Property Development in Turkey

Property development is the process of building new property: homes, hotels, factories etc. It can either be the development of land into buildings - in which case it can either be previously undeveloped land (green field sites) or land that has previously been used for some other purpose - or it can be the re-development of existing buildings

Making changes to your home or other property can also count as property development. For example, adding a garage or an extra bedroom or a pool. See our Guide to Building or Altering a House in Turkey.

Property development numbers in Turkey

Development is a substantial industry in Turkey, and Turkey very much sees development – both for local people and for residential tourism – as a key factor in its future economic success.

In 2016, 1.34million homes were sold in Turkey and nearly 995,000 building permits were granted.

Who is developing property in Turkey?

Development activity in Turkey is pretty much evenly split between local Turkish companies and international development companies.

Where are people developing in Turkey?

In 2016, the main areas for development were Istanbul, Izmir and Turkey’s other large cities. There was some development in coastal areas, but the huge overhang of unsold residential properties built in the 2008/9/10 era has limited the commercial viability of new development other than in specialist cases. Having said that, there has been a lot of activity when it comes to the development of hotels and other tourist accommodation in tourist centres such as Bodrum.

Types of property developer

Property developers range from huge international companies to private individuals. There is a distinction between the developer of a property and its builder or contractor. The developer is the person who has the idea behind the development and then coordinates the activities of architects, engineers, builders, and other specialists.

You do not need to have any qualifications in order to be a property developer in Turkey, but any construction company wishing to undertake work on new developments must be properly registered as a construction company before they can do so.

There is no restriction on foreigners resident in Turkey undertaking property development and there is no restriction on foreigners not resident in Turkey doing so – except that they will need to comply with Turkish company law when it comes to the appointment of a resident director etc.

Types of Property Development

Large-scale property development

By large-scale property development, we mean (for the purposes of this guide) projects that comprise more than, say, 50 finished units. This is not a legal definition but a practical one.

Small-scale property development

Small-scale property development is usually either building an individual property on an individual plot of land or it is building a small group of properties on a single plot of land. For example, demolishing a large old house and building five smaller houses or apartments on the site.

Alterations to property you already own

This type of property development is very common but completely different in nature from the other two types. See our Guide to Building or Altering a Property in Turkey.

Large-scale property development

The process

Whatever the size of the development, the process of developing a larger project tends to be similar, although individual parts of it will carry more or less weight.

Identifying an opportunity

Property development opportunities abound around the world; but to identify one that is going to suit your requirements you will first need to know about what is available in the marketplace. Generally, this means having a detailed knowledge of the country and area concerned. For someone who does not have that knowledge, lots of proposed development opportunities can be superficially attractive but doomed to failure as they are beset by lots of hidden (and expensive) problems.

This does not mean that you cannot execute a large property development project in a country or an area that is new to you. Many successful development companies have expanded into new areas. However, what it does mean is that you will have to be even more cautious than usual when selecting a development project and spend a lot more time and money on the process of due diligence before you commit to it.

Despite the fact that you can develop in unknown locations, most people would agree that it is easier, and usually more profitable, to stick to areas that you know. This applies both to geographic areas and to areas of activity – sticking, for example, to residential development or hotels or wherever your area of expertise lies.

This often leads foreign developers who see opportunity in Turkey to team up with experienced local people and companies.

Preliminary feasibility study

Once you have a potential project that your instinct and experience tell you is viable, you will need to carry out a preliminary feasibility study.

The extent of this and what is included in it will vary enormously from one developer to another. Some very successful developers rely solely on their instinct before embarking on a full due diligence exercise. Others have a quite sophisticated process for preliminary feasibility studies, involving architects, financial planners, and the like – even at this very early stage.

The most important thing about a preliminary feasibility study is that you need to establish that there is a market for the project, that you can keep your costs under control and that the margins on it are substantial. Usually, the potential profit identified in your preliminary feasibility study is rapidly eroded as you get into full due diligence and so you need to make sure that the numbers look exciting enough to make it worth going any further.

In Turkey, feasibility studies are prepared either by architects or by project engineers. The latter tend to be cheaper and found more often in projects involving fewer than about 50 units. Whichever way you go about it, such studies are always quite expensive. For a project involving the construction of, say, ten homes on a fresh plot of land, you should budget €5,000-10,000. This is just for the feasibility study, not the detailed project design.

Expression of intent

Assuming your preliminary feasibility study looks positive, you will need to reach an agreement in principle with the person who is selling the land or project. This agreement, too, should always be subject to satisfactory due diligence.

Despite the fact that this is a very weak agreement (because there will be so many ‘get out clauses’ that it is almost always possible to cancel), the agreement is still important as it reflects a moral, and sometimes legal, obligation to proceed with the project and not to deal with others whilst the investigations are continuing.

Of course, any agreement of this kind is only as good as the person you’re dealing with and so, before entering even this type of expression of intent, you should make sure that you are happy doing business with the other party involved. It can be worth doing, or getting your lawyer to do, some background checks on the person concerned. Business-orientated lawyers can usually help you with this.

The parties often prepare preliminary expressions of intent themselves, rather than getting lawyers to do it. This may be fine if both parties are experienced, but you should always use the services of a lawyer to produce even this basic document if you are relatively inexperienced and/or you are dealing with a country whose legal system is not familiar to you and/or you are not fluent in Turkish. If you do not, the danger is that something that you think of as a mere preliminary expression of interest may turn out to be legally binding upon you.

Due diligence

Due diligence is the process of making sure that what you have been told or believe to be the case is true.

The nature of the due diligence required in any project will vary, but it’s likely to include (at least) the following headings:

  • The local market
  • Is there a demand for the proposed product?
  • What are likely sales prices?
  • Does the land have good legal title?
  • Are there any restrictions on what you will be able to do on the land?
  • Does the land have (or can you obtain) permission to build what you want to build?
  • Will all the services that you require – water, electricity, roads etc. – be available?
  • Is the professional support you need (architects, project engineers, etc.) available in the area and/or will you be able to use the professionals you have previously worked with to deliver this project?
  • What will be the costs of construction?
  • Where is the finance going to come from?
  • How will you be able to sell the project?
  • How well does the legal system work and will you be protected if anything goes wrong?
  • How will you sell the units you are building – and at what cost?

Special points for Turkey

In Turkey, there are some special issues that require particularly careful attention.

Building permission is complex

Each municipality operated within a legal framework of what can and cannot be built. There is sometimes a little room for manoeuvre but, generally, not very much. Your project might be brilliant and beautiful but, if it is not of the type authorised in the area where you want to build, it will go no further. Thus, it is usually important to clarify this issue before you embark upon detailed investigation of the project.

There is a practical problem here. The only person entitled to negotiate with the municipality is the current owner of the land. Most municipalities will happily have a general discussion about a proposed project: after all, if it goes ahead you will be bringing employment and wealth to the area. However, most will not commit anything to paper. You can get around this by having a limited Power of Attorney from the owner, permitting you to negotiate with the municipality (but not to enter a binding agreement) and little else.

Restrictions on the professionals you can use to assist with your project

Only architects licensed to work in the area can be used for a project in that area. If you choose to work with your own favourite architect from another area or another country, they must have all their work approved and signed off by a local architect. This can add significantly to cost. It also adds, considerably, to the risk of confusion.

Only legally authorised construction companies can build development projects. Many small builders do not have that registration.

Finance

There is no legal restriction of how much of the sale price a developer can take by way of advance payments. Nor is there any restriction on how the developer can use that money. However, the reality is that buyers are very cautious. This applies equally to local Turkish buyers and to people from foreign countries.

They saw a great many developments in Turkey fail during the period from 2007 to 2011 and they saw a great many buyers lose all or part of the money they had invested.

They are, therefore, now very reluctant to pay large amounts of money to a developer before they take delivery of their property – and, even if they have paid a deposit, they’re very unlikely to be prepared to pay significant further sums unless they see real progress being made with the development. This has an impact upon how your contracts of sale will need to be drafted.

This means that you will need to raise more outside finance than would be the case in some other countries.

Who carries out due diligence?

The ultimate responsibility for carrying out the due diligence on any project rests with the person or company who is going to be the developer of the project.

Having said that, it is usual for a large portion of the due diligence – in some cases all of it – to be contracted out to various professionals.

If you are working in a place where you are unfamiliar with the legal and administrative system and, perhaps, where you don’t speak the language it is essential to seek professional help in this way.

The main person putting together the due diligence pack is likely to be your lawyer or – in some cases – a project engineer but they will, as necessary and directed by you, liaise with and call in the services of people such as accountants, hotel consultants, architects, project engineers, banks and other specialists.

Selecting partners for a development in Turkey

Assuming your due diligence is sufficiently encouraging for you to want to proceed with the project; you will need to select architects, engineers, builders etc. There are over 40,000 registered architects in Turkey.

It is usual for a proposed developer to meet various companies with the necessary qualifications and decide which they would prefer to work with. These people are used to discussing possible projects in this way and, particularly for larger projects, they will usually be happy to spend quite a lot of time in these meetings and doing some preliminary general work in relation to the project in order to satisfy you that you could work with them and that they are capable people. This is usually at little or no cost.

The choice of partners is, of course, critical. When choosing the people you want to work with, make sure that you check out their reputations. It may well be that this is an area where your lawyer will be able to help by using his local knowledge and connections.

Contracts in Turkey

You will need a lot of different contracts for a project of this kind. These will include:

  • A contract for the sale of the land
  • A contract with an architect
  • A contract with a project engineer
  • A contract with a builder or builders and other contractors
  • Contracts for finance
  • A contract with your sales agent
  • Contracts with your individual buyers

It is absolutely essential that all these contracts are prepared by your lawyers.

To prepare them, they will need to understand your wishes very clearly. Expect this process of discussing what you want and need to take some time.

Once they have prepared the contracts, particularly the contracts with your individual buyers, you may want to take their words and convert them into your house style. If you do this, you need to get the lawyers to approve the final version.

See our Guide to Contracts in Turkey for more information on contracts.

Sales

Sales are, of course, essential to any project and you will usually want to test the water at as early a stage as possible to make sure that your offer appeals to the buyers you’re aiming it at: and that your pricing is right.

Under the law of Turkey there is no restriction as to how early you can start your sales activity. However, if you are merely testing the water and have no immediate intention of building the project it would be illegal to take any money at this stage.

A key factor in making sales is choosing the right estate agents.

Whilst it is permitted for developers to sell their own properties, for example, from an office on-site, most developers will use the services of estate agents. It works better for all but the largest developers.

In Turkey, it is still not necessary for estate agents to have any professional qualification or licence, but a developer will wish to make sure that the agent or agents selling his property are perceived in the area to be reputable and well-established. This can make a big difference to sales, especially to local people.

Many developers who want to attract foreign buyers will also wish to undertake marketing and sales in the countries from which those buyers are likely to come. They can either do this directly (for example, by having their own sales offices in the countries in question) or they can use local real estate agents in those countries to offer the properties on their behalf.

Until recently, lots of Turkish developers had their own overseas sales offices but, since the crash, this has become much rarer.

Although an estate agent does not need a professional qualification in order to sell property in Turkey, if you want to sell through agents based in other countries, those agents will need to have whatever qualifications and licences are required in their own country.

In practical terms, even in you appoint agents in (say) Germany or Russia to sell to their citizens you will also need an agent in Turkey to deal with the buyers if they come to Turkey on inspection visits or just to look at your properties. You can either appoint the Turkish agent to be the managing or coordinating agent, or you can carry out that task in-house. Many experienced developers, large and small, prefer to keep in-house control of this crucial task.

Special development opportunities in Turkey

At the moment, the main excitement amongst the development community in Turkey relates to Istanbul generally and, elsewhere, to hotels and residential complexes that operate in the same way as a hotel.

These residential complexes have, for example, a hotel reception facility, bars, and restaurants – but they either offer apartments and villas instead of hotel bedrooms or in addition to conventional hotel bedrooms.

These individual accommodation units – whether villas, apartments, or hotel bedrooms – can be owned by individual investors, who then allow a hotel management company to let their properties as part of an overall project for the site. These developments have the twin advantages of having performed relatively well during the recession of the mid-2000s and of offering buyers a ready-made way of securing some sort of ongoing income from their investment.

However, they do need to be set up very carefully to ensure compliance with both Turkish law and the law of the country where the buyers live.

Another area of activity attracting a lot of attention is the renovation of old city property. In some places, this might be by way of a restoration of the old buildings, but it is, more commonly, by demolishing the old and building afresh, often to a much higher density.

The other main area of current (2017) development opportunity relates to small infill sites within existing developments. In essence, they are the properties needed to finish off that development. They may have been planned but not built when the developer was overtaken by the crisis of 2007-2011. These have been popular as the recession has come to an end, because the developers have been able to acquire the land cheaply and because construction costs in most places are currently (2017) at rock bottom.

Quite a lot of development by foreigners is now done by way of joint ventures with Turkish construction companies.

Small-scale developments

Pretty much the same process applies as applies in the case of large developments but there are two great differences.

The first is that the process of due diligence cannot take nearly as long or be nearly as costly if you are only building a few units. As a result, it cannot involve as many professionals. In many cases, the due diligence report will be prepared by your lawyer and your accountant with the only outside sources of information being costings from your chosen builder and information from your chosen estate agent. Even though due diligence must be more limited, you should not think that this means you do not need to do due diligence on a smaller development. It is still essential.

In general terms, it is a good idea for a new developer – even a developer with considerable experience in another country – to start their career in international development in Turkey with a small development. Even then, they will often not make a profit on that first development. They will, however, learn a lot of lessons and they will generally find that their later, bigger, developments will proceed more smoothly and more profitably if they take this path.

For a novice developer, starting small is almost essential.

 

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