New Regulation in Turkish Capital Markets: Real Estate Investment Funds

November 2014 Özgür Kocabaşoğlu
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With the entry into force of Capital Market Law[1] (“CML”) numbered 6362, real estate investment funds have attained a legal background for the first time in our country. The Communiqué on Real Estate Investment Funds III-52.3 (“Communiqué”), published in Official Gazette numbered 28871, dated 03.02.2014, and entered into force in 01.07.2014, has been prepared within the framework of the provisions regarding the investment funds of the CML.

In General

In accordance with Article 52 of the CML, the asset that is established by portfolio management companies within the fund rules in conformity with the fiduciary ownership principles on account of the savers, with money or other assets collected from the savers in return for fund units, in order to operate the portfolio or portfolios, and which is not a legal entity, is called an investment fund. In relation to the real estate investment funds, these investment funds are considered as legal entities, within the limits of the registration and the amendments to the registration, cancellation and revision operations. The immovable properties that are in the real estate portfolio fund, and the rights and instruments that are based upon the immovable property, shall be registered in the name of the fund. In order for the investment funds to obtain authorization, their fund rules shall be submitted for the Capital Market Board’s (the “Board”) approval. The investment funds are established through fund rules, either temporarily or permanently. The purpose of the new regulation of the CML is to procure the management of the investment funds by professional institutions within a competitive market structure, in accordance with the UCITS provisions found in the European Union (“EU”) Directive[2] numbered 2014/91/EU.[3]

In accordance with Article 54 of the CML, in addition to its authorities found in the abrogated Capital Market Law numbered 2499, the Board has been authorized to determine the procedures and principles of conversion of funds, issuance of fund units, fund management and deposition fees, prospectus, and other public disclosure obligations.

Regulations Introduced by the Communiqué

Art. 4 of the Communiqué defines real estate investment funds as “an asset that is not a legal entity and permanently or temporarily established within the fund rules by portfolio management companies and real estate portfolio management companies, which holds an operating license duly given by the Board in order to manage the portfolio that is comprised of assets and transactions, as specified in the third paragraph, with the money collected from qualified investors in return for fund units, in accordance with fiduciary ownership principles, and pursuant to the provisions of the Law.” In other words, real estate investment funds are structures through which the savers are provided with the opportunity to receive real estate returns, such as rental income and value increment, by purchasing the “fund units” of the portfolios, constituted by purchasing real estate.[4] The real estate investment funds contribute to the development of capital markets by means of deepening competition in the real estate market, and developing capital markets through the sale of fund units in secondary markets. Another important issue specified in the definition is that real estate investment funds can solely be established by portfolio management companies and real estate portfolio management companies.

Real estate investment funds can be established to invest in specific real estate, or without any such restriction, provided that it is specified in fund notification documents. As stated in the definition, the transactions and assets to be found in a real estate investment fund’s portfolio are listed in the Communiqué as follows:

  • Real estates and property rights;
  • Private and public debt instruments, and shares of joint-stock companies established in Turkey, including those covered by the privatization process;
  • Foreign private and public sectors’ debt instruments and joint stock company shares tradable within the framework of Governmental Decree no. 32, Protection of the Value of Turkish Currency put into force by Decree of the Council of Ministers no. 89/14391 dated 07.08.1989;
  • Time deposits and participation accounts;
  • Investment fund units;
  • Repurchase (repo) and reverse repurchase transactions;
  • Lease certificates and real estate certificates;
  • Warrants and certificates;
  • Settlement and Custody Bank money market transactions;
  • Cash collaterals and premiums of derivative instruments;
  • Specifically designed foreign investment instruments and loan participation notes deemed appropriate by the Board;
  • Other investment instruments deemed appropriate by the Board.

In accordance with Art. 53 of the CML, Art. 5 of the Communiqué stipulates that the fund assets are segregated from the assets of its founder, portfolio depository and portfolio manager. Thus, this rule, adopted for the investment funds, in general, is accepted with respect to the real estate investment funds, as well. The fund assets shall not be designated as collateral or pledged for purposes other than borrowing loans and conducting hedge-fund activities with the purpose of derivative instrument transactions, provided that such transactions are conducted on account of the fund, and the fund rules and the issue document shall also include provisions to this effect. In addition, the fund assets shall not be disposed of for any other purpose whatsoever, even if the management or the supervision of the founder, or the portfolio depository, is transferred to the public authorities. Moreover, the fund asset may not be attached, made subject to interim injunction, or included in a bankrupt’s estate even for the purposes of collecting public receivables. The debts and obligations of the founder and/or the portfolio manager to third persons and the receivables and claims of the fund from these same third persons may not be set off against each other.

Fund notification documents consist of fund rules, issue document and if any, investor information form. The fund rules is an agreement that is entered into by the unit holders on one side, and the portfolio depository and the portfolio manager on the other, which is concerned with the management of the fund portfolio and functioning of the fund in accordance with the fiduciary ownership principles, the depositing of the portfolio, including standardized terms of contract concerning the management of the fund in accordance with the provisions of proxy agreements. A fund-issued document is a document containing information about the nature and the sale conditions of the fund. An investor information form is a brief form showing the structure, investment strategy and the risks of the fund. The founder is responsible for the consistency of this form with the fund rules and issue document, for the accuracy of its contents, keeping them up-to-date and for the losses arising from inaccurate, misleading, or incomplete information included in this form. Standards of each of the fund notification documents are decided and determined by the Board.[5]

Various limitations in relation to fund size have also been envisaged in the Communiqué. Accordingly, real estate investments shall account for at least 80% of the fund net asset value. In calculation of this ratio, the capital market instruments issued by real estate investments continuously comprised of at least 75% of their total assets based on the financial statements prepared under the provisions of the legislation they are subject to, real estate certificates and fund units of other real estate investment funds shall also be taken into consideration. Despite the fact that there is a limitation regarding the fund size, a limitation with respect to the diversity of the investment funds has not been stipulated. In accordance with Article 18/1 of the Communiqué, lands, registered lands, houses, offices, shopping centers, hotels, logistic centers, warehouses, parking lots, hospitals and all other kinds of similar real estates can be considered as real estate investments. With respect to all kinds of buildings and similar other structures to be included in the fund portfolio, the occupancy permit shall have been received, and condominiums shall have been established. Buildings, lands, registered lands and similar other real estates and property rights that are pledged, or have restrictive provisions affecting the value of the real estate, may also be included in the fund portfolio, providing that it is specified in the mentioned fund information documents.[6]

On the other hand, the minimum fund size is another matter regulated within the Communiqué. According to Article 17/1 of the Communiqué, within one year as of the starting date of the sales of fund units to qualified investors, a fund portfolio value shall be a minimum of 10,000,000 TRY, and the cash collected from fund holders shall be invested within the portfolio restrictions set forth in the Communiqué. If the fund portfolio value does not reach the minimum amount by the end of the mentioned period, the fund’s investment activities shall be terminated, and the fund rules shall be removed by the founder from the trade registry within no later than six months.

Additionally, in accordance with the provisions found in the Fifth Part of the Communiqué titled “Principles on Appraisal of Real Properties,” the appraisal of the real estate investments at the end of every calendar year made by real estate appraisal companies, as deemed appropriate by the Board, have been made mandatory.

Conclusion

The principles of establishment, activities, and issuance of sales to qualified investors of the fund units concerning the real estate investment funds that are a legal entity with the entry into force of CML published in the Official Gazette dated 30.12.2012 and numbered 38513, are regulated in detail with the publication of the Communiqué. Even though real estate investment funds are yet to be established, various entrepreneurs are intending to establish the first real estate investment fund of Turkey. Real estate investment funds are commonly established abroad; they make the securitization of real estate possible, and liquidate them by connecting investors with real estate owners.[7]

[1] Entered into force by publication in the Official Gazette dated 30.12.2012 and numbered 28513.

[2] Akbulak, Yavuz. Türk Hukukundaki İlk Düzenleme: Gayrimenkul Yatırım Fonları, Banka ve Finans Hukuku Dergisi, Cilt:3 Sayı:11 Yıl:2014, p.173.

[3] This Directive amended Directive no. 2009/65/EC, which was the previous Directive containing UCITS regulations.

[4] CMB Investor Information Brochures – 3, Investment Funds.

[5] Akbulak, Yavuz, p. 175.

[6] Akbulak, Yavuz, p. 181.

[7] Akbulak, Yavuz, p. 188.</p

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