Retail therapy

Published: 8 September 2008

Kuwait sovereign fund invests in Turkey's biggest shopping centre

Few world cities epitomise the vibrance and complexity of emerging markets like the Turkish city of Istanbul.

As a historic centre for trade and tourism, Istanbul's attractions are compelling; its culture richly textured by history and international trade. The city is sited at a nodal point on the Silk Road where East and West meet, where commerce has flourished and generations of traders have converged from all points of the compass.

For centuries, the retailing tradition developed around Istanbul's historic Kapalıçarşı known internationally as the Grand Bazaar.

Some might trace the origins of modern consumer culture to Turkey’s fabled bazaars. But as the economy has grown, tastes have changed and retailers and consumers alike gravitate toward newer, more convenient shopping centres like the Istanbul Cevahir Shopping Centre.

Europe's largest retail development

Located in the Şişli district of Istanbul, the 420,000-square metre Istanbul Cevahir is one of Europe’s largest, retail developments, attracting 16 million visitors per year.

In October 2007, London-based St Martins Property Holdings bought the property from the Cevahir Group for USD515.5 million.

The transaction was the largest single asset real estate financing deal to date in Turkey, with HSBC playing a lead role in the transaction process.

The Istanbul Cevahir sale was significant at many levels. It was a landmark transaction for a country that was facing political uncertainty and low foreign investment; it mirrors the country’s expansion in the retail sector; and as a commercial showpiece it symbolises Turkey’s progress and potential as an emerging market.

The year of the Istanbul Cevahir sale, 2007, also happened to be a good year for the country in terms of FDI, amounting to USD19.8 billion.

Six years earlier, Turkey suffered an economic crisis triggered by political uncertainty and banking sector weaknesses. The country weathered the crisis and entered a period of high growth. Today Turkey, a member of the Organisation of Economic Co-operation and Development (OECD), is a promising emerging-market economy.

Turkey's shopping boom

The St Martins Property purchase of the Istanbul Cevahir took place amidst a boom in the number of malls proliferating across the country. While the majority of Turkey’s shopping centres have been developed by local companies, international firms have entered the sector in recent years, developing these centres to international standards.

Institutional investors from Europe, including the UK and Germany, first entered the market in 2003, and some observers have predicted the number of malls in the country could reach 350 by 2010.

The Istanbul Cevahir Shopping Centre is a six-storey complex, with 343 shops and restaurants, business centre, entertainment complex and 11-screen cinema.

The Cevahir transaction, Turkey’s single largest real estate asset purchase to date, was the first bullet financing of a Turkish real estate asset, with HSBC assisting as co-ordinator, joint mandated lead arranger, joint underwriter, joint bookrunner and agent.

The buyer, St Martins Property, is a British property development, investment and asset management company owned by sovereign investment body Kuwait Investment Authority (KIA).

St Martins had been looking for expansion opportunities in central and eastern Europe, where it owns more than 900,000 sq m of retail property.

Confidence and complexity

Nesrin Taraf, Assistant Manager, Corporate and Investment Banking, HSBC Turkey, said the buy signalled confidence on the part of a major outside investor in Turkey’s real estate potential.

“The acquisition was quite significant for the Turkish retail market in the sense that an investor with huge expertise in this area had decided to acquire the asset and bring their own know-how into the Turkish retail market,” said Ms Taraf.

The deal's complexity was a challenge, requiring extensive advance preparation by the HSBC team.

“Before the market acquisition, Cevahir was 50 per cent owned by the Istanbul Metropolitan Municipality and 50 per cent owned by a local family business partnership,” Ms Taraf said.

This meant the acquisition had to be completed in stages. The process began in December 2006, with the acquisition of the 50 per cent owned by the Istanbul Metropolitan Municipality, and the balance 50 per cent was bought from the Cevahir family in March 2007.

“We at HSBC had multiple roles in the transaction requiring the joint efforts of the DCM, Global Markets and Real Estate teams; structuring the deal, providing not only the syndicated loan but all sorts of side products such as equity financing, bridge facilities, hedging products and so on. We were involved from the very beginning, and we had the most active role,” said Ms Taraf.

The advantage of a local presence

Two other banks were involved in other aspects of the transaction, but HSBC was able to provide the commercial and retail banking services as well as its local presence.

“HSBC was the only bank on the ground in Turkey, out of the three mandated deal leaders following the process. We had the local experience and the local knowledge,” Ms Taraf said. “We had a very active role in the documentation process, and in setting up the practical aspects, the account structure, the waterfall structure, and so on."

Nesrin Taraf, Assistant Manager, Corporate and Investment Banking, HSBC Turkey

“Because HSBC was the only team on the ground, we were also delegated the role of being the account bank and security agent, which meant we were also responsible for the security structure of the deal.”

Ms Taraf added that HSBC needed to ensure the structure put in place would enable the client to run the shopping centre effectively as a long-term investment.

Emerging markets offer risk and rewards

The Istanbul Cevahir acquisition was also notable given the backdrop to the deal and the uncertain international climate in which it was conducted.

“Historically, real estate has been perceived as quite risky in Turkey, and HSBC has very strict guidelines in terms of real estate lending,” said Ms Taraf. “The real estate team had a lot of factoring to do.”

“Another issue for investors and their banks is that Turkey is an emerging market, and is therefore perceived as a risky market for real estate investment and real estate financing, in comparison with countries in Western Europe,” Ms Taraf said.

“This deal is very significant in that it shows that such complex deals can be structured in Turkey. It also shows that the Turkish market is getting to a more mature stage, where it can absorb such large-scale transactions. It also demonstrated that HSBC has the capability to lead transactions of such calibre.”