Turkey faces significant issues—including terrorism, tension with Russia and the Syrian refugee crisis—that are increasing debt and distress in country. Government regulations might not be enough to save the situation.
REPORT FROM TURKEY—Hotels in Turkey are performing poorly, and sources attribute the country’s decline to recent acts of terrorism, increasing tension with Russia and the Syrian refugee crisis.
Tourism throughout Turkey has nosedived after the 12 January bombing in Istanbul killed 12 people from Germany, traditionally one of Turkey’s largest inbound markets, according to Turkish newspaper The Hurriyet Daily News. Turkish economists predict the country will lose approximately $8 billion in tourism revenue, according to the newspaper.
The fortunes of Turkey’s middle class have dipped due to these geopolitical events, and the fall of the Turkish lira and a polarized domestic political situation have contributed to an overall decline in the country’s economy.
To try and rectify hospitality industry declines, the Turkish government on 7 April enacted new regulations that allow Turkish banks to restructure debt on an estimated $17 billion of loans the country’s hospitality companies owe the banks. Restructuring of the loans has to be done by the end of 2016, twice if necessary, so that assets do not become distressed.
Sources said the move is a dramatic ploy in dramatic circumstances.
“It is a temporary solution to a problem that can get out of control,” said Alpay Dinçkoç, head of institutional sales and research at brokerage firm Oyak Securities. “It is aimed at reducing (non-performing loans) inflow to the banking system, triggering more NPLs in the system, as it would make lending rules more strict. It is a matter of cash flow at this point.
“If banks contract their existing exposure to tourism (and) hotel-related loans they will force the companies to bankruptcy. (The) problem should be more concentrated to Antalya and Istanbul regions where Russians and terror-related cancellations concentrate.”
Mehmet Önkal, managing partner of BDO Hospitality Consulting, described the loans as short-term “working capital loans and not capital investment loans.” He admitted Turkey’s economic troubles could continue through the end of 2017.
“But this is not sustainable,” he said. “How many times can you roll a debt on for? This crisis is going to last much longer than all the past ones.”
One positive is that only a few banks are holding loans, even if the debt weight is heavy, sources said. All types of hotels, hospitality and tourism companies are in the same boat, with the problem mostly being domestic in nature.
According to Önkal, international hospitality debt “is not that much.”
“Most of the investments are done with equity,” he said. “There are very few banks in this game. Some money comes from (Gulf Cooperation Countries), some from Asia and Turkic republics, but not much.”
Kaan Bozdemir, managing partner at real estate investment broker Reha Medin Commercial, agreed that Turkey is experiencing a woeful period.
“Everything is upside-down, both the economy and real estate,” Bozdemir said.
Tension with Russia began on 24 November when Turkey shot down a Russian warplane on Turkey’s border with Syria that Turkey claimed had entered Turkish airspace illegally.
In retaliation, Russian officials on 17 December banned charter flights from Russia to Turkey, which accounted for about 90% of the 4.4. million Russian travelers who visited Turkey in 2014, according to TurSab, an association of Turkish travel agencies cited in the Financial Times.
Bozdemir said the current picture in Turkey is not what was expected for 2016.
“Every month we keep doing minuses in regards to foreign tourism. Last year, Istanbul saw 75% occupancy. Now, it is 25%,” Bozdemir said.
“It is unfortunately not a usual dip in performance,” Önkal said of what is happening in Turkey.
In February, Istanbul’s occupancy decreased 21.4% to 47.5% year over year, according to data from HNN’s parent company STR. Over the past year and a half, the city’s monthly occupancy peaked in August 2015 at 76.2%, but continually decreased month after month. Occupancy first dropped below 50% in January 2016 to 48.9%.
The figures show less damage for the Turkish Riviera, which contains most of Turkey’s sea-and-sand resorts. In February, occupancy dipped 0.8% to 48.1%. In January, occupancy had increased 13.1% to 42.3%.
In Istanbul, revenue per available room in February fell 18.3% to 137.73 Turkish liras ($48.21). STR analysts attributed the RevPAR declines to drops in occupancy.
The ripple effect of six major terrorist incidents in Istanbul and capital Ankara since last October have caused Istanbul RevPAR to drop for five consecutive months. Four of the five months saw RevPAR fall by more than 9%.
Things can only get better
Bozdemir estimated that 3,000 hotels are for sale in Turkey’s high-tourism area, which is between Marmaris and the middle of the Mediterranean region.
“It is crazy, most are owned by banks, and prices are funny,” Bozdemir said.
He gave an example of a 3-star hotel in Cappadocia that is valued at more than 20 million Turkish lira ($7 million), but its owner is asking for only 12 million Turkish lira ($4.2 million) for the property.
“And it is a 3-star hotel, brand new, with 60 rooms, surrounded by nature, with a pool. It is perfect,” Bozdemir said.
Bozdemir said he hopes Turkey will soon recover from all its current obstacles.
“Now we are at the bottom, but we hope that when this mess with Syria has settled down … next year, we presume it will get a little better, but there will be no big jump,” he said.
“The perspective had to change, and it has,” Bozdemir said. “Now hotels in the south (of Turkey) are doing everything they can to appeal to domestic customers, but Turkish people do not have the habit of doing pre-reservations, although the prices are so attractive, that is changing a little.”