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01 February 2016

Turkey: A New Capital Market Instrument: Real Estate Investment Funds in Turkey

By the enactment of the Communiqué on Real Estate Investment Funds (“REIFs”) III-52.3 (Gayrimenkul Yatırım Fonlarına İlişkin Esaslar Tebliği), published in the Official Gazette numbered 28871 and dated 3 February 2014, Real Estate Investment Funds were introduced into Turkish law. The Communiqué, which entered into force on 01 July 2014, regulates the establishment and operations of REIFs. Since its enactment, more than 50 applications to establish REIFs have been made to the Capital Market Board (“CMB”).

Investment funds under capital market law

The Capital Market Law No. 6362 (Sermaye Piyasası Kanunu) (“CML”) creates the infrastructure for REIFs in Turkey. Art. 52 of the CML defines investment funds as “an asset (i) which is established by portfolio management companies (ii) within fund rules and in conformity with fiduciary ownership principles (iii) on account of at least one investor (iv) with cash or other assets gathered from such investor(s) (v) pursuant to the provisions of CML, (vi) in return for fund units, (vii) in order to operate the portfolio(s) consisting of instruments and rights determined by the Board, and (viii) which does not have full legal capacity nor personality”. Like capital market organisations, REIFs fall under the supervision of the CMB and are subject to its decisions.

Form & activities of real estate investment funds

Pursuant to the Communiqué, REIFs are limited legal entities (and thus have limited legal personality) established with the approval of the CMB. Real estates assets are registered in the name of the REIFs that own them. Funds cannot engage in any business other than the operation of a portfolio composed of the following assets and transactions:

(i) Real estate and property rights;

(ii) Private and public debt instruments as well as shares of joint-stock companies established in Turkey, including those covered by the privatisation process;

(iii) Foreign private and public sector debt instruments and joint-stock company shares tradable within the framework of Governmental Decree no.32 on Protection of the Value of Turkish Currency, put into force by a Decree of the Council of Ministers no. 8914391 dated 7811989;

(iv) Time deposits and participation accounts;

(v) Investment fund units;

(vi) Repurchase (repo) and reverse repurchase transactions;

(vii) Lease certificates and real estate certificates;

(viii) Warrants and certificates;

(ix) Settlement and custody bank money market transactions;

(x) Cash collaterals and premiums of derivative instruments;

(xi) Specially designed foreign investment instruments and loan participation notes; and

(xii) Other investment instruments deemed appropriate by the Board.

REIFs can be established solely by portfolio management companies and real estate portfolio management companies.

Restriction of investments

At least 80% of the total fund net value of a REIF must consist of real estate investments. This value shall consist of Real Estate Investments (+) Other Investments (+) Receivables ( – ) Liabilities. In making this calculation, the capital market instruments issued by real estate investment companies should be taken into consideration, as are shares of joint-stock corporations with real estate investments comprising at least 75% of their total assets, real estate certificates, and fund units of other real estate investment funds.

In addition, a maximum of 20% of the fund’s net assets value can be invested in shares of joint-stock corporations with real estate investments consisting of at least 75% of their total assets (according to the financial statements prepared under the provisions of legislation they are subject to). Real estate investments which individually exceed 20% of the fund’s net assets value shall not exceed 60% of the fund net assets value shall not, in sum total, exceed 60% of the fund’s net assets value.

Tax exemptions

In accordance with Turkish tax law, income arising from REIFs is fully exempted from corporate tax. Income of REIFs also benefits from a 0% withholding tax.

In accordance with Turkish tax law, income arising out of operations of REIFs is fully exempt from corporate tax. Income of REIFs also benefits from a 0% withholding tax.

author: Murat Kutluğ