Meriç Bahçivan is head of the real estate practice at Basgül. He advised Turkish and international clients including commercial and individual sellers, purchasers, and investors on complex real estate, construction, and infrastructure projects and transactions. He also represented clients before Turkish courts on real estate related cases including the zoning plan, licensing, and expropriation disputes. He frequently advises non-Turkish clients on their real investments in Turkey. One of such clients noted in respect of a real estate matter that "[he is] excellent and very responsive – our matter was dealt with efficiently, in particular maintaining communication with us throughout. Highly recommended".

How is the real estate market in your jurisdiction being affected by inflation?

The exceptionally high inflation in 2022 has materially increased real estate prices throughout all segments of the real estate market. As of October 2022, the annual inflation stands at 65.26% according to the official statics, whereas alternative sources (e.g., the Inflation Research Group, ENAG) note that the actual annual inflation is around 185.34%.

The expectation that inflation will get even worse going forward also created a demand-pull inflation and contributed to an overall rise in the real estate market, especially in housing prices.

Another driver of dynamism in the Turkish real estate market is Turkey's rather liberal approach to the acquisition of real estate by foreigners. Foreign individuals, foreign companies and Turkish SPVs with foreign capital can obtain real estates without burdensome requirements. By way of such acquisitions, foreigners can also acquire citizenship or a residence permit if the sale price of the property is more than USD 400,000. After becoming a Turkish citizen, they will not be subject to certain limitations imposed on foreigners, such as obligation to develop a construction project, or to deposit foreign currency as the sale price into a Turkish bank. Turkish jurisdiction also limits obtaining real estates that are allocated to some certain purposes (e.g., agricultural lands). By way of acquiring citizenship, such limits shall no longer be imposed either. Real estate has always been an appealing investment tool in inflationist environments. We observed that this was one of the motivations behind the increasing demand in 2022. Rentals, like sales prices, escalated since the real estate markets seem to be out of the woods after the pandemic. As such, investors have actively searched for lucrative real estate acquisition opportunities that can potentially enable shorter return periods for their investments.

That said, starting from the third quarter of 2022, real estate transactions started to slow down, especially due to increasing difficulties in terms of access to financing.

It should also be noted that Turkey aimed at mitigating the adverse effects of high inflation on the residential sector before the elections in 2023, by way of introducing a massive real estate project in September 2022. This is described as "the grandest of its history". With the participation of Housing Development Administration of Turkey (aka TOKI), 500,000 residential flats, 1 million parcels of land, and 50,000 commercial properties will be made available with a favourable financing model.

Are there opportunities that real estate investors should be aware of, particularly in the rental market?

Commercial real estates that surface 15 million square meters will be available with the completion of the Istanbul Finance Centre (IFC) in 2023. IFC is a long-awaited project that will help Istanbul to compete with other global financial hubs. The Law on IFC came into force in June 2022. This law introduces many incentives and exemptions for the investors who obtain "Participant Certificate to IFC" on different topics varying from tax, wages, and social security premiums to work permits for foreign individuals:

  • 100% of the corporate income tax will be exempted for the years between 2022 and 2031. The exemption rate will be 75% starting from 2031.
  • Transactions will be exempt from banking and insurance transactions tax.
  • Employees will be exempt from income tax at varying rates and from obligation to hold work permits.
  • Lease agreements on real estate in IFC will be exempt from all fees and stamp duty.
  • 50% of the project will be allocated to public authorities and financial institutions.

Does your jurisdiction pose any significant risk of real estate prices stagnating due to rising inflation vs declining GDP? If so, how can investors protect themselves against these risks?

In 2022, Turkey introduced a 25% cap on the annual TRY rent price increase rates in respect of residential leases. The cap does not apply to commercial estates and will stay in effect until July 2023. Prior to this amendment, Turkish Code of Obligation envisaged a cap corresponding to the yearly consumer price index. This means that if the 25% cap had not been introduced, such limit would have been 65.26% as of November 2022. While the destiny of this cap after July 2023 is still unknown, it has led to many eviction disputes. Under Turkish law, landlords are entitled to eviction only on limited grounds, such as defaulting two times on the lease payments. The landlords may need to wait up to three years for a court's decision on eviction and its enforcement. As a practical mitigant going forward, the landlords might consider obtaining an undated letter of eviction from the tenants: a remedy for eviction, the validity of which has recently been accepted by court decisions. This should avoid lengthy and difficult litigation proceedings.

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