Real Estate Investment Companies In Turkey - Real Estate

Overview

The principles regarding the establishment of a real estate investment company ("REIC") in Turkey —its founders; the issuance, sale and transfer of shares; its activities and management principles; the required qualifications of its partners and managers; dividend distribution; and other obligations that REICs are subject to in Turkey, including informing investors and transformation of joint-stock companies into REICs, are regulated by the Communiqué of the Capital Markets Board ("CMB" or "Board") on Real Estate Investment Companies No III.48.1 ("Communiqué").

A REIC is a capital market institution established to issue its shares in order to operate a portfolio consisting of real estate, real estate projects, rights on real estate, infrastructure investments and services, capital market instruments, and other assets and rights as determined by the Board.

REICs can be established to operate a portfolio consisting exclusively of infrastructure investments and services, or they can be established to invest in a specific project, real estate or infrastructure investment and service, or to operate in a specific field of activity.

It is obligatory for REICs that operate a portfolio of infrastructure investments and services in Turkey to be established/converted exclusively to engage in this type of activity, and a provision in this regard must be included in their articles of association.

REICs that operate a portfolio consisting exclusively of infrastructure investments and services cannot invest in real estate, real estate projects or rights to real estate that are not related to infrastructure investments and services. Other REICs cannot invest in infrastructure investments and services, or in assets and rights on them.

At least 75% of the assets of REICs that are established to operate in certain areas or to invest in a certain project, real estate or infrastructure investment and service must consist of investments made within the scope of this activity, and their titles should include wording regarding the activity, project, real estate or infrastructure investment and service.

Establishment and conversion requirements

While REICs may be established as a REIC from the outset, joint-stock companies may also convert into REICs by amending their articles of association in accordance with the provisions of Turkey's Capital Markets Law ("Law") and the Communiqué. In the articles of association of REICs that will operate a portfolio consisting exclusively of infrastructure investments and services, it should be clearly stated that at least 75% of the assets of the company will consist of infrastructure investments and services, and only infrastructure companies may convert into such REICs.

Establishment and conversion requirements for REICs are as follows:

a) they should be established in the form of a joint-stock company under the registered capital system, or should have been incorporated as a joint-stock company and must apply to the CMB to adopt the registered capital system;

b) initial capital in the establishment, current paid-in or issued capital and equity capital in the conversion should not be less than TRY 64,500,000 each, and if the REIC will operate a portfolio consisting exclusively of infrastructure investments and services, these should not be less than TRY 210,000,000;

c) if the above-mentioned capital amount

is less than TRY 129,000,000—at least 10% of its shares representing the capital; or
if the capital amount is TRY 129,000,000 or more, or shares representing TRY 12,900,000 of the capital—and if the REIC will operate a portfolio consisting exclusively of infrastructure investments and services, shares representing TRY 21,000,000 of the capital must have been issued against cash in the establishment, all of the shares issued against cash must be paid in the conversion and must have been issued against cash; or the sum of cash and cash equivalents and financial investment items included in the current assets group in the independent audited unconsolidated or individual financial statements for the last accounting period should be at the rate or amount specified above;

d) they must include the wording "Real Estate Investment" in their title or apply to the CMB to change their title to include this wording;

e) their founding partners or current partners, general manager and members of the board of directors must meet the conditions stipulated in the Communiqué;

f) their articles of association must comply with the provisions of the Law and the Communiqué or they must apply to the CMB to amend their existing articles of association in accordance with the provisions of the Law and the Communiqué;

g) the qualifications of the assets in their portfolio and their proportion in the assets of the company must comply with the qualifications and limitations set forth the Communiqué;

h) if capital in-kind is invested in the establishment, the value of capital in-kind must be determined;

i) the undertaking must provide a guarantee to the CMB that 25% of its initial capital or issued capital will be offered to the public, and to qualified investors if the company will operate a portfolio consisting exclusively of infrastructure investments and services, within the period and principles specified in the Communiqué;

j) their capital must not have been increased in the last two years from funds generated by converting assets to market value.

For the establishment or conversion, an application should be made to the CMB with a standard form determined by the CMB together with the documents specified in the relevant form. The CMB examines the application in terms of compliance with the provisions of the legislation, and if the application is found appropriate, the company should apply to the Ministry of Commerce for the approval of the amendments to its articles of association. The general assembly meeting in which the amendments to the articles of association will be approved must be held within 30 days at the latest following the receipt of the CMB's permission, and the general assembly resolution must be registered with the Trade Registry within 15 days following the general assembly meeting.

Issuance and sale of shares

In order for REICs to sell their shares through a public offering in Turkey, they must apply to the CMB for the approval of the prospectus regarding the public offering of shares representing at least 25% of their issued capital within three months following the registration of the companies or amendments to the articles of association with the Trade Registry.

For REICs that will operate a portfolio consisting exclusively of infrastructure investments and services, in order to sell their shares through a public offering they must apply to the CMB for approval of the prospectus regarding the public offering of shares representing at least 25% of their issued capital. If their issued capital is less than TRY 420,000,000, the application must be made within four years following the registration of their establishment or amendments to the articles of association with the Trade Registry. If their issued capital is TRY 420,000,000 or more, the application must be made within six years following the registration of their establishment or amendments to the articles of association with the Trade Registry.

It is also possible for REICs that will operate a portfolio consisting exclusively of infrastructure investments and services, to sell their shares only to qualified investors, provided that there is a provision in their articles of association in this regard.

After the public offering, at least 25% of the REIC's issued capital must consist of publicly held shares.

Companies that do not apply to the CMB by completing the necessary preparations to be offered to the public, or companies whose applications are not approved by the CMB due to not meeting the necessary conditions, cannot operate as REICs. These companies are required to apply to the CMB to amend their articles of association so as not to cover REIC activities and to leave the registered capital system.

Qualifications and transfer of shares

REIC shares may be issued as registered or bearer shares. The issued shares may only be granted the privilege of nominating candidates in the election of the members of the board of directors. After the public offering, no privilege may be created, including the privilege of nominating candidates for the board of directors.

Prior to the public offering of shares or their sale to qualified investors, any transfer of shares representing 10% or more of the capital and any transfer of privileged shares regardless of their ratio are subject to the approval of the CMB. In share transfers within this scope, those who will acquire new shares must meet the conditions in the Communiqué. The transfer of privileged shares in the amount that enables the attainment of management control is also subject to the approval of the CMB. If the shareholders holding the shares attaining management control fail to meet the conditions set forth in the Communiqué, they must dispose of the said shares within three months at the latest from the date on which they are deemed to not meet the conditions.

Principles regarding investments and activities

a. Principles regarding activities and limitations

Investment activities of REICs and limitations on investment activities are detailed in the Communiqué. Among many other activities, REICs are permitted to purchase, sell, lease or promise to sell any type of real estate for the purpose of generating trading profits or rental income. Companies that will operate a portfolio consisting exclusively of infrastructure investments and services may only perform transactions related to real estate assets that are the subject of infrastructure investments and services.

Companies may purchase and sell domestic and foreign capital market instruments, open time deposits or participation accounts in TRY or in foreign currency, and lend capital market instruments, provided that these are not within the scope of intermediary activities.

REICs cannot own more than 5% of the capital or voting rights in any company. They cannot engage in commercial, industrial or agricultural activities other than the transactions permitted in the Communiqué, they cannot undertake construction work on real estate, infrastructure investments and services in any way, and they cannot acquire personnel and equipment for such purpose. Under no circumstances may they operate hotels, hospitals, shopping centres, business centres, commercial parks, commercial warehouses, housing estates, supermarkets and similar real estate properties for commercial purposes, and cannot employ personnel or give loans for such purposes. The sum of the money and capital market instrument investments of a REIC that belong to a single issuer cannot exceed 10% of the total assets of such REIC.

REICs may use loans up to five times the amount of their own capital that is included in the unconsolidated or individual financial statements prepared and disclosed to the public at the end of the accounting period in order to meet their funding needs or the costs related to their portfolios and may issue debt instruments within the limitations of Turkish capital market legislation.

Limitations on the activities of REICs that will operate a portfolio consisting exclusively of infrastructure investments and services are also detailed in the Communiqué. In addition to other restrictions, they cannot invest in infrastructure investments and services and related projects abroad.

b. Portfolio principles and limitations

Limitations on portfolios of REICs are also detailed in the Communiqué. In addition to other restrictions, REICs are obliged to invest at least 51% of their assets in real estate, real estate projects, rights on real estate, real estate investment fund participation shares, and companies in which they have 100% participation in the capital.

For REICs that will operate a portfolio consisting exclusively of infrastructure investments and services, the percentage of assets that must be invested in the real estate assets listed above is increased to 75%. In case of violation of this ratio, a one-year grace period may be granted to REICs by the CMB from the end of the accounting period in which the violation occurred. If the breach is not remedied at the end of the period, an application must be made to the CMB to amend the articles of association in a way that does not cover real estate investment activities, within three months at the latest from the end of the period.

For all types of buildings and similar structures to be included in the portfolio, the occupancy permit must be obtained and a freehold ownership must have been established. Only real estate and rights on real estate that do not have any encumbrance annotations that will directly and significantly affect the value of the real estate can be included in the portfolio. The ratio of land and plots in the portfolio for which no transactions have been made for the development of a project for more than five years from the date of purchase cannot exceed 20% of the REIC's assets.

REICs may establish the right of superficies, usufruct rights and time-share servitude in their favour on real estate properties owned by other persons and may transfer these rights to third parties. Provided that they acquire their ownership, they may invest in real estate assets abroad and in foreign capital market instruments.

Valuation principles

For the transactions listed in the Communiqué, REICs are obliged to determine the market values and current rental values of the assets and rights subject to the transaction.

It is obligatory that the market values of the assets and rights to be included in the portfolio and the valuation of the current rental values be carried out by qualified institutions and organisations as determined by the CMB, and the selection of the valuation firm should be made according to the conditions determined in the Communiqué. Accordingly, REICs must specify the valuation company that will provide the valuation service for each asset that needs to be appraised by decision of the board of directors, disclose this to the public, and send a copy of the decision to the CMB. Specified valuation companies may only be changed with the approval of the CMB after the reason for the change is sent to the CMB.

REICs may receive service from the same real estate valuation company for a maximum of three consecutive years for each asset in their portfolio that needs to be appraised.

Trading, leasing and similar transactions to be made regarding the assets in the REIC's portfolio or assets planned to be acquired are carried out by taking into account the appraisal values determined. If values higher than the appraisal value are taken into consideration in purchase transactions and lower than 95% of the appraisal value in sales and leasing transactions, taking into account the current market or payment conditions, this situation must be disclosed to the public.

Public disclosure and informing investors

REICs are obliged to announce the market values of the assets and rights that will be the subject of the transactions listed in the Communiqué, as well as the valuation reports they have made regarding the current rental values, on Turkey's Public Disclosure Platform ("PDP"). They should announce the purchase, sale or lease transactions exceeding 2% of the assets included in their latest financial statements disclosed to public on the PDP within the first business day following the transaction at the latest. They are obliged to announce purchase, sale or rental transactions not exceeding 2% on the PDP collectively within 10 working days following the end of the accounting period at the latest.

Information contained in the announcements and advertisements to be made during and after the public offering period should not be incorrect, misleading, baseless, exaggerated or incomplete, should not cause investors to have inaccurate ideas about the current conditions of the company, and should not contain misleading statements about the efficiency, profitability or financial situation of the company. Texts, pictures, photographs or images that do not coincide with the real situations of the assets in the partnership portfolio should not be used in these announcements and advertisements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Turkey: Real Estate Investment Companies In Turkey