OBG talks to Erman Ilıcak, Chairman, Rönesans Holding

 Interview: Erman Ilıcak

What obstacles face developers in urban renewal?

ERMAN ILICAK: Since so many buildings are not earthquake resistant there will be massive renewal in cities vulnerable to earthquakes. The government has passed a bill for city transformation and renovation, and both legally and illegally constructed buildings will be evacuated and demolished under each region’s master plan. Municipalities need to create attractive environments for residential developers to invest in renovation programmes. One bottleneck to be addressed in metropolitan cities is narrow roads, which do not permit access for fire brigades or ambulances. In the event of a disaster, if one building collapses over a road all access to the neighbourhood can be cut off. The legislation ensures new structures will have underground parking so that streets will have fewer parked cars. The other challenge is enlarging the streets and allowing developers to build taller buildings on larger parcels of land. It is currently difficult to buy buildings as a group to achieve a larger footprint, but this would permit for more green space between the parcels. Again, this will allow municipalities to plan for wider streets free of parked cars, neighbourhoods with more green areas and trees, and earthquake-safe buildings erected to new standards. The challenges facing developers on this master planning is to get equipped for larger-scale projects and to get properly mobilised to acquire bigger plots of land. This means encouraging flat owners to sell or to agree to be moved to other locations temporarily, while their rents are paid by developers. Higher building coefficients need to be granted by the municipalities to trigger such a renewal mechanism, as this will attract developers.

How much potential do secondary cities provide for shopping centre developers?

ILICAK: After the shopping centre boom in the biggest cities like Istanbul, Ankara, Izmir, Bursa, Adana and Gaziantep, mall developers moved to secondary cities and even most mid-sized cities have more than one shopping centre now. Developers are focusing on building smaller centres for cities with populations of less than 300,000 people. If we compare such cities to their EU counterparts, in terms of gross leasable area (GLA) per 1000 people, there appears to be still more potential in such cities. However, it requires greater innovation to deliver the right product for each city.

Rent per sq metre of GLA is a function of the revenue to be made by each shop, which should be calculated to ensure the sustainable rent/turnover ratios are not higher than 14-15% for small to medium-sized shop units. If we compare a medium-sized city with Istanbul or Ankara, the sustainable rental levels are 30% lower. Depending on the return-on-investment calculations, shopping centres still offer the highest in terms of returns overall, but are dangerous in terms of competition. They are followed by office buildings and hotels in terms of returns, while returns on residential developments are rising in the profile of mixed-use projects.

What projects are local banks interested in financing? Is getting funding becoming more difficult?

ILICAK: Turkish banks are financing commercial real estate projects as well as residential projects, because of their liquidity. We can say Turkish banks have filled the role once played by foreign real-estate-specialised financial institutions. The subsidiaries of foreign banks in Turkey are competing with domestic banks, even though the parent bank may be suffering liquidity or capital adequacy ratio problems abroad. Due to the slowdown in EU economies, banks are more selective with their clients. However, project financing is still in place – just with higher mark-ups. So far, Turkey has proven itself to be independent from ailing economies in the EU. The economy is still very robust. With the lira stable at approximately $1:TL1.8, we are also seeing many institutional foreign investors in the market, which replaced more opportunistic funds with very short-term strategies, due to the stabilisation of the economy and the lira following the central bank’s policies.