ISTANBUL (Reuters) - For centuries, Istanbul lured intrepid shoppers with colorful jewellery and carpets which tumbled from shops in the ancient alleyways of the Grand Bazaar.
Today, the city's affluent young middle-class is embracing a different kind of shopping experience in giant glass-and-chrome malls, whose rise strikingly illustrates Turkey's emerging prosperity, but also spotlights some economic frailties.
Shopping malls are sprouting across Istanbul at a dizzying pace, with foreign money attracted by Turkey's large, young and growing population of over 70 million. According to official data, per capita income surged to $9,333 in 2007 from $7,500 a year earlier and is expected to continue rising strongly.
"Organized retailing is coming alive and competition is growing, to the consumer's advantage. The choice of brands is increasing and quality is rising," said Turan Ozbahceci, chairman of PERDER, an Istanbul Retailers' Association.
With around 2 million square meters of retail space due for completion in 2008, Turkey has the third largest stock of malls being built in Europe, behind Russia and Spain, according to real estate firm Jones Lang LaSalle.
The sector is set to double in size within five years, expanding further into the Anatolian heartland, according to the Turkish Council of Shopping Centres and Retailers (AMPD).
But there are concerns that a glut of projects could flood the market just as global economic woes put the brakes on years of strong growth in this European Union-candidate country.
Economic growth last year dipped to 4.5 percent, after growth rates of 6.8 percent on average since 2002. The government has said it expects growth of 4.5 percent in 2008.
In places where there is a high concentration of shopping outlets, there have been some early difficulties in renting out retail space, forcing retailers to refocus their activities.
"The global volatility has caused a certain slowdown in Turkey and this is reflected in turnover and means retailers need to be more creative and look at efficiency and cutting costs," said AMPD chairman Nusin Oral.
The economic outlook is also clouded by political uncertainty over a court bid to close the ruling AK Party for alleged Islamist activities.
Most Turks still shop at small bakkals, or grocers, but malls are attracting the more affluent classes who want the convenience of shopping, dining and entertainment in one place.
"Turkish people have made the leap from bakkals to shopping centres," said Yusuf Esenkal, marketing manager at Istanbul's Cevahir shopping mall, which is one of the largest in Europe and attracts tens of thousands of visitors daily.
"Starting with the Grand Bazaar, Turkish people have a 700-year-old tradition of commerce and because of that they were ripe for shopping centre culture," he said.
Among the palm trees at the Cevahir mall's courtyard, headscarved mothers queued with children at a face-painting stall. A minor TV celebrity encouraged shoppers to donate to a children's literacy campaign as Turkish pop music blared out.
Foreign retailers are playing a key role in the expansion.
In February, private equity firm BC Partners led a consortium that bought a majority stake in the Migros chain, Turkey's largest retailer, for $1.7 billion.
The previous month, British retailer Tesco's Turkish chain Kipa said it would invest $1.5 billion over the next five years to open 100 stores. It expected the expansion to boost revenues to $5 billion once the new stores were operational.
French food giant Carrefour runs supermarkets with Turkey's Sabanci Holding in a joint venture called Carrefoursa.
U.S. retailers say they favour Turkey more than any other individual market, according to a recent survey of retailer attitudes to emerging markets by commercial real estate adviser CB Richard Ellis. Retailers cited the ease of foreign ownership as well as economic stability.
In April, Turkey's prominent Dogan family said U.S. property tycoon Donald Trump would build an office, residential and shopping complex in Istanbul with the Dogan Group.
Turkey's first mall opened in 1988 but a faltering economy limited expansion. After a 2001 financial crisis, the sector burst into life with economic growth of 7 percent and a surge in foreign direct investment, which reached $20 billion last year.
The number of malls will reach 350 by 2010 from 189 now, with 72 under construction and 87 at the planning stage, according to the Turkish Council of Shopping Centres.
Nonetheless, Turkey's shopping centre sector lags behind average European levels, illustrating why the sector is still growing strongly. Its 55 square meters of shopping space per thousand people compares with 125 in neighboring Greece, 230 in Britain and 750 in Norway.
The industry is focused on Istanbul, the most populous city with 12.5 million people and home to 40 percent of the malls, reflecting the large wealth gap between east and west.
The growth in shopping malls mirrors wider expansion in the retail sector, which is forecast by AMPD to have turnover of $200 billion by 2010 from $150 billion last year and $136.9 billion in 2006. The organized retail sector -- malls and chains -- grew 10 percent in 2007.
But growth this year has so far been driven by new openings, with sales actually dipping when these are stripped out.
The general economic environment is worsening as well. In March, the consumer confidence index tumbled more than six percent to a historic low, and company closures jumped 225 percent from a year earlier.
Last week, the central bank signaled there were interest rate rises ahead as it sharply raised its inflation forecasts, and said it might take four years to reach its 4 percent target.
Annualized consumer inflation was 9.15 percent in March. The central bank forecasts a year-end rate of around 9.3 percent.
The court case to close the ruling AK party, a pro-business party with roots in political Islam, has also knocked the stock market and drawn criticism from the European Union. The row exposes divisions between the government and the secular establishment, which includes the powerful military and judiciary, over the role of Islam in the country.
"When you list all the factors such as the party closure case ... they seem like heralds of disaster. But despite these developments Turkish retail remains an attractive place for foreign investors," PERDER'S Ozbahceci said.
Indeed, the economic gloom appears not to have substantially affected the shopping mall boom yet.
The rapid expansion has in fact led to calls for regulation to protect small-scale retailers, like the bakkals, but sector officials say this would only hinder further development.
Some shoppers at the Cevahir mall, which boasts a small rollercoaster, multi-screen cinema and bowling alley, echoed these concerns. Emel Aktas, 54, complained about the lack of local retailers in the space.
"We have become too much of a consumer society and it puts pressure on our children," she said.
Editing by Clar Ni Chonghaile