Turkey’s shift towards Islamic finance coupled with government reforms draws Gulf investors.
Gulf investors are plowing more money than ever into Turkey. From hospitality firms to private equity houses, Gulf firms are betting on profiting from Turkey’s growth and reforms. The country’s economic and political stability, coupled with its young population and strong focus on Islamic finance puts it ahead of many investment destinations in the region and in Europe.
The 75 million population-strong country straddling Europe and Asia is also embarking on major reforms to lure more investments and bolster its $772 billion GDP economy. One such move expected to open the floodgates of Gulf money is the Turkish government’s easing of foreign ownership property restrictions. (Already Gulf firms have been busy doing business in Turkey this year.) Kuwait’s Burgan Bank bought Turkish lender Eurobank Tekfen and Abu Dhabi-based food and beverage firm Agthia Group acquired Turkish spring water firm Pelit Su.
Abu Dhabi’s energy firm Taqa is looking at investments in Turkey, while Dubai-based private equity firm Abraaj Capital is also eyeing new deals there. The revolutions transforming the Middle East have thrown Gulf investors into the arms of Turkey as investment safe havens in the region diminish.
“Because of the Arab spring, fund managers have been reluctant to make investments in the GCC region (other than in Saudi Arabia), which has resulted in a large amount of dry powder in MENA focused funds,’’ said Dubai-based Bilkis Ismail, counsel at law firm SJ Berwin, who is a member of the International Private Funds team.
“Fund managers, where the fund documentation permits, are now deploying these monies for investment into Turkey.’’ Investors are particularly interested in healthcare, consumer, transportation, industrials, manufacturing, and infrastructure and telecom sectors in Turkey, she added.
Qatar’s sovereign wealth fund was part of a group that had bid for a stake in Turkish airport operator TAV Havalimanlari Holding. Saudi Arabia’s telecom firm Saudi Oger has a controlling stake in Turk Telecom, the country’s biggest phone company.
A growing area of interest for Gulf firms is Turkey’s Islamic finance arena. This industry is benefitting from Turkey’s shift of focus from integrating with Europe to bolstering ties with its Arab and Islamic neighbours, under the leadership of Turkish Prime Minister Tayyip Erdogan and his Islam-leaning Justice and Development Party.
“This is not something that Turkey has previously fully capitalized on, due to its focus on being a secular state and thereby continuing its quest to obtain membership of the European Union,’’ said Ismail. “But with the Arab Spring fallout there is an increasing appetite for Islamic finance in Turkey.”
This mutual interest in Islamic finance came to the fore in 2011 when a $350-million Islamic bonds or sukuk issued by Turkish bank Kuveyt Turk, an affiliate of Islamic lender Kuwait Finance House, attracted strong Gulf interest. Saudi Arabia’s National Commercial Bank or NCB is majority owner of Turkish Islamic lender Turkiye Finans. Turkish apprehension about Islamic institutions persists and is behind the classification of Turkish Islamic lenders as “participation banks.’’
Turkey’s struggle between its secular image and the growing power of Islamic roots is not the only issue facing the country. Turkey, which suffered a financial crisis in 2001, has a host of economic problems from underdeveloped infrastructure to corporate governance.
“There are still issues with the grey economy. Sometimes the infrastructure is outdated or incomplete,’’ said Jarmo Kotilaine, Chief Economist of NCB Capital.
Strong economic growth in the last two years has led to a steep current account deficit that reached 10 percent of GDP in 2011, but has since subsidized in 2012 as the economic turmoil in its main trade partner, Europe, and global economic malaise helped slow down an overheating economy. The IMF has also called on Turkey to undertake more reforms in the labour market and education system.
“One of the biggest issues in Turkey is corporate governance. It remains to be seen whether the new Turkish Commercial Code will help to address transparency issues and allay investors’ concerns,’’ said Ismail.
“Turkey is heavily focused on local relationships and whilst there is a lot of interest in Turkey from regional and global managers, without the local relationships or using a local intermediary, they are not getting the traction in finding the right deals. That is half the challenge with Turkey.’’
Turkey’s booming hotel industry, which has benefitted from an uptick of Arab tourists who are shunning unstable countries in the region, has promoted hotel firms, including Abu Dhabi-based Rotana and Dubai’s Jumeirah Group, to look for properties there. Jumeirah this year acquired management of Istanbul’s historic Pera Palace and is on the prowl for more deals.
“We are looking at potential projects both in Turkey’s major cities as well as in the resort locations,’’ said Piers Schreiber, Jumeirah Group’s vice-president of corporate communications. “We see growing demand for luxury hotels both from domestic and foreign travellers.’’