Over the past decade, developers are already building homes, malls and office buildings with a record pace. The true-estate industry has anchored a 5% average rate of growth from the $800 billion economy since 2002, accounting for 30% of gross domestic product over that period, based on Intes, Turkey's union of construction-industry companies.
But a sharp decline from the Turkish lira and rising interest rates, as well as political turmoil since last year, are threatening to slow that growth engine. Investors are also reluctant to acquire real-estate during a 16-month election cycle that could chart Turkey's path for the next decade.
Already, apartment for rent have slumped because buyers have to pay higher mortgage rates on mortgages, now at the average 14% compared with record lows around 7.4% in May 2013.
"Higher rates plus a weakening currency are negatively impacting property sales because those can't prepare yourself and ... have no trust," says Fulya Kenber, a 58-year-old Century 21 broker in Istanbul's central Besiktas neighborhood.
Emlak Konut GYO, EKGYO.IS -0.45% the most important Turkish real-estate developer, said home sales plummeted 39% in January compared to the previous month. Analysts said the home and property giant is forecasting sales of 10,000 units this year, down from 15,175 a year ago.
"Basically said there's quite high demand and the ones aren't scared, I would be lying," says Burcu Alim, a sales representative at developer Agaoglu's headquarters in Atasehir, an old pasture around the Asian side of Istanbul which has been transformed into a dense district of soaring apartment blocks.
Meanwhile, the lira's slump—up to 30% into a record low contrary to the dollar—is which makes it harder for some commercial tenants to repay rents. Most retail leases in Turkey require stores to pay for rent in euros or dollars, but sales are common in lira.
Subsequently, numerous landlords were forced to produce emergency price cuts to aid tenants pay bills. Turkey's second-biggest developer, Torunlar GYO, said it fixed the exchange rate at 1.95 liras per dollar in January—then an 18% discount—for tenants at Mall of Istanbul, a landmark project just moments far from Turkey's biggest airport.
The plummeting lira also has created headaches for many people developers, whose foreign-currency debt due within twelve months surged greater than fourfold to $101.3 billion in 2013, central bank data show.
Investors took note, punishing real-estate companies with large external debt no foreign-currency income. Sinpas GYO's shares have dropped 56% because the lira selloff were only available in May following U.S. Federal Reserve signaled a stop to its monetary easing. Turkey's benchmark BIST 100 Stock Index fell 34% from the same period.
As the lira fell, pushing prices higher, the central bank in excess of doubled an important rate to aid the currency and convince investors it'll fight inflation. Analysts the move will hamper the economy.
"I do not think the building industry can set the framework for and always support economic growth," says Gulay Elif Girgin, chief economist at Seker Purchase Istanbul.
To be sure, the slowdown may show to be a temporary hiccup.The country's young population, having a median era of 30, supports need for roughly 400,000 new homes per year, analysts say. Rising incomes that tripled to a lot more than $10,000 since 2002 also have stoked interest.
Also, while mortgage rates have jumped from record lows, they're still below historically prohibitive rates which are as high as 50% in 2002. Pm Recep Tayyip Erdogan's Justice and Development Party, or AKP, continues to embrace real-estate development like a driver of growth possesses unveiled plans to support property prices.
But GDP growth is forecast to fall by half to two% this holiday season and doubts are growing about several megaprojects promoted from the government, including turning a large swath of Atasehir right global financial center plus a $30 billion want to develop Istanbul's third airport.
Also, sales and leasing will have to pick up to the real-estate engine to hold humming. That will get harder as skyscrapers rise within the Asian and European hills lining the Bosporus.
Some developers like Agaoglu have resorted to zero-fascination with-house financing to slice overall loan rates for investors and close sales. Most the firms offer deep discounts as high as 40% to lure buyers before construction starts.
Turkey's government has been using land sales and discounted loans to spur homeownership not less than three decades. Consider the AKP came to power in 2002, the government has stepped around the gas, boosted by strong demand.
Since 2007, property values have jumped by 36% nationwide, in line with emerging-markets real-estate data provider Reidin. Demand am strong that perhaps the 2008 collapse of Lehman Brothers Holdings Inc., which triggered a universal financial meltdown and dragged Turkey in a recession in 2009, didn't hurt local home buyers' appetite.
But supply may be catching up with demand. Inside four years before the economic turmoil, new apartments averaged 558,000 annually. That compares approximately 200,000 as Mr. Erdogan's government came to power.
Meanwhile, investors have been spooked by persistent political unrest that first boiled in June with protests over Mr. Erdogan's want to develop a mixed-use building that has a plaza in Istanbul's central Taksim Square.
The environmentalist sit-in become nationwide antigovernment demonstrations when police used lacrimator and water cannons to disperse activists. And recently, Mr. Erdogan's allies have been ensnared in the bribery investigation mostly tied to construction deals, forcing a cabinet shuffle in December and threatening the AKP's antigraft record prior to elections.
Turkish officials hope that political turmoil will calm once elections are no longer, and home buyers will resume the market.
"Real estate property could be the biggest money generator for your government and possesses been a decisive aspect in generating wealth, containing spread throughout individuals as property prices rose," said Bertug Tuzun, an analyst at Ak Investment in Istanbul. "The government is sustaining real-estate demand having its projects."
A digger works over a plot that will host an office building tower in Atasehir, an Istanbul neighborhood the federal government desires to turn into a worldwide financial hub. Emre Peker/The Wall Street Journal
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