A. Overview and Background
Real Estate Investment Trust ("REIT") is a financial instrument that enables investors to aggregate their capital and enter the real estate market without the encumbrances associated with direct ownership.1
REITs were first introduced back in the 1960s when U.S. President Dwight D. Eisenhower signed a law that allowed regular investors to invest in the real estate instrument.2 By the same token, in 1995, Turkiye also introduced a legal framework for REITs under the Capital Markets Law. Turkish REITs, which are called 'Gayrimenkul Yatırım Ortaklıkları' ("GYO"), give investors access to a diversified real estate portfolio.
The market value of REITs around the world reached $1.513 trillion US Dollars in 2024. This is eye catching in the sense that this figure alone supports the notion that REITs are important financial instruments.3 Similarly, one can also see the strong growth when looking at the numbers of Turkish REITs. The total market value of Turkish REITs reached about ₺240.4 billion Turkish Liras4 (roughly 7 billion US Dollars) and it is expected to grow by a remarkable 31% annually in the following years.5
Before delving into the details, it is important to highlight that a real estate can be contributed to a REIT though two primary methods; (i) contribution as capital in kind which constitutes the main subject of this essay, and (ii) transfer through sale or lease. Broadly speaking, the former involves directly adding the property to the REIT's capital structure in exchange for equity or shares, while the latter method entails selling or leasing the real estate to the REIT, which then manages or owns the property as part of its portfolio. This essay then, in its own right, will focus on the first method that is contribution as capital (capital in kind) and try to shed some light over the legal and procedural framework of the Turkish REIT system.
In the following sections; section (B) will look at legal framework and criteria for contributing real estate as capital in kind. Building on this, section (C) will outline the process of contributing real estate, and section (D) will then look at the various benefits of contributing real estate as capital in kind) investing in REITs. Finally, in section (E), turning to potential challenges, we will discuss potential obstacles that may arise during the process and the legal measures that can be taken to mitigate them.
B. Legal Framework for Contributing Real Estate as Capital in Kind
The inclusion of real estate as capital in REITs constitutes an important element of the REIT framework in Turkiye, offering both legal and commercial advantages. In this section, we will look at the legal regulations regarding the acceptance of real estate as capital and look at the criteria required for real estate to be categorized as capital in kind according to the related legislation.
- Regulatory Requirements
In essence, the Capital Markets Law No: 6362 (in Turkish, Sermaye Piyasası Kanunu) and the rules provided by the Capital Markets Board of Turkiye (in Turkish, Sermaye Piyasası Kurulu) govern the Turkish REITs. The Communiqué on Principles Regarding Real Estate Investment Trusts III-48.1 (the "Communiqué")6 also serves as a guideline for contribution as to how to set up, run, and manage REITs.
By the same token, Turkish REITs are subject to specific portfolio and operational restrictions, as outlined in Article 22 and the following provisions of the Communiqué, which ensure legal and market compliance while safeguarding investor interests. Portfolio restrictions serve as a safety net, limiting the types of real estate assets that can be held while maintaining the stability and transparency of the REIT's portfolio. Likewise, operationally speaking, REITs are further prohibited from engaging in activities beyond their primary focus, such as producing goods or services for trade. - Criteria for Contributing Real Estate as
Capital
Art. 9 of the Communiqué identifies real estate as one of the assets that could be contributed as capital in kind to REITs, enabling its inclusion in the capital structure of the REIT. That being noted, the Communiqué also lists particular requirements that real estate must satisfy in order to be considered capital in kind. Thus, several legal criteria apply when real estate is provided as capital to a REIT, each intended to protect the interests of the REIT and its investors. In fact, under Art. 4 of the Communiqué III-48.1, REITs have to be set up as joint stock companies (in Turkish, Anonim Şirket).7 Consequently, especially Art. 342 and 343 of the Turkish Commercial Code ("TCC"), which regulate capital in-kind contributions, also bring REITs into the scope of the TCC in this regard.
Having established the legal framework above, let us turn to various requirements for real estate to be considered capital in a Turkish REIT.
- Legal Ownership and Registration
This is paramount in the sense that the property must have a clear legal standing. Put simply, only properties that are officially registered with a valid title deed (in Turkish, tapulu) can be considered as capital contributions under Turkish law. Thus, any disputes regarding ownership need to be resolved before any transaction. This ensures compliance with Art. 342 and 343 of the TCC and Art. 9 of the Communiqué, that the property is legally protected and ready for transfer, free from any encumbrance.8 - Free from Encumbrances
Apart from the clear ownership, the property must also be free of any encumbrances, such as mortgages or liens. The reason behind this is that legal or financial liabilities encumbrances adversely affect the value of the property, and thus would not qualify for capital contribution. Both the TCC and Art. 9 of the Communiqué emphasize this point because encumbrances could potentially affect the property's value. Therefore, ensuring that the property is free of such legal restrictions is vital for the REIT's ability to fully utilize the asset.9 - Valuation by Independent Appraisers
Independent, certified appraisers also have to evaluate the worth of the property. This stage is also very important since it guarantees fair evaluation and openness. When differences develop, both Art. 343 of the TCC and Art. 9 of the Communiqué demand that the lowest appraised value be applied to guarantee that all those engaged know the actual market value of the property.10 This aims to ensure that the real estate is not overpriced, safeguarding the interests of every investor engaged.11 Needless to say, this ensures that the property with its actual market value can be integrated into the REIT's capital structure. - Approval by the Board of Directors and
Shareholders
The recognition of real estate as capital requires approval from both the directors and shareholders, which must be recorded in the REIT's articles of incorporation, thereby providing formal acknowledgment of the contribution as required by the TCC and Art. 9 of the Communiqué.12 This is not simply a procedural requirement. In fact, a closer look would suggest that it aims to provide assurance to protect the interest of those shareholders who are REIT investors.
- Legal Ownership and Registration
C. The Process of Contributing Real Estate as Capital
The above section "B" examined the framework and criteria for contributing real estate as capital. In this section, we will continue to build on the earlier section and take a closer look at the procedural steps of contributing real estate as capital in kind. From the initial pledge stage, to valuation of the property and regulatory approvals, to registration, the process involves important steps for both real estate owners and REITs. We will outline each stage in detail and highlight the critical milestones and legal safeguards.
- The Pledge Stage
The process commences with a formal commitment (in Turkish, taahhüt), whereby the parties involved consent to contribute the real estate as part of the company's capital, as per Art. 128 of the TCC. As mentioned earlier in our discussion, if the REIT has not yet been established as a joint stock company (in Turkish, Anonim Şirket), it must either be created as one or converted into a joint stock structure. This naturally triggers and brings into effect the relevant provisions of the TCC governing joint stock companies.
Since the capital contribution involves real estate, Art. 128 of the TCC also requires that the property can only be accepted as capital if it has been annotated properly (in Turkish, şerh) in the land registry. This also shows that annotation is a key part of the pledge process, providing a legal basis for the capital contribution in REITs. At the same time, it serves as a safeguard and prevents unauthorized transfers before the REIT's formation is complete.
Once this legal requirement is fulfilled, the contribution of real estate must be formally outlined in the articles of incorporation of the REIT. Afterward, newly formed or converted REIT must apply to the Capital Markets Board as per Art. 8(c) of the Communiqué, which includes detailed sub-provisions relating to REIT's form and principles.13 - Valuation Process
Establishing accurate value for the property prior to its contribution as capital in kind is essential, as this valuation will also be reflected in the REIT's overall capital value. The appraisal process will be carried out by certified experts who are duly appointed by the court (commercial court of first instance) located in the same vicinity as the company's registered headquarters. These experts will be vested with the required authority by the applicable court, and they will be responsible for evaluating the true and fair value of the real estate in accordance with the relevant legislation. That said, although the court will rely on this appraisal, stakeholders who have interests in the transaction will have the right to challenge the valuation in the appraisal report.14 - Legal Approval and Registration
The transaction must be approved by the REIT's board of directors and shareholders following the completion of the valuation process. This is noteworthy in the sense that it assures that the property's contribution as capital in kind is consistent with the REIT's long-term objectives and is also outlined in the company's foundational documents, i.e., articles of association. According to Art. 343 of the TCC, the incorporation of non-cash assets, such as real estate, into a company's capital structure necessitates adherence to specific procedures to safeguard both shareholders and the financial stability of the company, that is, REIT.
Following this formal approval, the final step is to register the REIT with the trade registry (in Turkish, Ticaret Sicili), as stipulated by TCC Art. 128. This article stipulates that, in order for real estate to be acknowledged as a component of the company's capital, it must initially be annotated in the land registry (In Turkish, Tapu). This annotation functions as a protective measure, preventing unauthorized transactions and safeguarding the rights of the REIT regarding the asset until registration is completed. Upon registration of the REIT in the trade registry, the contributed real estate is legally recognized as part of the REIT's capital base, allowing it to claim full ownership rights over the asset.
This legal procedure; from acquiring board approval to registering with the commercial trade registry, supports the integrity of the REIT's capital contributions, ensures adherence to Turkish commercial law, and ultimately seeks to establish a robust foundation for sustainable market growth.
D. Strategic Rationale for Contributing Real Estate as Capital
Having discussed the procedural steps above, the contribution of real estate assets as capital to REITs also provides investors with a variety of advantages. In fact, the provision of financial flexibility through the enhancement of fixed asset liquidity is one of these advantages. Apart from this, REITs also provide portfolio diversification, mitigate risks, and allow real estate proprietors to maintain professional oversight of their assets in addition to tax benefits. We will briefly take a look at each of these advantages below:
- Liquidity and Financial Flexibility
Given the fact that real estate is not a liquid asset, it may be argued that REITs offer investors an advantage by enhancing the liquidity of these fixed assets. Further, since real estate is categorized as a fixed investment, it may not be possible to quickly sell and convert it into a liquid asset. On the other side of the coin, the stock exchange, for example (in Turkiye, Borsa Istanbul) trades REIT shares, enabling investors to quickly and easily invest and liquidate their real estate assets,15 and further, direct their portfolios according to their investment strategies and needs.16 - Tax Considerations
REITs also provide various tax benefits, which may be interesting to investors as extensively outlined by the PwC bulletin titled "Worldwide Real Estate Investment Trust (REIT) Regimes - Compare and Contrast."17 Be that as it may, tax regimes differ greatly from one jurisdiction to another. For example, quite recently, in Turkiye, the Communiqué amending the General Communiqué on Corporate Tax Serial No. 23, published in the Official Gazette on Sept. 28, 2024, established new tax regulations for the real estate sector, effective January 1, 2025. In compliance with these regulations and supplementary tax advantages, our firm provides comprehensive consultancy services to investors in this sector. - Portfolio Diversification and Risk
Management
We have already mentioned that in the traditional sense, real estate is a fixed asset. For instance, a REIT may include shopping centres, office buildings and housing projects. In light of this, REITs offer investors a different alternative for portfolio diversification by investing in different real estate projects and assets. Therefore, one could argue that REITs offer a safety net by diversifying their portfolios, investors can distribute their investment risks and protect themselves to some extent against fluctuations in the market.18
E. Challenges and Considerations
Be that as it may, although REITs in Turkiye provide considerable financial and strategic benefits, the process of contributing real estate assets as capital via REITs can be easier said than done, presenting various challenges. Investors and property owners must deal with complex legal, administrative, and operational hurdles in the process. Key issues such as valuation disputes, regulatory requirements, and the long-term nature of REIT commitments require careful planning and professional support to ensure compliance and minimize risks. So how can this whole process be managed smoothly? The following section will elaborate on the key challenges that need to be considered for the capital raising process to run smoothly.
- Valuation Disputes
This is the elephant in the room when discussion the REIT contribution process. Disputes may arise between the REIT and the owner of the real estate concerning the valuation of the property intended for capitalization. Unless resolved amicably between the parties involved, such disagreements may have an adverse effect upon the process of capital contribution.19 If the dispute remains unresolved, it is crucial to conduct a precise and transparent valuation, as the matter may be escalated to the judiciary.20 - Legal and Administrative Hurdles
The intricate procedures for establishing REITs and capitalizing real estate assets involve legal and administrative processes regulated by official authorities. This is particularly apparent in matters such as adherence to Capital Markets Board regulations, acquiring requisite permits, and finalizing legal procedures. Though such procedures can be administratively burdensome, they are also necessary. Therefore, they require careful planning by investors along with the help of a legal professional. In particular, administrative judicial decisions should be used to examine the limits of the administration's discretionary power and how this power is balanced with the review of compliance with the law.21 - Long-Term Commitments
Time is yet another aspect that investors must take into consideration. Transferring fixed assets to a REIT presents a double-edged sword; offering a certain level of stability, yet it is a commitment that is made for an extended period of time nonetheless. In this context, owners should consider the consequences of relinquishing direct control over the asset and the potential effects on their overall investment strategy.22
F. Final thoughts
The contribution of real estate as capital in kind to a Turkish REIT offers a novel and dynamic opportunity for investors, granting access to a diversified and flexible portfolio without the burdens of direct ownership. Turkiye's REIT structure, with a market value of approximately ₺240.4 billion Turkish Liras (around 7 billion US Dollars) and supported by robust legal frameworks, alongside a global valuation of $1.513 trillion USD in 2024, offers an attractive opportunity for both domestic and foreign investors. This approach not only allows property owners to maximize real estate liquidity and benefit from taxes but also gives investors more freedom with their portfolios, broadening capital investment in Turkish markets.
The above being noted, capital contribution in REIT is not without hurdles. From potential valuation disputes to enduring obligations, each stage of the REIT process in Turkiye necessitates meticulous legal guidance, strategic insight, and preparedness to navigate the intricacies of financing fixed assets. To put it another way, Turkiye's REIT structure calls for a mix of professional support, patient planning, and openness that safeguards every participant.
Looking on the horizon, the real potential resides in improving this framework to support sustainable development and establish an environment appealing to a wide range of investors. To this end, a legally strong foundation is very important. By pushing market innovation and supporting regulatory compliance, Turkiye's REIT industry can not only strengthen its local position but also have the potential to become well-known abroad. All things considered, REITs show the possibilities of real estate as a basic type of capital where market innovation, investor confidence, and regulatory harmony combine to generate long-lasting economic impact.
As new regulations evolve in this sector, it is important for investors and companies alike to remain informed about the new legal developments. And finally, reflecting on Benjamin Franklin's timeless insight that "an investment in knowledge pays the best interest", we can help clients steer clear of legal hurdles and provide assistance with a unique commercial perspective, optimizing both compliance and long-term growth.
Footnotes
1. CFA Institute. (2019). Understanding Real Estate Investment Trusts (REITs). Available at: https://www.arx.cfa (Accessed: 12 September 2024).
2. REIT Institute. REITs: History of innovation. Available at: https://www.reitinstitute.com/reits-history-of-innovation/ (Accessed: 10 September 2024).
3. Real Estate Investing. (2024). Global REIT Market Overview. Available at: https://realestateinvesting.com (Accessed: 12 September 2024).
4. Aydinoglu, C. (2004). Turkish REITs: An Overview of the Industry and its Performance. Massachusetts Institute of Technology. Available at: https://dspace.mit.edu/handle/1721.1/26715 (Accessed: 12 August 2024). As discussed in this paragraph, recent figures indicate that REITs have experienced immense growth, signalling maturity over the years and solidifying their position in the Turkish investment landscape as key players. That said, while these figures are relatively recent, Aydınoğlu's 2004 paper offers valuable insights into the early potential of Turkish REITs. Despite their smaller size compared to global REITs at the time, REITs demonstrated significant liquidity and growth potential, which paved the way for the robust figures seen in 2024. Therefore, it can be argued that the progression of Turkish REITs did not happen all of a sudden but gradually increased over the years. This progression, in fact, shows that the expectations for transparency, professionalism, and market integration for Turkish REITs have evolved and developed significantly over the past two decades.
5. Simply Wall St. (2024). Turkish REIT Market Report. Available at: https://simplywall.st (Accessed: 12 September 2024).
6. Communiqué on Principles Regarding Real Estate Investment Trusts (III-48.1) dated 09.10.2020 and numbered 31269. https://www.resmigazete.gov.tr/eskiler/2020/10/20201009-15.htm (Accessed: 09 August 2024).
7. Communiqué on Principles Regarding Real Estate Investment Trusts (III-48.1), Capital Markets Board of Turkiye. Available at: https://www.spk.gov.tr (Accessed: 02 August 2024).
8. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 68-70.
9. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 73-78.
10. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 90-92.
11. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 90-92.
12. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 80-85.
13. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 141-153.
14. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 154-172.
15. Oh, J.S. and Verstein, A., 2024. A Theory of the REIT. The Yale Law Journal, 133, pp.812–814. In their article, Kurtz, Monahan, and Schragger emphasize the essential function of publicly traded transactions within REIT structure, rightly highlighting that these transactions enhance liquidity, mitigate risks, and fortify governance. Conversely, they further argue that illiquid REITs forfeit these benefits, rendering them less appealing to both investors and property stakeholders. The persistence of illiquid REITs, notwithstanding structural and market-related challenges, is attributed to their aggressive marketing tactics aimed at less sophisticated investors. This critique by Kurtz, Monahan, and Schragger emphasizes that illiquid REITs do not fully conform to the fundamental principles of the REIT model and raises concerns regarding their long-term viability. Available at: https://www.yalelawjournal.org/article/a-theory-of-the-reit [Accessed 10 October 2024].
16. Cimit, İ. (2001). Türkiye'de Gayrimenkul Yatırım Ortaklıkları. Afyon Kocatepe Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 3(2), 47-58. Available at: https://dergipark.org.tr/tr/pub/akuiibfd/issue/60865/902267#article_cite (Accessed: 7 Oct. 2024).
17. PwC, 2021. Worldwide Real Estate Investment Trust (REIT) Regimes - Compare and Contrast. This booklet provides a comparison of global REIT regimes across 30 countries. Available at: https://www.pwc.com/gx/en/industries/financial-services/asset-management/publications/compare-and-contrast-worldwide-real-estate-investment-trust-reit-regimes-2021.html [Accessed 12 October 2024].
18. Cimit, İ. (2001). Türkiye'de Gayrimenkul Yatırım Ortaklıkları. Afyon Kocatepe Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, 3(2), 47-58. Available at: https://dergipark.org.tr/tr/pub/akuiibfd/issue/60865/902267#article_cite (Accessed: 7 Oct. 2024).
19. Özmen, T. R. (2024). Taşınmazın Gayrimenkul Yatırım Ortaklığına Sermaye Olarak Konulması. pp. 172-177.
20. Ayan, E., 2010. Gayrimenkul Değerlemesinde Gelir İndirgeme Yaklaşımı ve Yaklaşımın Türkiye Koşullarında Uygulanabilirliği (Kocaeli Uygulaması). Çukurova Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 19(1), pp.382-397. In his article, Ayan discusses the difficulties in valuations and how subjective judgments, especially in the income discounting approach, can affect the reliability of valuation results: "In the income discounting approach, which is widely used in real estate valuation, the variables used in the valuation process that directly affect the result are extremely open to the personal judgment of the appraiser". In addition to this, Ayan also refers to the subjective factors such as the discount rate in markets dominated by high real interest rates in the valuation process are worth considering, and emphasizes that otherwise the problem of undervaluation of real estate assets may arise. Available at: https://kutuphane.dogus.edu.tr/mvt/pdf.php [Accessed 12 November 2024].
21. Arat, N. (2011) İdari Uyuşmazlıkların Alternatif Uyuşmazlık Çözüm Yöntemleri ile Halli Önündeki Engeller, Journal of Istanbul University Law Faculty, 69(1-2), pp. 901-906. In his article, Arat emphasizes that administrative proceedings have different characteristics from civil proceedings. From a comparative law perspective, in France for example, Arat notes that administrative law has been shaped on the basis of the case law of the Conseil d'Etat and judges not only interpret the rules of law, but also create new rules of law. This gives the administrative judge a broader jurisprudential power than the civil judge. Further to his observation, Arat also states that, unlike the judicial judiciary, the administrative judiciary does not only resolve conflicts of interest between the parties; it also aims to ensure that the administration acts in accordance with the law and protects the rights of individuals. Based on this, he argues that the administrative judiciary stands out with its multifaceted functions such as ensuring the balance between social and individual interests. Moreover, he states that the administrative judiciary has the characteristic of creating case law, which causes its decisions to have different effects and consequences than the civil judiciary. Therefore, while the civil judiciary aims to resolve disputes between individuals and reconcile interests, the administrative judiciary aims to protect the rights and freedoms of individuals against the administration representing the public power by protecting the legal order. Available at: https://dergipark.org.tr/tr/pub/iuhfm/issue/9185/115054 (Accessed: 14 November 2024).
22. Kazancı, O., Ulubeyli, S. & Doğan, E., 2023. The Position and Performance Characteristics of Turkish Real Estate Investment Trusts. Presented at the 7th International Innovative Studies & Contemporary Scientific Research Congress, Tokyo, May 2023. Available at: https://www.researchgate.net/publication/371155924_THE_POSITION_AND_PERFORMANCE_CHARACTERISTICS_OF_TURKISH_REAL_ESTATE_INVESTMENT_TRUSTS (Accessed: 12 October 2024).
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