First four years of Turkish REIFs
Real Estate Investment Funds (REIFs) were introduced into Turkish law on January 3, 2014 after the Capital Markets Board of Turkey (CMB) published its Communiqué in the Official Gazette. This Communiqué was put in place to provide the regulatory framework for the establishment and operation of Turkish REIFs, the sale of Turkish REIF Units to Qualified Investors (QIs), and related transparency and reporting requirements for REIFs.
Turkish REIFs are contractually formed open-end funds. They have no legal personality and are managed by Portfolio Management Companies (PMCs) or PMCs with limited activities such as Real Estate Portfolio Management Companies (REPMCs) that have to be established in joint stock company form. One PMC or REPMC may manage several REIFs. An REIF is set up as a specialized fund which is accessible to only QIs.
The Communiqué introduced a lightly regulated though flexible regulatory model, in line with international market standards and customary practices for REIFs. Similar to the Alternative Investment Fund managers Directive (AIFMD), the Communiqué sets forth provisions on custodianship, transparency and reporting requirements for sponsors and/or managers.
As mentioned in the latest PwC-ULI joint report, Emerging Trends in Real Estate Europe 2018, Europe’s real estate industry remains ‘‘cautious but positive’’ as it comes to terms with today’s low-return market and the longer-term disruptive forces of technology and social change. Similarly, we are “cautious but positive” on the future of Turkish REIFs.
Turkey has been one of the major emerging markets in the real estate industry since 2003. Despite global, regional and domestic instability in recent years, not only domestic but also international investors continue to consider Turkey to be an emerging market in the real estate sector, particularly because of its high population growth and strong demand for housing.
Despite the hardships of the last couple of years, according to Investment Support and Promotion Agency of Turkey reports, over the last decade the real estate sector accounted for approximately 8.4 percent of GDP, and on the investment side, FDI inflows stood at $10.8 billion, with real estate and construction garnering $4.2 billion (38.8 percent) of total FDI in 2017. Recently in the Turkish real estate market, most investors have made investments in residential assets, taking into account government support in that area and for urban transformation projects.
On the other hand, since the introduction of REIFs in 2014, which unfortunately coincided with a slowdown in Turkish real estate investments, as of May 2018, 6 new REPMC’s and 33 REIFs have been established by 14 PMCs (six of them being these new REPMCs) and have issued participation units. Yet so far there is no publicly available data on the quantity of participation units that have actually been sold to investors, or the number and profiles of such investors. These REIFs have various investment strategies, although the majority of them have been established to invest in specific properties (e.g., a shopping mall or residential property), while some focus on land investments and others on specific regions within the scope of their investment strategies.
Almost half of these REIFs have been established for an indefinite period of time (which is somewhat unusual compared to REIFs globally) while the rest have terms ranging from 4-12 years.
Generally, management fee charges range from one to two percent per annum and only some charge exit commissions (e.g., 10 percent) while others do not impose such commission charges at all, raising questions as to the sustainability of the model for the PMCs. Further, unlike common practice in global REIFs, there are four REIF units which are traded on an exchange (BIST) and which do not operate on a contractual commitment basis, but rather simply rely on standard format fund circulars.
Although the Turkish REIF regulation is largely in line with global standards, providing a tax efficient, secure and flexible investment platform due to the possibility the Fund, its investors and the PMC/REPMC can freely set contractual terms and conditions for the operation of the REIF through an investors agreement (e.g., setting rules around commitments and the desired governance model). And because there is substantial room for growth, it seems that the Turkish ecosystem needs time to improve and further align with the best global REIF practices, especially when it comes to fund documentation.
Proper fund documentation (e.g. investors agreement) is particularly important to mitigate potential future disputes among investors and PMC/REPMCs that have been seen elsewhere, especially after the global economic crisis in the late 2000s. Building investors trust in Turkish REIFs is critical. Turkish investors, traditionally known to be hesitant to invest their savings in financial products, should be given time, and they require patient and convincing effort, deserve world class offerings providing legally and financially secure solutions, much like those international investors would expect to see.
Despite the government’s policies encouraging pension funds to invest in REIFs, empirical observations suggest that Turkish pension funds have so far been somewhat hesitant to do so. They seem to need more time to digest the idea of investing in essentially illiquid assets such as REIFs, should they seriously aim to reach out for relatively higher yields, which they are much in need of. Yet given the vast opportunities for returns, we are optimistic about the future appetite of Turkish pension funds as regards REIFs in the long-term.
Hence for the future, given their potential, we are “cautious” but rather “positive” regarding the future potential of Turkish REIFs.
The opinions expressed in this page are the author’s own and do not reflect the views of the firm and the publication or any other individual attorney.