Turkey’s construction industry saw a pronounced collapse in activity in Q3 2018. The industry contracted by 5.3% y/y in the quarter, versus an 8% y/y expansion in Q1 2018 and dropping further to 8.7% in Q4 2018, observes GlobalData, a leading data and analytics company.

Municipal elections in Turkey were held against the backdrop of the economy entering a recession in Q4 2018, the lira losing value as much as 40% against the US dollar and inflation reaching 20%. The currency collapse drove up the cost of imported materials, and the industry has also suffered from massive interest rate hikes, which increased loan repayment costs while drying up demand for new homes.

With no general election scheduled until 2023, such loss became a vote on Erdogan leadership and will drive more uncertainty in the country’s construction sector.

Yasmine Ghozzi, Economist at GlobalData comments, “The building boom which had been fueled by low interest rate and cheap credit has come to an end and there are far more homes than needed.”

In December 2018, the Ministry of Treasury and Finance developed a rescue plan that would allow construction and real estate companies to offload unsold stock to a state-backed fund. Subsequent earnings would then be directed into repaying banks affected by swelling bad debts amid the lira crisis.

Despite government incentives, including tax cuts and cheaper loan campaigns, the sector remains in turmoil, and the circle appears to be tightening. Residential sales decreased 2.4% in 2018 compared to the previous year and mortgage sales recorded 79% decrease in December 2018 compared to the same month of the previous year.

As the economy is expected to perform poorly in 2019, GlobalData has revised down sharply the outlook for Turkey’s construction industry owing to developments in recent quarters. Having contracted by 4.8% in 2018, output will continue to fall significantly in 2019, by around 4.5%, before recovering slowly thereafter assuming the government continues to focus on developing transport and energy infrastructure.

The government aims to increase the share of renewable sources in the country’s total energy mix from 10% in 2016 to 30% by 2023. The residential side of the construction sector in particular will continue to be exposed to increased pressure from higher borrowing costs and a weaker lira.

Ghozzi adds: “Coupled with poor domestic and international investors’ sentiment for this sector, this would inhibit large scale private real estate investments in the upcoming period.”