Istanbul's Commercial Market
Attracts Foreign Investors

Commercial real estate in Istanbul is showing up on more shopping lists despite political tensions and rising Turkish interest rates.

Foreign real-estate investors, some who have joined with local companies, are betting Turkey's fast-growing economy will fuel a growing appetite for shops, office buildings and apartments with modern amenities. The total amount of foreign investment in the Turkish real-estate market is expected to rise to about $3.5 billion this year from $2.9 billion last year and $1.8 billion in 2005, according to Serkan Gonencler, an economist at Deutsche Securities in Istanbul, a unit of Deutsche Bank AG.

Istanbul's development prospects also ranked first out of 27 European cities, based on the results of a survey of real-estate professionals released earlier this year by the Urban Land Institute of Washington, and accounting firm PricewaterhouseCoopers. Both Istanbul and Moscow, which ranked second for its development prospects, don't have much existing investment-grade real estate and so "they've got a lot of room to grow," according to Stephen Blank, a senior fellow with the Urban Land Institute.

At the same time, Istanbul ranked 11th in a separate risk-adjusted ranking of its total-return prospects, which considers such concerns for newer markets as the potential difficulty of finding buyers.

Some investors are impressed by economic growth that is above average for Europe. The country's gross domestic product grew 6.1% last year, above the 2.8% for the 13 euro-zone countries, though it is decelerating and expected to slow to 5.7% this year as Turkey battles inflation and currency depreciation, according to Moody Corp.'s Economy.com. Confidence in the economy has been fueled in part by business overhauls undertaken by the country and by steps it has taken to join the European Union.

Shoppers browsing in the centuries-old Grand Bazaar.

Still, the risks are many. Voters are preparing for parliamentary elections Sunday that could affect political tensions between the AKP, the country's Islamic-based ruling party, and secularists, a rift that led to peaceful protests in the streets in the spring, averting a greater crisis. In addition, interest rates will need to come down to support demand for real estate, according to Murat Gulkan, an equity strategist for Deutsche Securities in Istanbul. The benchmark bond yield in Turkey has risen to about 18% from about 13% in May 2006, Mr. Gulkan says.

Much of the development is dense and vertical. Hattat Construction Co. is building the Diamond of Istanbul, a three-tower mixed-use complex to be clad in shimmering glass that is vying to be the city's tallest structure at more than 850 feet. The city, famous for its centuries-old covered Grand Bazaar, also has dozens of modern shopping centers under way or planned, and the region is attracting such multinational chains as home-furnishing company Ikea Group, according to Jones Lang LaSalle Inc. of Chicago.

Some investors are keeping a watchful eye on the elections while proceeding with their expansion plans. GE Real Estate Europe, part of General Electric Co., entered Turkey late last year when it agreed with a partner to pay about $50 million to acquire a 51% stake in Garanti REIT, a Turkish real-estate investment trust.

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