Turkey: A New Means For Funding Real Estate Projects Beyond Conventional Methods – Real Estate Investment Funds

The Capital Markets Board (the "Board") has introduced a new financing model for real estate projects with its Decree on the Principles Regarding Real Estate Investment Funds1 (the "Decree"). Given the flexibility of the real estate investment fund model (no public offering procedure, easier liquidation process, etc.) in comparison with other funding methods (real estate investment companies, etc.), it is expected that real estate investment funds will gain popularity as a new financing tool for real estate projects within a short time following the Decree's coming into force on 1 July 2014.

The real estate investment fund is defined under the Decree as an estate, established for a definite or indefinite period of time for the purpose of managing the assets acquired with the funds provided by qualified investors in return for contribution shares. The portfolio of the fund should be operated based on fiduciary ownership principles in the name of the investors. Real estate investment funds may be founded for the purposes of both investing in a specific project and/or sector as well as for an unspecified purpose.


A real estate investment fund may only be established by portfolio management companies and real estate portfolio management companies (the "Founder") that are registered with the Board. The establishment of a real estate investment fund is subject to the approval of the Board. To obtain such approval, the internal regulation of the fund, the standard form and other relevant documentation, as may be requested, must be submitted to the Board. Upon the Board's approval, the fund is established upon the registration of the internal regulation of the fund before the relevant trade registry.

Founders may either manage the fund directly or hire another portfolio management company or real estate portfolio management company as the manager of the fund.

Real estate investment funds do not have legal personality, the assets are held by the fund on the basis of the fiduciary ownership principles on behalf of its investors.2 As an exception, the fund is deemed to have legal personality with respect to the registration of real estate related rights. In other words, the real property held by the fund will be registered before the relevant land registries in the name of the fund.

With the purpose of protecting investors' rights, the estate of the fund is deemed separate and different from the estate of the Founder, portfolio trustee and/ or the portfolio manager. Accordingly, the assets of the fund cannot be levied; even for the collection of public receivables, put in pledge and provided as a guarantee for the obligations of the Founder and/or portfolio manager. The obligations of the Founder and/or portfolio manager to third parties cannot be set off with the receivables of the fund from such third parties.

Qualified Investors - Contribution Shares

Contribution shares are issued to investors, in return for the cash provided by such investors to the fund. The contribution shares of the real estate investment funds do not have any nominal value. The value of the contribution shares is determined on the basis of the total value of the assets of the fund (i.e., total value of the assets / total number of the contribution shares). Accordingly, if the fund is managed profitably by the Founder or portfolio manager and the value of the assets increases following the establishment of the fund, the value of the contribution shares owned by the investors will increase proportionately, which will constitute the return of the contributors' investment in the fund.

As per the Decree, contribution shares may only be issued to qualified investors,3 which are generally defined as the legal or real persons holding cash deposits and financial assets exceeding TL 1,000,000.4 Accordingly, the issuance procedure in real estate investment funds is simpler than that in the public offering procedure: the Founder should apply to the Board with the issuance certificate (ihraç belgesi), the standard form and other relevant documentation as may be requested by the Board. Following the approval of the issuance certificate by the Board, the contribution shares of the fund may be issued and submitted to the investors through appropriate distribution channels.

Investors may always exit the fund by selling their contribution shares to other qualified investors. However, unlike in other types of investment funds, the investors may not exit from the fund by freely returning their contribution shares to the real estate investment fund. The return of the contribution shares may be restricted under the fund documents (internal regulation, issuance certificate, etc.) with certain time periods (e.g., once a year, etc.).

Moreover, the return of the contribution shares of the funds having a definite duration may be restricted to the complete term of the fund, which means that the contribution shares may only be returned to the investors upon the dissolution of the fund.

The foregoing restriction regarding the return of the contribution shares arises from the immovable nature of the assets held by the fund. The liquidation of the assets are more time consuming than other types of financial instruments, such as equity, forex transactions, etc., which restricts the ability of the fund for immediate return of the contribution shares (liquidity issue).

The Decree adopts a flexible approach with respect to the liquidity issue. It does not impose any minimum cash requirement to ensure the liquidity of the fund. Instead, the Decree encumbers all responsibility for ensuring the liquidity regarding the return of the contribution shares to the Founder. Such liquidity may be ensured by the Founder by any means deemed appropriate. The Founder may also opt for purchasing the contribution shares in its name, to ensure the liquidity for the return of the contribution shares. However, contribution shares to be acquired by the Founder may not exceed %50 of the total number of contribution shares and the respective contribution shares should be returned to the fund within 2 years following the acquisition of the contribution shares by the Founder.

It is possible to apply a commission for sales and/ or return of contribution shares, provided that terms and conditions regarding such commission are expressly set forth in the internal regulation and the issuance certificate. Such commissions would be included in the fund's assets as revenue.

Fund Estate

The estate of the fund is comprised of real estate investments, as well as other types of financial instruments. However, at least 80% of the total value of the fund's assets should be real estate related investments, as real property, real estate related rights, shares of real estate investment companies and joint stock companies 75% of the total assets of which consist of real estate investments, real estate certificates and other real estate investment funds. The remaining part of the estate may consist of other types of rights and investments such as deposits, investment funds other than real estate investment funds, derivative transactions and other similar financial instruments.

The total net asset value of the fund should reach at least TL 10,000,000 within a year at the latest, following the commencement of the sales of the contribution shares. The assets of the fund should be subject to asset valuation by institutions recognized by the Board, at least once every year and the results of the asset valuation should be notified to the investors. The asset valuation should also be conducted prior to each real estate transaction of the fund.

Scope of Investments

The fund is entitled to purchase all types of real estate (land, residence, office buildings, shopping centers, hotels, etc.) and real estate related rights (construction right, usufruct right, etc.). The fund may also use credits for the investments to be made and grant mortgages over the fund's assets for such credits, on the condition that the total amount of the credits does not exceed 50% of the total value of the fund's assets, and that the Board and the investors are sufficiently informed of such credit related transactions.

The Decree sets forth certain restrictions regarding the abovementioned investments. Real estate investment funds are not allowed to make short-term real estate investments on an ongoing basis. They may not directly manage or operate real estate projects or undertake the construction works with respect to the real estate projects. If a property owned by the fund needs to be operated or any construction work should be conducted, such works must be outsourced to third parties.

All buildings and other similar constructions to be acquired by the fund must have occupancy permits and condominium ownership should be established over the respective properties. However, acquisition of buildings such as hotels, shopping centers, offices, hospitals, commercial warehouses for the purpose of gaining lease income, is exempted from the condominium ownership requirement.

Real estate investment funds may acquire real estates and real estate related rights that are subject to transfer restrictions or encumbrances (mortgages, etc.). However, the value of such real estates and real estate related rights may not exceed 30% of the total value of the fund's assets.

Agreements granting rights in favor of the funds such as promise to sell agreements, promise to sell agreements in return of land share, revenue share agreements etc. must be registered with the land registry. However, the agreements executed with the Housing Development Organization (TOKİ) and its subsidiaries are exempted from the above-mentioned registration requirement.

The Founder or portfolio manager may collect performance fee from the investors over the revenue and sale profit generated from the real estate investments and/or increase in the value of the fund's real estates, provided that such fee is expressly set forth in the internal regulation and the issuance certificate.


During the last 20 years, real estate investment funds have gained popularity in Europe. They were first regulated in Europe by Switzerland and Germany; followed by the other European states. By the beginning of 2010, the number of these funds was around 780 and their value was Euro 210 billion, approximately.5 These figures indicate the significance of the funds in the real estate investment market.

The Turkish real estate market (as an emerging and alternative investment tools to become a mature investment jurisdiction. Given the relative flexibility of the legislation, it seems that real estate investment funds may attract the attention of local and global market players and contribute to the achievement of the above goal


1 Published in the Official Gazette dated 3 January 2014 and numbered 28871.

2 Under fiduciary ownership, a person (trustee) holds a property on behalf of the other party (beneficiary) on the basis of a written or verbal agreement between the parties. Legal owner of the property is the trustee. However, the property is not held by the trustee for its own benefit, however, kept by the trustee for the benefit of the beneficiary.

3 Defined in Articles 31 and 32 of the Decree on the Rules regarding Establishment and Operations of the Investment Institutions published in the Official Gazette dated 17 December 2013 and numbered 28854 - Article 2 of the Decree on the Sale of Capital Market Instruments published in the Official Gazette dated 28 June 2013 and numbered 28691.

4 Professional investors such as (i) intermediary firms, banks, portfolio management companies, collective investment institutions, pension mutual funds, insurance companies, mortgage financing institutions, asset management companies and institutions established abroad, which are equivalent to the above-mentioned institutions, (ii) retirement and support funds, (iii) public entities and institutions, international institutions such as the Central Bank of Turkish Republic, the World Bank, International Monetary Fund, and (iv) other institutions deemed to be similar to the abovementioned institutions by the Board, are also considered as qualified investors.

5 Gayrimenkul Yatırım Fonları, Yalçın Özge OKAT, http:// www.sermayepiyasasi.org/yatrm-fonlar/makaleler/703- gayrimenkul-yatrm-fonlar-yalcn-oezge-okat.html , p.1.

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