Market news

Investment recoup time crunched

07.11.2008

For those looking to invest in real estate, an important factor to consider is the amount of time it takes to earn back the initial cost of the purchase in projected rental earnings.
  The recoup time for storefronts and residences differs and the years it takes to earn back the initial cost of a storefront investment is usually shorter. For example, about five years ago the ideal recoup time according to realtors for a residential purchase was 12 years, while for storefronts it was eight years. If it took the buyer a theoretical 15 years or more to earn back their initial investment, it was thought to be overvalued.
  This calculation was recalibrated after the start of the real estate boom in 2005. The future rental earning, as a way of earning back the initial investment for a storefront rose to between 10 and 12 years, while for residences it went to between 15 and 20 years. In luxury residences and high-demand neighborhoods and streets, above the average recoup time was considered normal.
  Stagnation in real estate markets over the last two years and the global financial crisis has once again brought a recalibration of what the average recoup time for investments should be. The effects of market changes were most clearly reflected in previously owned units and took less of a toll on storefronts.
  
With the numbers

  To replace the theory with numbers, consider a YTL 180,000 apartment in any given neighborhood. Two years ago, an investor could recoup his initial investment in the apartment in 15 years with a rental income of YTL 1,000 per month. In today's market conditions, an apartment that will bring YTL 1,000 per month may be purchased for between YTL 140,000 to YTL 145,000. The recoup time in the investment then decreases to 12 years or less.
  The psychology of the global crisis is creating a demand for homes that can recoup the initial investment in 120 months or 10 years. Considering the previous example again, an investor who was willing to pay YTL 180,000 for a unit that could bring in YTL 1,000 per month, now is only willing to offer YTL 120,000 for the same rental income.
  The prices are actually determined by demand and need, according to the president of the board of Sefa Real Estate, Ali Sefa Özgen. A property owner indeed can really bring down the recoup time. The seller, even if he needs to sell the property, is okay with waiting. But then, when there is a buyer he starts thinking to himself, am I selling at below market rates? Is that why this person wants to buy my property?
  But buyers are also in a crisis of psyche, Özgen said. Buyers are looking for investments that they can recoup in 10 years or less. You cannot even really call that a bargain because when you look at international hedge funds, they say that for developing economies, the time it takes to earn back the initial investment is calculated at about seven years, said Özgen.
  
 Luxury and high demand exempt

    What realtors and real estate insiders call A-plus property, in other words luxury real estate, is exempt for the most part from the market's ups and downs in investment recoup time, as are properties located in business, entertainment and shopping districts such as Bağdat Caddesi on the Anatolian side of Istanbul and the Nişantaşı- Beyoğlu corridor on the European side. In properties in this category, the time it takes to recoup initial investment is above the 20-year mark. Meanwhile, fluctuations have occurred in the B and C property categories with recoup time sinking to 12 years and below.

ISTANBUL - Hürriyet

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