In order to help finance the real estate market, the Turkish government has issued new rules for revitalizing a long dormant capital markets instrument, and based on the success of the first project, it is starting to pay off.  

THE Housing Development Administration of Turkey (“TOKİ”) first issued rules back in the 1990s to essentially establish Real Estate Certificates (“RE Certificates”), but in the ensuing years this capital market instrument never took off due to lack of demand. However, following recent advances in Turkish finance law and the increased financing necessities of the Turkish real estate sector, an effort has been made to unite finance and real estate once again through a renewed use of RE Certificates.

In 2016 and 2017, the Capital Markets Board (“CMB”) amended the relevant Communique[1] to attract investors to this security. RE Certificates finally started to bear fruit in March 2017, pursuant to a Revenue Sharing Agreement executed between TOKİ and a contractor for a project[2] to be developed on TOKİ-held land. RE Certificates amounting to nearly a quarter million Turkish Liras were issued for this project, and these RE Certificates are currently being traded on the Istanbul Stock Exchange under the instrument group GMS and trade code PMVR3.G.  

The following is a brief overview of what RE Certificates are and how they work.

What is their purpose?

RE Certificates may only be issued for real estate projects that have not yet started or have not yet been completed, and they can only represent either specific independent units or area units within independent units of a project.

When RE Certificates represent area units of independent units of a project, the investor may obtain title to a house by acquiring an adequate number of RE Certificates prior to the completion date of the project. Thus, the instrument aims to provide title to people who wish to buy a house but do not have enough savings for the entire payment up front. RE Certificates also provide investors a way to benefit from the increasing value of a real estate project when they wish to enter the real estate market but are unwilling to purchase a house.

Furthermore, RE Certificates are thought to offer a quick financing source for urban transformation projects. To that end, RE Certificates are intended to facilitate urban renewal and especially support construction projects in at-risk areas for earthquakes and disasters as per the state’s urban transformation principles.

Who are the issuers?

The issuers are private joint stock companies that have applied to the CMB to issue RE Certificates as well as public institutions and organizations that have been authorized to issue capital market instruments under their respective regulations. Issuers are required to have already completed a previous project and must have fulfilled all obligations under its construction agreement and technical specification within five years of the date of application to the CMB. In addition, the value of this previously completed project must be at least half of the sale value of the real estate project for which they are applying to issue RE Certificates. The issuer must also be the sole owner of the land on which the project will be constructed, and either the relevant land deed must be converted into a construction condominium ownership or a construction right must be established in favor of the issuer.

How do investors buy RE Certificates, and how do they convert them into title or cash?

RE Certificates may be issued through public offerings made to investors, they may be sold directly to qualified investors, or they may be issued abroad. In this way, investors can either purchase RE Certificates directly from the issuer or on a stock exchange through banks and financial intermediaries. Within a specified time, investors may then request from the issuer that their RE Certificates be converted into title (performance in kind) or cash (performance in cash) subject to certain conditions.

Investors who prefer performance in kind may request the transfer of ownership of the independent unit in its name from the issuer, but only if they hold an adequate number of RE Certificates pursuant to the duration and terms stipulated under the specifications approved by CMB. These investors must request the performance in kind before the project is completed, at which point their RE Certificates will be blocked and the investors will execute a promise to sell agreement for the independent unit that has been requested. Upon completion of the project, their RE Certificates will be canceled and title to the independent unit will be delivered to them in return for the RE Certificates.

Investors who do not request title or who do not have an adequate number of RE Certificates for such a request are presumed to have requested performance in cash. The independent units which correspond to the number of Certificates owned by the investors will then be sold by the issuer through public auction, and the income will be distributed to the investors based on their RE Certificate shares. If the independent units cannot be sold through auction, they will be sold based on the stock price for the previous three months, or if such a price is not determinable, based on a price to be stipulated under an evaluation report. The amount collected will then be distributed among the investors based on their RE Certificate shares.

Investors who wish to cash-out their RE Certificates before completion of the project have the option of selling their certificates through a stock exchange. If it is authorized under the specifications of the project, investors may also sell back their RE Certificates to the issuer within specified periods. In this way, investors have the opportunity to turn a profit on their real estate project investments in a comparatively short amount of time.


What are the advantages to investors?

Investors have a unique opportunity to invest in a safe and stable market supported by the state and under the surveillance and audit of both the CMB and the Public Disclosure Platform. Since RE Certificates are traded through the stock exchange, investors are also able to monitor any changes to the value of their RE Certificates. Furthermore, investors have the option to sell their RE Certificates through a stock exchange prior to the project completion date, thus if investors are interested in benefitting from a value increase in the market, they may cash-out their RE Certificates very quickly and easily, just like shares of a publicly traded company. Also, the credits received from banks to purchase RE Certificates are not subject to any commission fees as such fees are paid by the state. 

Are there any risks?

As with any investment, RE Certificates carry certain sector-related risks; doubly so as there are both CMB and real estate-specific issues at play. Though manageable, there are also certain risks for litigation on both fronts, particularly as this is a relatively new capital markets instrument. Before embarking on this potentially lucrative investment, it is recommended that investors seek out the advice of experienced legal counsel with a thorough understanding of the real estate sector and capital markets as well as a solid capacity in both private dispute resolution and administrative litigation.