Real Estate Investment Companies in Turkey Revisited

The Turkish real estate market, increasingly growing following the economic and political stability maintained in 2005, greatly benefited from the worldwide growth of the real estate market. With new foreign and domestic investors turning their attention towards Turkey, the Government began to analyze suitable investment models and instruments. Once again, the most discussed topic concerning Turkey-related investments in real estate, some of which took place at real estate summits such as MIPIM (Cannes) and GYODER (Istanbul), were Real Estate Investment Companies ("REIC").

As previously introduced in our Autumn 2004 issue, a REIC is a corporation whose primary business is to own and manage real estate properties, such as apartments, office buildings, hotels, shopping malls, various facilities or warehouses. There are three types of REICs that may be established within the framework of the Communiqué on Principles regarding Real Estate Investment Companies¹ ("Communiqué") issued by the Capital Markets Board ("CMB"). These are (i) limited-term REICs established for a particular project; (ii) limited or unlimited-term REICs established to invest in particular areas; and (iii) limited or unlimited REICs formed without any restriction on scope or objectives. Structurally, a REIC is set up as a joint stock corporation, with 49% of its shares to be publicly owned.

The Communiqué sets forth the requirements for a company to be established as a REIC and qualifications of the prospective incorporators of REICs. The Communiqué is regularly amended by the CMB in order to make it compatible with the world REICs markets.

The CMB recently announced a new draft communiqué, contemplating certain amendments regarding REIC establishment requirements and the qualifications for the incorporators of REICs ("Draft Communiqué"). The Draft Communiqué aims to facilitate the use of REICs as investment vehicles, and thus, the requirements have been relaxed.

The highlights introduced by the Draft Communiqué are as follows:

• For REICs with an initial capital of less than 50 million YTL (approximately USD 32 million), share certificates representing at least 10% of the initial capital should be issued in return for cash. For REICs with an initial capital equal to or greater than 50 million YTL (approximately USD 32 million), the share certificates representing 7.200.000 YTL (approximately USD 5 million) of the initial capital for the REIC should be issued in return for cash.

• The required qualifications for the legal entity incorporators have been reduced by also recognizing the real estate experience of such legal entities’ majority shareholders. Moreover, the net profit adequacy requirement for such entities has been removed.

• The removal of certain restrictions such as the restriction not to invest more than 10% of the total portfolio amount in capital market instruments and the requirement to have three different types of immovable property each with a value not less than 10% of the total value portfolio provides flexibility for the REIC’s asset portfolio.

• The requirement for the majority of the board of directors to be Turkish citizens has been removed.

• REICs can now manage their securities and liquid portfolios, provided that the REIC must either (i) hire one or more portfolio managers possessing portfolio management licenses in accordance with the CMB requirements; (ii) consult with an investment consulting company that is authorized by the CMB; or (iii) work with an authorized portfolio management company in accordance with the CMB legislation.

• The minimum requirements for REICs to invest in foreign real estate, real estate projects and real estate based capital market instruments, has been increased to 49% of their total portfolio value.

However, it should be noted that even if the Draft Communiqué is enacted, REICs will not be able to engage in the real estate construction business and may not employ personnel² and acquire equipment in order to perform such activities. Furthermore, REICs are not allowed to operate the real properties within their portfolio for commercial interests and may not employ anyone for such activities (e.g. cleaning, security, building administration etc.). Finally, REICs are not permitted to continuously engage in the short-term purchase and sale of real property.

Investors must consider that, although the land may be purchased by a REIC incorporated in accordance with the Communiqué, the construction would need to be undertaken by another company and, if so planned for a development by an investor, residence condominiums or shopping malls could not be operated by the REIC.

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.