Turkey’s construction sector battles costs and credit

Alamy via Reuters

• New building permits fall 22%
• Residential sector worst hit
• Labour costs up 105% from 2023

A tightening credit environment and higher costs have weakened demand in Turkey’s construction sector, causing a fall in new building licences and completion permits in the residential segment. 

The number of new permits for buildings issued fell by 22.7 percent to 24,082 in the second quarter of 2024 compared to the same period last year, data issued by the state statistics agency Turkstat on August 16 showed. 

There was an even steeper decline in permits for residential units, which dropped by nearly a third year on year to 137,210, down from 176,976 in the first quarter. 

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The combined residential unit total for the first half of the year fell short of the fourth-quarter total figure for 2023, marking a significant slowdown in new projects entering the development pipeline. 

Occupancy permits, issued on completion of a construction project, were also down in the second quarter. The number of residential units cleared for occupancy dropped by a quarter, pointing to a drying up of supply in Turkey’s housing market. 

One of the challenges facing the industry, which is feeding into the weaker demand for new projects, is input costs. 

Annualised construction costs rose 66 percent in June, a Turkstat report issued on August 13 said, with materials prices rising by half and labour costs doubling year on year. 

The rise in labour costs in part reflects skills shortages in the construction trade, some of which stems from demand due to rebuilding work in the regions hit by the February 2023 earthquakes.

The pace of construction cost increases in June, though still above the general inflation rate, with the consumer price index rising 62 percent in July, was the slowest since October last year.  

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Despite this easing, high interest rates and restrictions on borrowing imposed by the central bank will reduce demand in the housing market further, and put pressure on construction companies seeking finance for projects, said Tahir Tellioğlu, president of Turkey’s Building Contractors Federation. 

“The problem is not only the difficulty citizens have in getting a housing loan, it is also the issue of commercial loans, which also are high interest and unobtainable,” he told AGBI.

On August 20, Turkey’s central bank kept its key lending rate at 50 percent, pointing to the need to cool domestic demand further in order to bring down inflation.

However, Tellioğlu warned that if new housing rollouts continue to fall, Turkey will face renewed property inflation as supply shortfalls bite. 

“On average, Turkey has an annual demand of 900,000 housing units,” he said.

“If construction falls below 750,000, it will mean those who can buy will pay more, while those who can no longer buy will be doomed to rent.”