In dire need of political victories after a number of setbacks, both domestically and on the international scene, President Recep Tayip Erdogan is tapping Islamic finance, resuscitating defunct Emlak Bank as an Islamic bank to stimulate Turkey’s depressed real estate sector, once a key driver in the country’s past economic miracle. MARC ROUSSOT reports.
Turkey is fighting. The battles are ongoing, with Kurdish PKK/YPG militias in Northern Syria, with the US over a Russian missile deal, and more importantly with a spiraling economy as real estate, Turkey’s economic engine, has stalled.
Against this backdrop, unemployment has hit 14.7% in January, the highest in nearly a decade, and Moody’s Investors Service expects the Turkish economy to contract by 2% in 2019. But with the help of Emlak Bank, a fully-fledged Islamic bank launched in March, President Erdogan hopes to reverse the current trend, put the economy back on track and rebound politically following the recent municipal election debacle.
Incepted by the Ministry of Treasury and Finance, and headed by Berat Albayrak, a Turkish businessman and former minister of energy, and also the president’s son-in-law, Emlak Bank is currently focusing on strengthening the supply chain for construction.
Despite the growing presence of Turkish real estate companies in Africa and the Middle East, the financial institution will first fund domestic projects and primarily tap manufacturers in the building materials sector as well as individuals seeking to invest in housing.
With a capital of TRY750 million (US$129.37 million), the bank plans to open 15 branches this year, have TRY5 billion (US$862.44 million) in assets and over TRY30 billion (US$5.17 billion) within five years.
The bank has one main target, summarizes Ozgur Altuntas, the manager of the Strategic Planning Department at Emlak Bank: “Becoming the market maker bank of the real estate sector in five years.”
To achieve this goal, the bank is working on several financing models, including supply chain financing, asset management, certificates based on purchasing rights, real estate investment funds, mortgage certificates, savings systems and a rent registration system. IFN also understands that Sukuk will play an important role, as Emlak Bank will use capital market products intensively.
Overall, the bank aims to reach more customers and increase the total market share of participation banking by developing real estate-based capital market products, explains Abdurrahman Cetin, the head of the Strategy Development Department at the Banking Regulation and Supervision Agency.
Water under the bridge
Emlak Bank is not new. First established in 1946, the bank was allegedly used to fund suspicious and corrupt housing projects. Along with other government-run financial institutions, the bank made losses of up to US$20 billion and was closed in 2001 as part of pledges made to the IMF.
“The 2001 crisis was a very important milestone for the Turkish banking sector. It triggered the establishment of a strong and specialized regulatory body called the Banking Regulation and Supervision Agency. Moreover, very powerful regulations have been introduced and Emlak Bank hired very professional bankers,” states Ozgur, to clear up any doubts on the bank’s sustainability.
The Banking Regulation and Supervision Agency is on the same page, certain that history will not repeat itself and that old practices have been expunged. In total, after President Erdogan’s decision to re-establish the bank, 7,229 overdue files were reviewed and transferred to the Savings Deposit Insurance Fund of Turkey and a new management was introduced.
“Thus, a new page was opened and a new participation bank was established with its strong capital structure, experienced staff and clean balance sheet. Under normal circumstances, the examination and transfer of files coming from the past is a very long process. This process was completed in a short period of two weeks,” Abdurrahman tells IFN.
From bad to…
Emlak Bank has gotten rid of its past bad habits. But the bank is making a comeback in a particularly difficult environment. The House Price Index has been declining for two consecutive months in December 2018 and January 2019, according to the central bank. The price of homes had never fallen since the apex bank started publishing the data in 2010.
The real estate sector is a genuine indicator of Turkey’s economic health, or the lack thereof, as the construction industry has been the biggest driving force behind economic growth and employment for many years. Moreover, housing construction represents 40% of the global construction sector.
“Due to the rise in interest rates, the cost of buying housing increased and demand decreased. Emlak Bank was established to create alternative financing and sales channels for houses that companies could not sell in the market. However, in the coming years, with the increase in consumer confidence, we think that the market will be on the rise again,” analyzes Ahmet Ozgur, the director and head of valuation and advisory services at Colliers International, a Canada-headquartered global real estate services and investment management company.
Despite its flaws, Turkey’s real estate market has actually been very appealing to foreign investors since the Turkish lira took a huge hit on the back of 2018’s currency crisis. According to the Turkish Statistical Institute, 39,663 properties were sold to foreign investors last year, the highest number ever.
The Banking Regulation and Supervision Agency also forecasts growing demand on the back of Turkey’s demography. “There are 24.5 million students in Turkey. Approximately one million students attend the economic cycle each year. About 600,000 couples are married each year. Considering all these numbers, it is clear that significant opportunities can be developed with the right financing models,” Abdurrahman expounds.
This article first appeared in IFN Volume 16 Issue 16 on the 23rd of April 2019