Considering that the real estate investment trusts (“REITs“), of which there are currently 33 in Turkey, are subject to the strict supervision of the Capital Markets Board (“CMB”) and that they must be publicly traded at a minimum of 25%, the business world acts with the awareness that the REIT should have a very transparent functioning and approaches the formation and transformation of REITs cautiously. On the other hand, considering the tax exemptions provided to REITs and the unity of power provided by REITs, it is known that individuals/institutions definitely evaluate the formation or transformation of REITs once in their internal operations. It is observed that if individuals/institutions conclude that they can adapt to the REIT structure and functioning and that REIT is the appropriate tool to achieve their goals, they carry out the necessary work for this formation or transformation. However, the formation and transformation of REITs is subject to CMB supervision, just like its operation, and therefore, it should be noted that not all formation and transformation attempts have been successful.
It is certain that REITs constitute a beneficial structuring in terms of the national economy since they operate a portfolio of real estate related values and are organised as joint stock companies. In addition, the advantages for the main investors should be explained.
Most importantly and primarily, it should be taken into consideration that the main problem in our country is the shortage of financing resources and that REITs are of great importance in eliminating this shortage. The realisation of large-scale real estate projects such as business centres or shopping malls requires companies to undertake a significant financing burden. This means financing through loans, which often means an interest burden for companies with insufficient own resources. Financing such projects with the money to be collected from the public in return for REIT shares will ease the financing burden of the companies.
In addition, the liquidity of REIT stocks in the stock exchange and the diversification of investment through the portfolio make a great contribution to attracting alternative investors to the capital market. This type of partnership is particularly favourable in attracting and attracting foreign capital, and may serve Turkey to benefit from large-scale foreign funds seeking long-term investment instruments.
Pursuant to Article 5, paragraph 1, subparagraph (d) of the Corporate Tax Law numbered 5520 (“CVL”), it should be emphasised that REIT earnings are exempt from corporate tax. Although Article 15, Paragraph 3 of the KVK stipulates that 15% tax deduction will be made from REIT earnings, whether distributed or not, the rate of withholding tax to be made on these earnings (whether these earnings are distributed or not) has been determined as 0% with the Decree of the Council of Ministers numbered 2009/14594. These tax advantages are an incentive for investors.
In addition, the person who wants to lease the immovable property by investing in it personally and directly and generate rental income may face many problems such as late or non-payment of the rental fee, eviction lawsuits, taxes to be paid. However, in case of investing in a REIT, it will be possible to benefit from the income of a real estate portfolio managed by specialised persons and continuously audited by the CMB. For this reason, this type of partnership can provide larger and more effective results than individual investments.
On the other hand, it would be appropriate to raise some issues that are avoided in the formation or transformation of REITs. REITs are subject to continuous independent audit as of the accounting period in which their shares are offered to the public. As a result, the financial statements of the company at the end of the 6th and 12th months are audited by an independent audit firm listed by the Board. Although this situation creates confidence for investors, it is one of the possible risks that public disclosure obligations may lead to the disclosure of trade secrets and adversely affect competitiveness.
In addition, corporations established as REITs or transformed into REITs through amendment of the articles of association must provide the necessary space, equipment and personnel and establish the organisation necessary for the execution of the activities within 3 months following the registration of their establishment or amendment of the articles of association with the trade registry in order to be able to sell their shares through public offering, The partnerships established as real estate investment trusts are required to fulfil their commitments regarding the appointment of the general manager and the assets to be included in the portfolio, complete the public offering application form, the form and principles of which will be determined by the CMB, and the documents specified in the form, and apply to the Board for the approval of the prospectus for the public offering of shares representing at least 25% of their issued capital. As can be seen, the bureaucratic procedures applied in public offering are quite high and this situation is considered as the disadvantages of REITs.
In the light of all these explanations about REIT and the evaluation of the advantages and disadvantages of REIT, it would be appropriate to make an explanation about the Real Estate Investment Fund (“REIF”), which may be an alternative investment form to REIT. GYF is another form of collective investment regulated by the CMB.
In Article 4/1 of the Communiqué on “Principles Regarding Real Estate Investment Funds” issued by the CMB on 03.01.2014, a REIF is defined as “an asset without legal personality established for a period of time or indefinitely by portfolio management companies and real estate portfolio management companies that have obtained an operating permit from the Capital Markets Board in order to operate a portfolio consisting of assets and transactions determined by the Capital Markets Board in accordance with the principles of fiduciary ownership for the account of shareholders with the money collected from qualified investors in return for participation shares in accordance with the provisions of the Capital Markets Law” .
The expression “qualified investors” in this definition should be taken into consideration. As a matter of fact, REIFs stand out as an alternative investment opportunity for “qualified investors” who are interested in real estate investment but do not want to or do not have enough time to deal with transactions such as purchase, sale and leasing of real estates. Nitelikli yatırımcıların kim olduğu ise SPK mevzuatı uyarınca; “Yerli ve yabancı yatırım fonları, emeklilik fonları, yatırım ortaklıkları, aracı kurumlar, bankalar, sigorta şirketleri, portföy yönetim şirketleri, ipotek finansmanı kuruluşları, emekli ve yardım sandıkları, vakıflar, 506 sayılı Sosyal Sigortalar Kanununun geçici 20. funds established pursuant to the article of the Capital Markets Law, public benefit associations and other investors to be determined by the CMB to be similar to these institutions in terms of their qualifications, and real persons and legal entities holding Turkish and/or foreign money and capital market instruments amounting to at least TL 1 million”.
Although it should be noted that REITs and REIFs are basically similar to each other, it would be appropriate to emphasise the differences between them. The main difference is that while REITs have the status of public joint stock companies, REIFs are not “companies” established under the Turkish Commercial Code and accordingly do not have legal personality.
However, the obligation to offer at least 25 per cent of the shares of REITs to the public is not in question for REIFs, and as mentioned above, it is deemed sufficient to sell the participation shares of REIFs to qualified investors. Since they can only trade with qualified investors, REIFs are not subject to as stringent obligations and regulations as REITs, which are publicly traded companies.
In addition to all of these, the benefits of the SIFs should also be emphasised. Firstly, it should be noted that the fact that the fund’s investments are managed by experienced professionals and that investment decisions are based on detailed market research reduces the risk factor for investors.
However, the centralised management of the money collected from a large number of investors enables investment in large-scale and more efficient properties that cannot be invested individually.
Pursuant to subparagraph (d) of the first paragraph of Article 5 of the LPPD, the earnings of REIFs are exempt from corporate tax, provided that they are established in Turkey, and they also have advantages over alternative investment methods in terms of withholding and income tax.
On the other hand, all operational transactions such as purchase, sale, leasing, collection, follow-up of receivables, eviction of tenants, follow-up of zoning and permit processes, accounting of transactions and follow-up of tax liabilities are carried out by the portfolio manager and investors do not need to spend time on these works.
In addition to these, it should be emphasised that the GIFs also carry certain advantages for foreign investors. For example, as a result of the fact that they are subject to a serious CMB supervision, they create an environment of confidence for foreign investors who wish to invest in real estate in Turkey. It should also be noted that the gains arising from the investments made by foreign investors within the scope of the REIF system are not subject to taxation in their home countries.
Which of these two capital market institutions, which are very important for the financial market, will be preferred should be decided by evaluating on a case-by-case basis and basically by considering the nature of the relevant real estate/project, the type of investors, the nature and duration of the investment, the current status of the real estate/projects to be evaluated, the tax positions of investors, developers and sellers. Therefore, it is certain that different results will emerge according to each variable. Nevertheless, it should be emphasised that whichever one is preferred, both capital market institutions are recognised and known in international markets and will enable the development of capital markets in our country, especially in the real estate sector.
