Some buyers are buying such property purely as investors. They usually think that commercial property has less risk than residential property and that you tend to get far fewer problems with your tenants. It is far from clear that they are right.
Others buy commercial property for use in their own business.
It is still very difficult for foreigners to obtain a mortgage to buy commercial property in Turkey. In the last few years it has been difficult even for Turkish people to do so, but most banks will now offer local people a 60% loan-to-value mortgage. We expect that granting mortgages to foreigners will become easier over the next year or two – but you will probably, even then, not be able to borrow more than about 30% of the value of the property.
Should you buy or rent commercial property in Turkey?
If you are buying commercial property for the use of your own business, you will usually have a choice between buying a suitable property or of renting one.
Advantages of buying
- You don’t need to worry about rent increases
- If you manage to get a mortgage you may be able to fix your monthly mortgage payments for the whole duration of the mortgage, so giving you certainty as to your future outgoings
- Property tends to go up in value over time and, if it does, your business will benefit from any capital growth
- If the property goes up in value you may be able to re-mortgage it to release additional funds for your business or for yourself
- You will be more free to make alterations to the building to suit your particular business requirements and you will benefit financially if the property increases in value as a result of those alterations
- Under Turkish tax law, any mortgage interest payments will be tax deductible in the same way that your rent would have been
Disadvantages of buying
- Even if you can obtain a mortgage, you will have to pay a substantial amount of the property price yourself. This ties up money that could, perhaps, be used better elsewhere
- You must pay for the maintenance and upkeep of the property, though this is often also a requirement if you rent commercial property
- If mortgage rates change, your mortgage payments could go up, but so could your rent
- If the property loses value, as they did over the last few years, this will reduce the value of your business
- Owning the property restricts your flexibility, particularly if your business needs to grow into larger premises or shrink into smaller ones
- You are in business as (say) a plumber, not a property speculator!
Probably the most significant disadvantage of buying commercial property in Turkey is inflexibility. If you want your business to double in size quickly, it will be much more difficult (and expensive) selling your property and buying another than it would be finding another place to rent.
The advantages and disadvantages of renting are the flipside of the advantages and disadvantages of buying!
What kind of commercial premises should you buy in Turkey?
There are several considerations here.
- How much room do you think you’re going to need now and in the foreseeable future?
- If you can afford to buy more space than you need now, will you easily be able to sub-let any excess?
- Do you need parking?
- Do you need your premises to give a particular image: stability, elegance, high-tech or whatever?
- Do you need lots of storage space? If so, it can be cheaper to buy one unit for your active business use and another (much cheaper and less well located) for the storage of things that you will only need to access rarely.
- Do you want a modern building or a traditional/historic building? Modern buildings are generally much cheaper to buy and run.
- What are your requirements for power and water? Will these be available in sufficient quantity in this building?
- Does the building already have a licence to be used in the way in which you want? If not, will a licence be easy to obtain?
- How much will it cost you to repair and improve the building?
Location is as important for commercial buildings as it is for residential buildings: possibly more so. The price you will pay for the building can vary dramatically depending on its location. For example, a shop on the main shopping street in Istanbul or Bodrum can be five or ten times as expensive as a shop in a second or third-level location.
Do you have a requirement to be in a particular place? If not, you can save a lot of money by choosing a place only a few hundred metres away from the prime location, and often get the side benefits of easier access and a lot more available parking.
Finding the premises
Many of the estate agency firms in Turkey deal with commercial as well as residential property.
Commercial property in also advertised in the local press. However, you should bear in mind that the best commercial property is seldom advertised. It is passed on by word of mouth, often via the estate agent.
Legal steps and due diligence
A contract for the purchase of commercial property is likely to be more complex than the contract for the purchase of a house and so, unless you are very experienced and your Turkish is fluent, you would be foolish not to use a lawyer to assist you.
There are several steps that will need to be taken before you sign a contract:
- Your lawyer will check that the property has all the permits and licences necessary to use in the way in which you want or that they will be easily obtainable
- If the licences are not already in place you may try to negotiate a holding contract- either an option to buy or a contract with a ‘get out’ clause saying that you can cancel it if you don’t get the necessary permissions
- You will probably need to do a survey(inspection) of the building. This will not only look at its structural condition but also at the questions of whether you will be able to obtain adequate electricity, water, drainage, broadband, telephone and other services on the site and whether your proposed use is likely to create any special environmental or other issues.
- You will be wise to obtain detailed estimates for any improvement works, repairs or decorating that you intend to do to make sure that the overall cost of the project is within your budget
- Depending upon what you intend to use the premises for, you may need other professional advisers such as hotel or restaurant consultants
Raising the money
As already indicated, you are likely to need to raise most of the price yourself, from your own resources. You will also need to find all the cost of improvements, repairs and redecoration and the legal and other fees involved in buying the property.
The legal fees and taxes, payable on top of the price of the property, are likely to amount to about 7% of its value but the exact sum will depend upon its size, type, and location. Your lawyer will be able to give you an estimate early in the process.
Which is cheaper – buying or renting?
Obviously, this all depends on your particular case, but there is a general rule of thumb that says that the overall cost of buying a property – mortgage, legal expenses etc. – will be higher for the first five years that you own it than you would pay by way of rent. For the second five years, the figures will probably be pretty much the same. For the third five years and beyond, ownership will probably be cheaper than rental.
This does not take into account and rise or fall in the value of the property.
Buying commercial property in Turkey as an investment
Recently, any property investment, including investment in commercial property, has been a bit of a rollercoaster ride. After years of steadily rising commercial property values, the crash of 2007/8 saw them fall by up to 50%, leaving lots of owners with large losses.
Prices in Turkey have now begun to rise again and the price of prime property – top quality office blocks, shops, hotels etc. in the best locations – is now almost back at 2007 levels. Other property in other locations is still a long way off 2007 values.
Is the increase going to continue or have the price rises gone too far, with the result that there will be a downwards correction? Frankly, nobody knows. The consensus of professional advisers is that commercial property prices will continue to grow for the next few years. This is based on the analysis that there is very limited availability of top-quality property and that the success of the Turkish economy and growing population is generating more demand than there is supply.
If you are thinking of investing in commercial property, you will need to decide which particular type of commercial property is of interest to you. Some smaller investors buy individual shop or office units in secondary locations whereas others swear by prime prestige stores and hotels.
Rather strangely, in Turkey the rental yield you can expect to obtain from commercial property is around the same whichever type of unit you buy. It averages about 10% per annum of the value of the property. However, those who sing the praises of prime property will tell you that they have less problem collecting the rent and fewer voids.
Of course, an alternative to making a direct investment in commercial property is to look at investing in a Turkish version of a Real Estate Investment Trusts (REIT) or something similar.
If you’re thinking of investing in commercial property in Turkey there are four main things you need to bear in mind:
- Volatility. The market has proven that it can go up and down violently.
- Diversification. Because of the high cost of a lot of commercial property you have to be very rich to build up a diversified portfolio and so you’re exposed to the danger of something going wrong with your only building.
- Liquidity. It will always be slow – months not weeks – if you need to sell your commercial property. In bad economic times, it can be virtually impossible to do so.
- Management. The success or failure of any commercial property project depends on good management. You will probably not be willing or able to manage the property yourself and so you will need to find a good, reliable local property management company.
- Commercial real estate in Turkey: overview (Thomson Reuters Practical Law)