A number of real estate investment funds have received permission to launch within two and a half years of the enactment of the relevant legislation, and investor interest in this new instrument is steadily growing.

Over the last decade the Turkish real estate market has been growing rapidly, with the sector now accounting for approximately five percent of gross domestic product. Foreign direct investment (“FDI“) in the real estate and construction sectors rose to USD 4.1 bil-lion, constituting 24.8 % of the total FDI in 2015. As there is still a supply and demand gap and several mega projects in the pipeline, Turkey will continue to present excellent opportunities for real estate developers and investors. Investor sentiment as regards real estate is expected to remain positive in the foreseeable future, despite international and domestic political issues.

The Capital Markets Board (the “Board“), the regulatory and supervisory authority in charge of the securities market in Turkey, has created and implemented new instruments, including real estate investment funds (“REIF“) to boost real estate investment in Turkey. Within two and a half years of enactment of the Communiqué on Real Estate Investment Funds III-52.3 on 3 January 2014 (Gayrimenkul Yatırım Fonlarına İlişkin Esaslar Tebliği) (the “Communiqué“), a number of funds have received permission to launch, and investors’ interest in this new instrument is growing.

What are REIFs?

REIFs are asset pools with limited legal capacity solely for land registry purposes. They are established by either a licensed Turkish portfolio management company or a licensed Turkish real estate portfolio management company (“Founder“) for a definite or indefinite period and for the purpose of making investments in a wide range of assets and particular financial instruments on account of qualified investors (“QI“) with the money collected in exchange for fund units on the basis of fiduciary ownership.

The Communiqué sets forth a regulated but flexible model for REIFs in line with international market standards. While all transactions of the Founder regarding REIFs fall under the supervision of the Board, REIFs do not require an initial public offering on the stock exchange, unlike real estate investment trusts. Therefore, although a certain level of in-vestment protection measures are applied, there are no heavy disclosure burdens and capital market risks.

REIFs are allowed to manage portfolios comprised of (a) all types of real properties and property rights and (b) transactions, including (i) private and public debt instruments and shares of joint-stock companies established in Turkey; (ii) foreign private and public debt instruments and joint-stock company shares tradable within the framework of the provisions of Decree No. 32 on Protection of the Value of Turkish Currency; (iii) time deposit and participation account; (iv) investment fund units; (v) repo and reverse repo transactions; (vi) warrants and certificates; (vii) lease certificates and real estate certificates; (viii) settlement and custody bank money transactions, cash collaterals and premiums of derivative transactions; (ix) specially designed foreign investment instruments and loan participation notes deemed appropriate by the Board; and (c) other investment instruments deemed appropriate by the Board.

On the other hand, there are some investment and operation restrictions on REIFs. REIFs cannot develop or invest in real estate development projects, undertake construction of buildings, operate commercial real properties such as hospitals, hotels, warehouses, shopping malls or residences, or realise sale, purchase and lease of real properties located abroad. Although investment in shares and other financial instruments is permitted, at least 80 % of a REIF’s total fund value must consist of real estate investments. In addition, the sum of real estate investments made by an REIF which alone account for more than 20 % of the total fund value of the REIF cannot exceed 60 % of the total fund value of the REIF. Some of these restrictions are criticised by investors for being overly protective and consequently, the Communiqué has been amended as o allow REIFs to invest in particular real estate development projects which were provided with a construction license (such as the ones being carried out by the Public Housing Administration under Prime Ministry) by the Official Gazette published on 30 November 2016. It is believed that more amendments will follow when the market matures.

How to establish a REIF?

In order to establish an REIF, the Founder must apply to the Board by submitting a prospectus, which is the main contract between the Founder, the custodian, the manager of the REIF and QIs, setting forth general transaction terms. In addition, the management must obtain approval of the Board along with the other required documents. In order to start collecting funds, the Founder must again obtain approval of the Board for the issuance of certificates, by applying within six months as of the registration of the prospectus with the trade registry.

As per the Communiqué, fund units without a nominal value can only be sold to parties who qualify as a QI. QIs are defined as any person owning financial assets worth at least TRY 1,000,000 and other eligible organisations and corporations. Investors have criticised the TRY 1,000,000 threshold for qualifying as a QI and there have been requests to reduce it. The fund portfolio value must reach a minimum of TRY 10,000,000 within one year of the initial sale of fund units to QIs and the cash collected from fund holders will be invested in compliance with the portfolio restrictions set forth in the Communiqué.

QIs may easily exit from REIFs either by returning the fund units to the Founder or by transferring them to another QI. However, it is also possible to include transfer restrictions in the issuance certificates.

Tax Exemptions

Income from Turkish REIFs is exempt from corporate tax and has advantages in terms of withholding and income tax. For instance, non-resident individual QIs participating in REIFs and distributions from REIFs also pay no withholding tax and are not required to make any filing. Resident QIs also benefit from significant tax benefits.

In light of the above, the new opportunity for foreign investors to invest in real estate through REIFs is advantageous because it is safer, easier and cheaper than investing in the assets themselves or other capital market tools.

The Communiqué sets forth a regulated but flexible model for REIFs in line with international market standards.