a number of office buildings and industrial estates for sale in Istanbul as of date. This is due to the fact that most landlords are still short of cash. Adding to this factor is the fact that banks have decreased in number and demand from this sector decreased and banks as owner occupiers want to dispose of excess space. Banking Regulation and Supervision Agency (BDDK) and Privatization Administration sold a major property inventory by placing these on auctions. These were formerly on the accounts of nowclosed banks. Of these properties for sale, Former Sumerbank Facility in Beykoz was sold at the price of 29.750.000 USD. Turkey seeks to improve its investment climate through administrative streamlining, an end to foreign screening and strengthened intellectual property legislation. As Turkish real estate is experiencing some opening by way of a new regulation on foreign property ownership, which enumerates the group of countries, whose citizens and legal entities are allowed to acquire land. New foreign vehicles as well as Swiss and German Institutional investors have been attracted to the country. Furthermore, property transactions are expected to accelerate along with development of special vehicles such as mortgage, securitization and asset management. Source: Central Bank of The Republıc of Turkey Source: Central Bank of The Republıc of Turkey Prepared by Kuzeybati Worldwide Real Estate Services 15 IX. The Hotel Market In Europe in 2003, some important destinations were particularly affected by the decline in longhaul traffic caused by the war in Iraq and by the increasingly weaker USD. However, a strong Euro is likely to continue stimulating traffic from European countries to destinations outside the eurozone such as Turkey and Croatia. Tourism is a key factor for improving Turkish economy with tourism revenues, which reached a value of approximately 8,5 billion USD in 2002 accumulating to 4,7% of GNP and a value of 9,3 billion USD in the first eleven months of 2003. In year 2003, the number of tourists visiting Turkey has increased 5,3% to around 14 million tourists, where 3 millions arrived in Istanbul by all means of transport. There are 2 international airports in Istanbul, where flights are handled to all major destinations of the world. The target for tourist arrivals in Istanbul is 10 millions in the future. Due to these favorable conditions, occupancy rates and average room rates as well as profitability relatively increased. Istanbul’s hotel market is basically a recreational / pleasure and increasingly a business, incentive market and under demand from European, Russian and US travelers. Tourist hotels usually concentrate within the historical peninsula and Taksim districts while business hotels are usually between Taksim and CBD of Istanbul. The Eurovision Song Contest 2004 and F1 race starting in 2005 are the organizations, which are expected to increase the demand for hotels rooms and hence the need for new hotel developments. The Four Seasons Hotel was chosen to be the first in Europe and third in the World at the category of hotels with rates between 250 – 400 USD at a contest organized by TRAVEL+Leisure magazine in 2003. Ciragan Kempinski and Conrad Hotels have also been rewarded. Business and commercial travelers are more important for the 5 star international hotels. Occupancy levels were running at close to 70 % for most categories. Average rates have been as high as 245 $ for some hotels. At present there are 25 five star (7509 rooms) hotels in Istanbul. In addition to the Istanbul Convention center in Elmadag, five convention centers with capacity between 600 and 2000 people serve for congress tourism in Istanbul. Prepared by Kuzeybati Worldwide Real Estate Services Four Seasons Hotel As the center of Eurasia, Istanbul is preferred by many international hotel brands such as Hilton, Conrad, Sheraton, RadissonSas and Four Seasons. Recently, the managements of the privatized hotels Buyuk Tarabya and Macka have been given to operators Millennium Copthorne and Radisson groups. The re-construction of Macka Hotel continues. The renovation works for Grand Tarabya Hotel and construction for Novotel Hotel in Zincirlikuyu seem to be postponed. Construction of Four Seasons Hotel in Besiktas continues. There are also 8 more pipeline hotel projects for Istanbul. Source: Kuzeybati Worldwide Real Estate Services Source: Ministry of Tourism and Kuzeybati Gayrimenkul 16 X. Forecast At the aftermath of the crisis, 2003 has been the year of continued recovery. Towards the end of year rates have stabilized and are expected to increase slowly towards the middle of 2004. Vacancies tend to decrease. In 2004 the market is expected to be in an oversupply condition except for hotel, retail and leisure properties. However the demand for highly qualified properties especially for offices increases. Although the weakness of the US Dollar has been reflected on the rates, all Turkish properties are still at the low of a lifetime figures in terms of USD. Yields have stabilized. Indicators show that short-term investors should not stay late to start buying especially high yield properties. Long-term investors are expected to come to the market in the second half of 2004. Recently, the foreign investors such as German and Swiss funds, from which Turkish investors will also benefit, are entering or planning to enter the Turkish market. Source: Kuzeybati Worldwide Real Estate Services Prepared by Kuzeybati Worldwide Real Estate Services 17 Real Estate Rates in İstanbul Rents 2004 Annual Rental Level per m2 Forecast Class A Office Space CBD Class B office space CBD Class A Office Space Suburban Prime Retail Space Downtown (High Street & Shopping Centres) 123 77 123 615 138 31 46 69 32 - 246 - 138 - 200 - 1.231 - 385 - 65 - 66 - 215 - 66 USD USD USD USD USD USD USD USD USD Stable Stable Stable Increase Stable Prime Retail Space Suburban Prime distribution facilities Prime production facilities Prime residential Secondary residential Construction Costs Prime Office Space Prime Industrial Prime Residential Purchase Prime office Secondary Office Prime Industrial Secondary Industrial Prime Residential Secondary Residential Land Prime downtown office Prime suburban office Prime residential Prime industrial Prime retail Inıtial Yields Prime Offices Prime Retail Prime Industrial Prime Residential Stable Stable Stable Stable Forecast Rate (per m2) 400 150 400 - 500 - 250 - 550 USD USD USD Stable Stable Stable Rate (per m2) 1.200 350 300 175 1.000 350 - 1.800 - 700 - 375 - 275 - 1.850 - 650 USD USD USD USD USD USD Forecast Stable Stable Stable Stable Stable Stable Rate (per m2) 1.100 550 500 125 600 - 1.800 - 900 - 1.100 - 250 - 1.800 USD USD USD USD USD Forecast Stable Stable Stable Stable Stable % 10,3% 15,0% 10,3% 6,9% Forecast Decrease Decrease Decrease Stable 1. Rental rates include withholding tax; exclude operating fees. 2. Construction costs do not include land related costs. 3. Transfer tax (% 1.5) and/or VAT (18 %) is applicable to the above purchase rates Prepared by Kuzeybati Worldwide Real Estate Services 18 XI. Real Estate Legislation Legislation for foreign investments in Turkish real estate has recently changed. The requests by non-resident individuals and corporate entities, to own property in Turkey are assessed on the basis of the reciprocity principal. Foreign companies can now directly purchase properties in Turkey whereas before foreign companies needed to establish local subsidiaries to buy real estate. Non-resident individuals and foreign companies can now freely buy real estate anywhere in Turkey except for restricted zones whereas under the former legislation such purchases were only possible in municipal areas. Also, each foreign investor can normally buy up to 300,000 m2 of land in Turkey. Requests for further land is subject to the approval of the Council of Ministers. Citizens of and companies established in the following countries are allowed to own property in Turkey. Requests by citizens and corporate entities of countries other than the ones listed below to purchase Turkish properties will be evaluated by the Directorate of Land Registry in Ankara. Andorra Argentina Australia Austria Bahamas Bangladesh Barbados Belgium Belize Benin Bolivia Bosnia and Herzegovina Botswana Brazil Cameroon Canada Cape Verde Central African Republic Chile Colombia Costa Rica Côte d'Ivoire Croatia Denmark Ecuador El Salvador Estonia Finland France Gabon Germany Ghana Grenada Guatemala Guinea Guyana Haiti Holland Honduras Hungary Ireland Israel Italy Jamaica Japan Liechtenstein Lithuania Luxemburg Malawi Malaysia Mali Malta Mauritania Mauritius Mexico Monaco Mozambique New Zealand Nicaragua Nigeria Norway Panama Paraguay Peru Philippines Poland Portugal Republic of Korea San Marino Senegal Serbia and Montenegro (Yugoslavia) Singapore Somalia South Africa Spain Sri Lanka Swaziland Sweden Switzerland Tanzania United Kingdom Uruguay USA Venezuela Dominican Republic Latvia Prepared by Kuzeybati Worldwide Real Estate Services 19 Property taxes Taxable base for property taxes is the tax value of property, which is defined as purchase-sale value of property at the time of declaration. Each year, properties are subject to a revaluation at a level declared by the government. Property value declared may not be less than the minimum amount determined for the area by the related special valuation commissions. Property tax returns are filed in 4-year periods and annual taxes are paid in two equal installments. 2006 will be a filing year. REVALUATION RATIO BY YEARS Property transfer tax The acquisition of Turkish property is subject to 1.5 % transfer tax. The same charge will be applicable when the property is sold. VAT will also be applicable on company to company or company to person sales. Residential properties of usage area less than 150 m2 are subject to 1 % VAT in stead of the regular 18 %. Since there are very many exceptions to these taxes it might be wise to consult a tax specialist. Years 1990 - 1991 1991 - 1992 1992 - 1993 1993 - 1994 1994 - 1995 1995 - 1996 1996 - 1997 1997 - 1998 1998 - 1999 1999 - 2000 2000 - 2001 2001 - 2002 2002 - 2003 2003 - 2004 Rates 55,50% 54,10% 61,50% 58,40% 107,60% 99,50% 72,80% 80,40% 77,80% 52,10% 56,00% 53,20% 59,00% 28,50% Capital Gains In general, all capital gains obtained from the sale of property are subject to income taxation. In the calculation of the net capital gain, the cost of acquisition can be re-calculated by escalating with revaluation rates announced by the Ministry of Finance. The years in which the property was acquired or sold are excluded from the escalation. Earnings from the sale of real estate (which is held for at least two years) that are added to capital are exempt from corporate tax until end of 2004. However a 10 % withholding tax is applicable to the capital gain. Non-residents who do not maintain continuing trading or agricultural activities in Turkey are required to file a tax return for the capital gains within 15 days from the date of sale. Annual tax rates for different types of properties are as follows: Land Buildings Residential buildings Fields These rates double including Istanbul. 0.3 % 0.2 % 0.1 % 0.1 % in metropolitan areas Prepared by Kuzeybati Worldwide Real Estate Services 20 Depreciation Government Legislation The Ministry of Public Works, based in Ankara with regional offices throughout the country, is responsible for approving new projects for land outside municipal boundaries. The Ministry of Environment is responsible for approving environmental impact assessments for factory projects planned outside industrial zones. Further reviews are necessary for sites near military zones: in such areas, the developer must obtain approval from the local military commander. Property should be stated at historic cost price. In Turkey, an annual depreciation charge of 2 to 4 % on buildings (land is not depreciable) is allowed. The rate of depreciation on production facilities is 4 %; the rate applicable to administrative buildings is 2 %. Rates higher than the aforementioned standard rates are permitted if they can be substantiated. Depreciation of leasehold improvements is calculated on the basis of the duration of the lease period and in equal installments over the life of the lease. Under certain conditions, property within commercial organization can be re-valued without having taxation implications. However, depreciation is calculated based on historic costs. Municipal Legislation Rental Income Net rental income is taxable in Turkey. Rental income acquired by corporate entities is included in annual corporate income tax return and is subject to 30 % corporate tax. Additionally, a levy of 10 % is imposed. Corporate tenants are normally required to pay withholding tax in the name of the individual landlords. In the case of corporate landlords, tenants are required to pay VAT instead of withholding tax. If income earned in Turkey consists of only rental income that has been subject to withholding tax, non-residents are not required to file an annual tax return. Property owners are required to file their rental income every January unless they have other income. In such a case the filing month is March. Property related costs such as maintenance, repairment, insurance and interest are tax deductible. Stamp taxes are normally shared among sides of the rental contract. Land within municipal boundaries is controlled by the municipality. There are exceptions to this. The Ministry of Tourism may designate an area for tourism development, and special interest groups, such as the Historical Buildings Council and the Bosphorus Planning Authority in Istanbul, may restrict development for areas within their jurisdiction. Managements of Industrial Zones take over the responsibility of Municipalities within the zones. For land within municipal boundaries, the municipality may have a zoning plan designating permissible construction size and usage for each lot within the zone. As an alternative, lot owners may have to submit their own plan for the area, showing roads, green areas and anticipated building sizes. Once a zoning plan is accepted, the specific building project, including elevations and plans, must be submitted for approval by the municipality. Only then may construction start. Construction must be completed within five years of the issues of license provided that the construction starts within the first two years of issue. When finished, the municipality will inspect the site to ensure compliance with the approved plan and issue certificate of completion. Further permission is required to occupy the building. Prepared by Kuzeybati Worldwide Real Estate Services 21 Withholding Tax and Funds Cuts in Commercial Leases THE LANDLORD REAL PERSONS FOUNDATIONS AND ASSOCIATIONS COOPERATIVES GOVERNMENT UNITS COMPANIES TAX EXEMPT FOUNDATIONS AND ASSOCIATIONS BANKS AND INSURANCE COMPANIES WITHHOLDING TAX CUT % LEVY % TOTAL CUT % GROSS RENT MULTIPLIER VAT BIT 20,00% 2.00% 22.00% 128.21% 0,00% 0,00% 20,00% 20,00% 0,00% 0,00% 2.00% 22.00% 2.00% 22.00% 0,00% 0,00% 0,00% 0,00% 128.21% 128.21% 100,00% 100,00% 0,00% 0,00% 0,00% 0,00% 18,00% 0,00% 18,00% 0,00% 0,00% 0,00% 0,00% 100,00% 0,00% 0,00% 0,00% 0,00% 0,00% 105,00% 0,00% 5,00% LEVY: 10 % OF WITHHOLDING TAX ALL CUTS ARE DEDUCTIBLE FROM GROSS RENT Type of ownership Standard lease contract Lease duration Reviews / Indexation Renewal Lessor's obligations Lessee's obligations Basis of Measurement Unit of Measurement Rental Practices Agents' leasing fees Real Estate Taxation Trading costs Management costs LEASE INFORMATION Freehold and leasehold Yes 3 - 5 years, subject to negotiation. For Turkish Lira payments - annual indexation based on cost of living index. For US $ payments - annual indexation usually 2 – 5 %. Option to renew usually for one or more period Structural repairs Operating costs, fit-out costs, insurance, 3 months deposit Gross external area US $ per sq m per month Rent payable monthly or quarterly, usually 1 months’ rent as deposit 10 - 12 % of annual rent payable by tenant and 5% by landlord Variable by location, age, size and condition. Transfer tax: 1,5 % Agents fees: 1 - 3 % Legal fees: By agreement VAT: 18 % BIT: 5% Usually 8 - 12 % of rent Prepared by Kuzeybati Worldwide Real Estate Services 22 Sponsors For further information about the summit, please visit: http://www.bluechip.com.tr/gyoderprgen.htm?Submit2=Summit+Program Prepared by Kuzeybati Worldwide Real Estate Services 23 KUZEYBATI ADDS VALUE TO PROPERTY ALL AROUND TURKEY Services Brokerage Landlord/Seller Representation Tenant/Buyer Representation Investment Services Appraisal / Valuation Asset Management Portfolio Management Urban Planning Studies Feasibility Studies Market Research Development Consultancy Fields of Service Office Buildings Industrial Buildings Shopping Centers Hotel Properties Public Housing Related Land Nazmi Akbacı Ticaret Merkezi No:192 Maslak / Istanbul 80670 TURKEY Tel + (90-212) 286 18 45 Fax + (90-212) 285 06 69 E-mail info@kuzeybati.com.tr For further information on agency services please contact: Murat Ergin E-mail: murat.ergin@kuzeybati.com.tr For further information on market research and consultancy services please contact: Mehmet Ali Ersoy E-mail: mehmetali.ersoy@kuzeybati.com.tr Prepared by Kuzeybati Worldwide Real Estate Services 24