A real estate tale

David, a reader of my Hurriyet Daily News columns from Didim, asked me the following question last week:

The real estate market here in Didim is experiencing downside pressure from the economic crisis, as this is an area where a lot of British buyers have purchased over the last 5 years. I would estimate the amount of unsold properties to be over 20,000, for some reason many new buildings are still under construction even in the present climate!!

Last year I read that the title deeds office here in Didim was unable to transfer title deeds for property transactions between individuals, as all their manpower and time was being utilized working on behalf of the banks when they repossessed property from developers who had defaulted on their loans. The manager of the Deeds Office was quoted as saying that under Turkish law, they were obliged to prioritize the freezing of these assets on behalf of the banks.

This all seems perfectly reasonable and I can understand these actions. What I am increasingly confused about is what are the banks doing with these repossessed assets? They do not appear to be put back on the market in any volume anywhere in the resort. In your opinion, are the banks keeping these assets on their balance sheets at 'face value' or does 'mark to market' accounting apply here in Turkey ?

I would estimate that the property prices have decreased by about 25% in this resort from their 2007 peak, however it is very difficult to make an assessment as so few transactions are taking place to assist price discovery. Obviously, should the banks 'flood' the market with these properties; it would cause more downside on prices and further deteriorate their balance sheets.

I do know that some of these properties are changing hands between the banks, as a recent court case between a builder and a British buyer revealed that the tapu of the property in dispute had been transferred from the Is Bank to the Halk Bank.

I would be very grateful for your insight on this matter, although I realize you are very busy.

My quick answer to David was that nothing is marked to market in Turkey, with the commercial code almost as old as the ancien regime. But since this is really way out of my expertise, I had to consult a couple of bankers and a lawyer who specializes in the legal procedures. Here's what I have:

First, the banks could foreclose if the payment has not been made for over a year. Then, the legal process would take some time, including sending a formal notice to the contractor and then starting the procedures for seizure, including sending an expert to decide on the value of the property.

So mark-to-market is not an issue here. Actually, banks have to liquidify the property according to banking laws. It just takes some time. Therefore, the reason David is not seeing hordes of properties on the market could be that the seized properties have not hit the market yet and are still crawling through the legal process.

Alternatively, I have been told that there is a lively secondary market for seized properties; guys who make a living from following these auctions, getting the properties at bargain prices and then selling them at a mark-up. This could yet be another reason why David is not observing lots of property for sale at Didim. The new owners could have decided that it would be better to wait until market conditions improve.

Note that if it is only an issue of length of legal process, David is could observe a flooding next year. The secondary market, however, could dampen this effect somewhat.

BTW, the banks do not get involved in the auctioning process, it is outsourced and held as public auctions: You can see follow the auctions on the web as well; for example, see here and here.

Anyway, if anyone has more on this, I would be grateful.