About REIT Sector

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are capital market institutions that operate under the principles and procedures set forth in the "Communiqué on Principles Regarding Real Estate Investment Trusts." They are authorized to invest in real estate properties, capital market instruments based on real estate, real estate projects, real estate-based rights and capital market instruments, can establish ordinary partnerships to realize specific projects, and engage in other activities permitted by the Communiqué.

REITs may be established for a fixed term to realize a specific project, for a fixed or indefinite term to invest in specific sectors, or for a fixed or indefinite term without any limitation on their objectives.

REITs can be established as newly incorporated entities or existing companies can convert to REITs by amending their articles of association in compliance with relevant laws and the Communiqué. For the Capital Markets Board (CMB) to approve the establishment of a REIT or the conversion of a company with a different activity focus into a REIT, certain conditions must be met.

Although the REIT sector is relatively new in Turkey, a significant amount of institutional capital has already entered the sector. Tax incentives provided by the government have encouraged many companies to establish REITs, enabling them to securitize idle real estate assets and create new sources of financing. The increasing demand in the real estate sector, the need for institutional capital to meet this demand, and the ability of REITs to allow small investors to participate in real estate investments with relatively small amounts have all contributed to the entry of new REITs into the market. Considering that the majority of savings in Turkey are invested in real estate, the influx of professionally managed institutional capital into the construction sector is of great importance. With the practical implementation of long-term housing finance, REITs, as new capital market instruments, are expected to play a more active role in the markets.

What is a Real Estate Investment Trust?
A REIT is a special type of portfolio management company regulated by the Capital Markets Board under the Capital Markets Law. It operates by investing in real estate, real estate-based projects, and capital market instruments based on real estate.

What are the main functions of REITs?
The primary objectives of a REIT include:

• Investing in real estate with high return potential,

• Investing in real estate-based projects,

• Generating rental income from its real estate portfolio,

• Realizing capital gains through real estate trading.

A REIT that profits from buying and selling properties distributes these earnings as dividends to its shareholders at year-end, thereby enabling investors to indirectly benefit from the income generated by high-yield properties by purchasing REIT shares. The REIT system solves the liquidity issue related to direct real estate investment by allowing investors to buy shares in a company that holds the real estate instead of the real estate itself, which is generally less liquid.

Moreover, government tax incentives designed to address housing and real estate challenges make the REIT model attractive for real estate financing. It is also undeniable that real estate investments provide investors with a psychological sense of security. Additionally, diversification, which spreads risk, is another important factor making REITs appealing to investors.

Operational Limitations of REITs
REITs are subject to certain operational restrictions. They may only engage in portfolio management activities based on real estate. Consequently, REITs cannot hold machinery or equipment as assets. They also cannot directly undertake construction or manage projects except for providing financing to projects built by other companies.

Economic Contributions of REITs
REITs provide funding for large-scale real estate projects such as office buildings or shopping centers. These projects often require significant financial burdens, which companies usually cover through loans, incurring interest expenses, or equity costs even when their own capital is sufficient. REITs finance these projects by raising funds from the public through share issuance, thereby alleviating the financial burden on companies.

Investor Benefits in REITs
Investors benefit from the ability to trade REIT shares on stock exchanges and from the price fluctuations of these shares. Since REIT portfolios are managed by real estate experts, investors achieve better results than if investing individually. Some investors in REITs are international institutions that prefer to invest in REIT shares traded on organized secondary markets in emerging countries rather than direct real estate investment.

Investor Rights as REIT Shareholders
Investors who purchase REIT shares enjoy the following rights under the Turkish Commercial Code:

• Right to receive a share of the profits,

• Right to liquidation proceeds,

• Right to receive bonus shares from capital increases,

• Pre-emptive rights to subscribe to new shares,

• Right to attend, speak, and propose at general meetings,

• Right to vote at general meetings,

• Right to access, inspect, and audit the company’s activities and accounts.

How can investors invest in REIT shares?
Investors can purchase REIT shares by instructing licensed brokerage firms authorized to trade on the stock exchange.

What should investors consider before investing in REITs?
Investors should review the profitability, financial structure, activities, and investments of the REIT through the company’s activity reports and financial statements. They should also follow announcements disclosed to the stock exchange regarding the company’s capital, management, financial condition, and operations.

Types of REITs
REITs can be established as:

• Fixed-term entities for specific projects such as shopping malls,

• Fixed or indefinite term entities investing in specific sectors like tourism or healthcare,

• Fixed or indefinite term entities without any limitation on their objectives.

Key Stakeholders in REIT Organization

• Contractor: Real or legal persons who undertake the construction of real estate projects within the REIT portfolio.

• Operator Company: Companies that commercially operate hotels, hospitals, shopping centers, business centers, commercial parks, warehouses, residential complexes, supermarkets, or similar real estate owned or leased by the REIT.

• Consultant Company: Specialized firms providing consultancy on portfolio development, project management, and exploration of alternative investments.

• Real Estate Appraisal Company: Companies that determine the fair value and rental value of real estate, projects, and rights included in the REIT portfolio.

Scope of Real Estate Appraisal Services
REITs are required by the Capital Markets Board to engage independent appraisal companies to determine values and rental prices for:

• Purchase or sale of real estate, rights, and projects in the portfolio,

• Leasing of portfolio real estate,

• Leasing real estate for the portfolio,

• Renewal or extension of lease contracts,

• Acceptance of real estate mortgages,

• Ensuring legal compliance and document accuracy for project construction start,

• Year-end valuation of assets without recent appraisals,

• Contributions of real estate as capital.

Appraisals are conducted periodically to reflect current fair values in the REIT portfolio and are disclosed with financial statements to provide investors with accurate valuation data.

Establishment of REITs
REITs can be formed either as:

• Newly established joint stock companies under the Turkish Commercial Code, or

• Existing companies that change their articles of association in accordance with CMB regulations to convert into REITs.

Both establishment methods require CMB approval. Upon approval, the Ministry of Industry and Trade grants a license. Once registered, REITs begin to form their portfolio using the invested capital.

Public Offering of REIT Shares
Different timelines for public offering exist based on the paid-in capital:

• Less than 50 million TRY: public offering within one year after registration,

• Between 50 million and less than 100 million TRY: within three years,

• 100 million TRY or more: within five years.

REITs must establish necessary infrastructure and offer at least 25% of their paid-in capital to the public via the CMB. After regulatory approval and required announcements, shares are publicly offered.

Sources of Basic Information about a REIT
Investors can access information during and after public offering from:

• Articles of Association,

• Prospectus,

• Circulars announcing the public offering,

• Quarterly portfolio tables submitted to CMB and stock exchange,

• Quarterly reports detailing activities, portfolio, projects, financial comparisons, and forecasts.

Access to Financial Information
REITs, like all publicly traded companies, submit annual and interim financial statements to the CMB and stock exchanges. Annual reports must be audited and submitted within specified timeframes. Financial statements are also published in the Turkish Trade Registry Gazette within 30 days after the general assembly meeting or at the latest by the sixth month end after the fiscal year.

Independent Auditing of REITs
REITs are subject to continuous independent audit from the period their shares are publicly offered. Their financial statements at the 6th and 12th months are audited by an independent auditor registered with the CMB.

Permissible Activities of REITs
Generally, REITs:

• Form and manage their portfolios,

• Make portfolio changes as necessary,

• Diversify portfolios to minimize risk,

• Monitor developments related to real estate and related securities,

• Conduct or commission research to protect and increase portfolio value,

• Investigate and ensure legal compliance for portfolio assets,

• Ensure preparation of valuation reports for portfolio assets,

• Oversee external portfolio management or consultancy activities,

• Perform other assigned duties.

What Types of Assets Can Real Estate Investment Trusts (REITs) Invest In?

• They may purchase and sell capital market instruments, conduct transactions in the stock exchange money market and reverse repo market, and open demand and time deposit accounts in Turkish Lira or foreign currency.

• They may acquire and sell real estate such as offices, residences, business centers, shopping malls, hospitals, hotels, commercial warehouses, business parks, and similar properties for the purpose of earning trading profits or rental income. They may furnish properties such as hotels and hospitals, which require a minimum standard of equipment before operation, prior to leasing.

• They may acquire land and plots to earn trading profits or to develop projects through the establishment of condominium rights (pre-emptive ownership).

• They may sell real estate on which usufruct rights have been established for project development purposes after acquiring ownership, in order to realize gains.

• They may sell real estate subject to sales promise agreements registered in the land registry to earn profits.

• They may invest in real estate-based projects that meet all conditions stipulated by applicable legislation to earn real estate development profits or rental income.

• They may establish usufruct rights on real estate and exercise such rights, establish timeshare easements, and become usufruct right holders on lands they own for commercial gain.

• Subject to special regulations, they may implement projects developed under the Build-Operate-Transfer (BOT) model by establishing usufruct rights in favor of themselves or third parties, provided that relevant legislative conditions are met.

• Provided the collateral is approved by the regulatory board and without acquiring ownership or establishing condominium rights, they may invest in real estate-based projects under contract provisions if the applicable legal requirements are fulfilled.

• They may jointly invest through condominium rights in real estate-based projects, provided that no restriction exists on the disposition of the share allocated to the partnership under agreements among co-owners, and legal conditions are met.

• They may purchase and sell foreign real estate, provided they acquire ownership.

• They may invest in companies established abroad whose sole activity is real estate and in foreign capital market instruments based on real estate.

• Subject to contractual provisions, they may lease real estate from third parties for rental income purposes and re-lease such properties.

• They may enter into swap and forward transactions, write options, and enter into futures contracts (excluding those based on commodities) for risk hedging purposes.

What Restrictions Apply to REITs’ Investments?

• They may not acquire a controlling interest in the capital or management of companies whose shares they purchase and cannot hold more than 5% of the capital or voting rights in any single company.

• They are prohibited from investing in gold and precious metals.

• Trading of capital market instruments must be conducted through the stock exchange; therefore, investments in capital market instruments not traded on the stock exchange or organized markets outside the stock exchange are prohibited.

• They may not invest in commodity-based futures contracts or commodities.

• They may not short-sell securities.

• They are prohibited from securities lending transactions.

• They cannot engage in derivative transactions that exceed the purpose of risk hedging.

• Except for taxes, fees, and similar legally required expenses, commission fees or other costs related to asset acquisition or disposal may not exceed 3% of the asset value.

• They may not invest in assets or rights subject to transfer restrictions.

• They may not engage in continuous short-term real estate trading.

What Portfolio Limitations Do REITs Have?

• At least 50% of the portfolio value must be invested in real estate, real estate-based rights, and real estate projects.

• Investments in capital market instruments, reverse repos, money market transactions, and subsidiaries may constitute up to 50% of portfolio value. Within these assets, investment deposits (demand and time) in Turkish Lira or foreign currency may constitute a maximum of 10% of the portfolio value.

• Investments in foreign real estate and real estate-based capital market instruments may not exceed 49% of portfolio value.

• The ratio of land and plots held for more than five years without any project development action may not exceed 10% of the portfolio value.

• Portfolios of companies established for specific sectors or projects must consist of at least 75% of the assets specified in their titles and/or articles of association.

• General purpose REITs should diversify their portfolios by sector, region, and real estate type, and manage them with a long-term approach.

What Else Can REITs Do?

Providing Collateral
In projects based on revenue sharing, if the landowners grant usufruct rights in favor of the REIT for free or at a low cost, mortgage or limited real rights may be established as collateral for the project in favor of the landowners. Additionally, mortgages and other limited real rights may be established on portfolio assets solely to finance these transactions or to secure loans for investments.

Borrowing
REITs may borrow up to three times the net asset value reported in their last publicly disclosed quarterly portfolio statement to meet short-term funding needs or cover portfolio-related costs. They may also issue debt securities within the limits prescribed by capital market regulations.

Issuance of Asset-Backed Securities
REITs may issue asset-backed securities based on receivables arising from the sale or sale promise agreements of real estate within their portfolios, in accordance with regulatory board provisions.

Subsidiaries
REITs may invest only in:

• Operating companies,

• Other real estate investment trusts,

• Companies established within the scope of Build-Operate-Transfer projects,

• Foreign companies solely operating in real estate or foreign capital market instruments based on real estate,

• Companies established in Turkey whose expert appraisal value of real estate planned to be included in the portfolio at acquisition constitutes at least 75% of the balance sheet total.

However, investments in operating companies cannot exceed 10% of the portfolio value as disclosed in the last quarterly portfolio statement.

How Are REITs Taxed?

For more detailed information, please visit:
http://www.gyoder.org.tr