Real estate risk/return disconnect in Turkey
HDN | 3/25/2010 12:00:00 AM | GARY S. LACHMAN
Turkey has arrived and can no longer be considered a high-risk backwater for grey money deals with unrealistically high returns.
Over the past six months our law firm, Lachman & Yeniaras, has seen an unusual amount of fruitless activity between private equity real estate investors and local developers in Turkey. Institutional investors with portfolios in the $150 million to $1.5 billion range have established offices, formed ready to deploy special purpose vehicles, or SPV's, and spent countless hours at meetings and lunches chasing the same deals with the same dismal results.
The foreign private equity firms want +12 percent returns to compensate for country risk, and locals scratch their heads, chuckle, and think, "what risk?" The locals' mindset is more about whether offering an 8 percent return is too generous, and the foreign private equity firms have made up their minds that, for a sub-double digit return, they will stay in Western Europe or North America. The result is deal stagnation.
How does the emerging market professional reconcile the philosophical attitudes, economic and political biases, inconsistent legal transparency and financially bruised egos of the foreign private equity firms with successful owners of local businesses? Perhaps the first step that an attorney or business consultant to foreign capital must take is to fully explain the mentality of the market. This action takes the form of an economic reality check. For Turkey, this is not difficult. We are a huge country, both in terms of geography and population. We are a political democracy with relatively transparent politics. Our banks are, for the most part, financially sound and signed on to the Basel accord before even the United States did. The land title registration system is centuries old and is so functionally excellent and accurate that the title insurance industry has had little success selling their policies (so standard and required in the U.S.) here in Turkey.
We have a vibrant stock exchange and well-managed Capital Markets Board. The level of mergers and acquisitions strategic advisory is as sophisticated as in any first world country. International law firms are beginning to penetrate the market, and major accounting firms like KPMG, E&Y, and PWC have been here for years competing for market share from powerful and knowledgeable Turkish accounting firms like Erdikler Taxand.
In summary, Turkey has arrived and can no longer be considered a high risk backwater for gray money deals with unrealistically high returns. The great irony is that no matter what the reality may be, there will always be naive and greedy people who delude themselves (or allow themselves to be deluded) that it is possible to consistently earn double digit returns anywhere.
Witness the victims of Bernie Madoff. If they had only come to play golf at the Istanbul Golf Club instead of the Palm Beach Country Club, we could have taught them a few things about deals that sound too good to be true.
The answer to this dilemma is found in developing one’s cross-cultural communication skills. The emerging market professional must hone these skills to be able to communicate to the foreign client that the risks are not as great as they may seem, and the rewards (while slightly better than those to be found in Poland, Austria, Germany or the U.S.) cannot be much above 8 to 10 percent for legitimate opportunities.
If it sounds too good to be true (like a 12 percent return and a 3-year payback for a trophy company or building), then it probably is. Some of the data is not accurate or there are undisclosed risks. During my first two years as a special counsel on foreign law at a major Turkish law firm, at least half my clients were very successful U.S. and U.K. investors and developers who had gotten themselves in serious trouble in Turkey because they chose the wrong professional consultants and failed to perform the most obvious type of due diligence: social due diligence.
If they had simply asked the right people about those they were about to partner with, they would have been surprised at the revelations. Unfortunately, they were too concerned about someone else beating them to the "opportunity." Well, the good news was they got the deal; the bad news was they got the deal.
* Gary Lachman may be contacted at [email protected] and found on the Web at www.lachmanyeniaras.com.