Investors anxious but hopeful

Author: | Published: 1 May 2008
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Turkey's real estate market has rapidly emerged in recent years thanks to the growing interest of foreign investors in real estate investments in Turkey and the relatively stable domestic economic conditions, resulting in an active and profitable market. The positive outlook and promising developments in Turkey's EU accession bid, as well as high liquidity in international markets substantially underpinned this growth.

From the legal point of view, the Turkish legislative framework bestows upon foreigners the liberty to acquire real estate through the establishment of a joint venture company subject to Turkish law, which enjoys the same rights as Turkish entities. This and the liberal exchange regime permitting profits to be transferred abroad constitute a convenient base for the benefit of foreign investments. Furthermore, a recent piece of legislation regarding housing-finance activities, publicly known as the Mortgage Law, and the pertinent secondary regulations, enacted in 2007, allows and regulates securitisation of housing loan receivables and has therefore paved the way for financial institutions' interest in real estate, on top of real estate investors.

In spite of this, as of the end of the first quarter of 2008, it is a fact that the real estate markets in Turkey have been adversely affected not only by global macroeconomic conditions, but also by specific legal developments.

Foreign acquisitions

The real estate markets in Turkey are principally regulated by the Turkish Civil Code (Law 4721), which sets forth the rules relevant to the right of ownership, rights in rem, and principles to be observed by and before land title registries and possession. The Land Registry Law (Law 2644) outlines more detailed principles regarding acquisition and transfer of ownership rights and the rights in rem on real property. It also regulates the acquisition of real property by foreigners, be it real persons or legal entities.

The Direct Foreign Investment Law (Law 4875, DFIL), which regulates the principles of foreign investments in general, and the Mortgage Law (Law 5582), which provides for the rules applicable to mortgage related investments in Turkish capital markets, should also be considered in the evaluation of Turkish legal environment on real property.

The rules

The regulations concerning the acquisition of real property by foreigners envisage separate conditions for foreign (non-citizen) real persons and foreign (non-Turkish) legal entities.

Foreign real persons

A real person of a foreign nationality is entitled to acquire real property located in Turkey provided that (i) de jure or de facto reciprocity permitting Turkish citizens to acquire real property exists in the origin country of that person; (ii) the property concerned is to be used for residential or business purposes; and, (iii) the property is located within the boundaries of the relevant implementation zoning plans or regional development plans.

The total area of real property acquired by a real person cannot exceed 25,000 metres squared. Acquisition of real properties in certain areas (that is, strategic regions, military zones, agricultural areas, regions having flora and fauna features and mines) is not permitted.

Foreign legal entities

Foreign legal entities are in principle prohibited from acquiring any real property in Turkey unless specific laws expressly permit it. The exceptional circumstances where foreign legal entities are entitled to acquire real property in Turkey are provided under three specific laws – the Tourism Incentive Law, the Law on Industrial Regions and the Petroleum Law. Under these laws, foreign legal entities may acquire real properties in Turkey subject to the fulfilment of certain conditions.

Joint ventures

Due to the restrictions and prohibitions on acquiring real property in Turkey for foreign real persons and legal entities mentioned above, it has been the market practice for foreigners to acquire real property through the establishment of or participation in Turkish companies – that is, joint stock companies or limited companies.

The Turkish Commercial Code in its spirit treats all companies established under Turkish law in the same way, irrespective of whether they have foreign shareholders. In other words, under the approach of Turkish Commercial Code, a company established in Turkey even with 100% foreign shareholding shall be treated equally and shall benefit from the exact same rights as any other Turkish company, including acquisition of real property, without being subject to any restrictions.

Although the Turkish Commercial Code treats all Turkish companies equally, regardless of foreign shareholding (if any) in their share capital, the Direct Foreign Investment Law effectively reduces this principle to writing. It expressly states in Article 3d: "Companies registered in Turkey with foreign participation/ shareholding may freely acquire title (ownership) to real property in Turkey in regions open or available to Turkish citizens." Accordingly, the approach under the Turkish Commercial Code relating to equal treatment is clearly and strongly restated under the DFIL. As a result of this legal environment, foreign investments have tapped into Turkish real property markets either through acquiring shares in Turkish companies or setting up new Turkish companies in a joint venture form with Turkish partners or with a fully foreign shareholding.

Foreign real property investments in Turkey as defined above have functioned in the past and continue to do so. But after the ruling of the Constitutional Court on March 11 2008, they are expected to do so with a degree of anxiety.

Constitutional Court ruling

The Constitutional Court of the Republic of Turkey announced its annulment ruling in relation to Article 3d of DFIL on March 11 2008 in response to the filing of CHP, the principle opposition party in the Turkish parliament. The provision subject to annulment clearly provided for the equal treatment of Turkish companies and foreign shareholdings in the acquisition of real property in Turkey by stating: "Companies registered in Turkey with foreign participation/shareholding may freely acquire title (ownership) to real property in Turkey in regions open or available to Turkish citizens", as mentioned above.

The Court, in its short ruling, stated that the annulment ruling would take effect six months after the issuance of the reasoning of the ruling in the Official Gazette. Starting from the date of issuance of the reasoning, there will be an additional six months' term for the provision to remain in effect.

The government's first reaction upon the ruling of the Court was to express its determination to prevent the ruling from having an adverse effect on foreign real property investments in Turkey. The government announced that the required revisions would be made and the current status quo would be maintained after the ruling was issued and analysed (it has yet to be released). It is also notable that the period up to the effective annulment of the provision gives the government enough time to take necessary action, including revision of the provision in compliance with the reasoning of the Court.

Members of the Turkish real property market – both participants and consultants – have expressed their expectation that the matter will be resolved in due course without having an adverse effect on foreign real property investments and the status quo. It should also be noted that the potential legal implications of the annulment are vague and unclear without the Court reasoning, in view of the following:

  • Turkish law does not clearly define "companies having foreign participation/shareholding". Accordingly, how a Turkish company will be defined as a "company with foreign shareholding" (that is, by shareholding percentage, management right) is uncertain.
  • As previously noted, Turkish Commercial Code treats all companies established under Turkish law as Turkish companies enjoying equal rights, regardless of shareholding structure. If this principle changes in relation to real property acquisition by Turkish companies with foreign shareholders, share transfers in Turkish companies to or from foreign shareholders could also be supervised and controlled. This would be a serious u-turn in the liberal approach of the Turkish economy towards foreign investments.

Consequently, we observe that the ruling of the Court has created confusion in foreign real property investments and may have some adverse effects. But we agree with the consensus that the matter will be resolved in due course in a way that will preserve the current foreign investment flow in real property markets.

Financing and securitisation

The securities market in Turkey is mainly regulated by the Capital Markets Law, which was enacted in 1981. Under that law, asset-backed securities were initially introduced to the market through the Communiqué Serial III Number 14 regarding Asset Backed Securities and General Finance Companies, issued in 1992. Although asset-backed securitisation was popular for a few years following the issuance of the Communiqué, due to certain tax obstacles financial institutions in Turkey have preferred to securitise their receivables from credit cards and exports in the international markets rather than domestic markets. This is because (a) there were no regulations and thus no restrictions regarding offshore asset securitisation; and (b) it was a low-cost hard-currency financing method. Apparently, asset-backed securitisation in the Turkish market has disappeared since 1995, whereas international asset securitisation of Turkish financial institutions has rapidly increased.

Mortgage-backed securitisation had not been regulated in the Turkish market. The main reason for the lack of mortgage-backed securitisation has been the characterisation of the mortgage as an ancillary right attached to the respective receivable and subject to strict registration requirements. Accordingly, it was not possible to issue securities based on mortgage rights, which would be negotiable in a secondary market.

Under these circumstances, for the purpose of supporting the Turkish housing market and the securities market, the government enacted a new Law (Law 5582) on March 6 2007, which amended certain provisions of the Capital Markets Law, the Execution and Bankruptcy Law, the Consumer Protection Law, the Financial Leasing law, the Mass Housing Law and various tax laws so that an efficient housing finance system be established through introducing mortgage-backed securities as a new funding mechanism for banks and financing institutions and setting forth the relevant principles. Accordingly, the new Law on housing financing (the Mortgage Law as introduced) is a frame law amending and revising the provisions of certain laws to enable mortgage-backed securitisation rather than creating a separate Law on mortgage financing.

Under the Mortgage Law, mortgage-backed securities are defined as securities representing the investors' beneficial ownership interest in specific housing-finance receivables, the proceeds of such housing finance receivables, and ancillary rights such as the mortgages by which such housing finance receivables are secured. According to the Mortgage Law, housing finance receivables consist of residential mortgage receivables, mortgage-backed securities, mortgage covered bonds and other securities backed by the same.

The Mortgage Law sets forth the main principles of mortgage-backed securities, the secondary markets, and introduces the market players of this new market, such as housing finance institutions, banks, and housing finance funds. The secondary legislation regulating mortgage-backed securities (that is, the principles for issuance of mortgage-backed securities and establishment of housing finance funds) was issued by the Capital Markets Board in August 2007.

As of today, many financial institutions are eager to benefit from this shiny new market by cooperating with international financial institutions and structuring the legal and financial basis of mortgage securitisation through domestic and international markets. Although the required secondary legislation and the entities for participating in the mortgage finance market have not been wholly established, the relevant governmental bodies intend to accelerate the development of the new market. It will not take long to reach that goal.

Admittedly, there are yet problems and obstacles that need to be overcome to sustain and even accelerate the growth trend in the Turkish real property market. But we believe that all these problems and obstacles are not intrinsic to the market. Thus they will not prevent its growth, but could merely cause temporary delays. Subject to a smooth settlement of international economic problems, the Turkish real property market still stands out as an exciting emerging market for international investors, in terms of both land development and financing opportunities.

Special update on Constitutional Court's Ruling

The reasoning of the Constitutional Court's ruling referred to above was published in the Official Gazette dated April 16 2008, just after this article was first submitted. The reasoning states that the Constitutional Court pronounced the annulment of Article 3d of the DFIL, which provided equal treatment to all companies established in Turkey and under Turkish laws irrespective of whether they had foreign shareholders, on the following grounds:

"The referred Article (3d) provides that foreign investors are entitled to acquire ownership rights or rights in rem on real property in the regions open to Turkish citizens through incorporation of new companies in Turkey or participation in Turkish companies. However, for the national economy be regulated in line with the prevailing national interests and the principle of rule of law as defined in the Constitution to be effectively implemented, the principles and procedures concerning the purpose of acquisition, manner of utilisation and transfer of ownership rights and rights in rem on real property to be acquired by foreign investors ought to be defined under the referred legislation. Given the absence of such a reference in the legislation, the legislation as it currently stands gives rise to ambiguities and grants unlimited liberty to foreign investors in acquisition of ownership rights and rights in rem on real property. Consequently, the subject legislation is in breach of Article 2 of the [Turkish] Constitution and shall be annulled."

The reasoning of the annulment was endorsed by a majority of the Court – six members voted in favour of the annulment against five dissenting votes including the president of the Court.

Following the publication of the reasoning, the government has six months before the annulment takes effect, to issue new legislation on this matter at its discretion. Various declarations of the government indicate that a new law addressing the issue is in the pipeline and will be enacted within the six-month period.

In consideration of the reasoning, the new legislation is expected to cover the following:

  • Companies established in Turkey and under Turkish laws shall be distinguished on the basis of the nationality of shareholders along the lines of (i) Turkish companies with full Turkish shareholders and (ii) Turkish companies with foreign shareholders. Accordingly, the guidelines according to which a Turkish company shall be treated as having a foreign shareholding that amounts to rendering possible the application of certain restrictions (that is, the ratio of foreign shareholding and degree of management control enjoyed by foreigners) will need to be clearly defined.
  • Acquisition of real property and rights in rem by Turkish companies with foreign shareholders will be subject to restrictions in relation to (i) the purpose of acquisition, (ii) the manner of utilisation, and (iii) the transfer of such rights.

Under the reasoning of the Court, the new legislation on the subject matter to be issued by the government is expected to place restrictions on foreign investors' acquisition of real property in Turkey. The restrictions in the new legislation will presumably be similar to those imposed on foreign real persons – that the property concerned be exclusively used for residential or business purposes; and that the property be located within the boundaries of the relevant implementation zoning plans or regional development plans. Reciprocity with the foreign investor's country of origin may also be required.

Author biographies

Murat Eryürekli

Eryurekli & Fidan

Murat Eryürekli is a founding partner of Eryurekli & Fidan.

After graduating from Istanbul University Faculty of Law in 1992 and Banking School in 1993, Eryürekli worked at the Capital Markets Board, the highest regulatory and supervisory authority of the Turkish capital markets, as a specialist consultant for five years.

Eryürekli joined Pekin & Pekin law firm in 1998 where he advised many local and foreign institutions and was actively involved in projects, particularly in the areas of capital markets, banking and telecommunication. Following his departure from Pekin & Pekin in 2004, he joined Eryürekli & Fidan as a founding partner.

Eryürekli has an Advance Level Licence for Capital Markets' Activities, a Licence for Derivatives, a Licence for Independent Audits and an Expert Licence for Valuation of Real Property. He is also qualified to act as an authorised arbitrator for the settlement of disputes in capital markets.

Eryürekli is the author of various articles published in local and international magazines on the subjects of capital markets, real estate investment companies and e-commerce. He has spoken on these areas at various conferences.

R Yalim Özilhan

Eryurekli & Fidan

R Yalim Ozilhan is an associate lawyer at Eryurekli & Fidan. Admitted to Istanbul Bar, he specialises in corporate and commercial transactions, particularly mergers and acquisitions, project finance and corporate finance transactions. He has substantial experience in conducting due diligence exercises and in structuring, drafting, negotiating and reviewing transaction documents from a Turkish law standpoint. He also prepares legal opinions.

He is a graduate of, and expects an LLM degree in private law from, Galatasaray University Faculty of Law. A native of Turkey, he is fluent in English and French.

Firm profile

Eryurekli & Fidan

Eryurekli & Fidan was founded in 2004 by Murat Eryurekli and Erdogan Fidan, former partners of a major Turkish law firm. Despite its short history, the Firm has seen steady growth in terms of size, client portfolio and range of services and has already become one of Turkey's leading law firms thanks to its partners' background, credentials and vast expertise and experience in international and domestic business transactions

The Firm particularly specializes and focuses its services on capital markets, securities, project finance and real estate development, financing and construction business.

Eryurekli & Fidan represents numerous international and domestic banks, financial institutions and corporations. The Firm has acted for major European banks, numerous "Fortune Global 500" companies and leading corporations in various sectors.

The Firm provides its services through a professional team of 12 lawyers, led by two partners, and five administrative staff, The Firm's attorneys are fluent in English and French.

Eryürekli & Fidan:

Veko Giz Plaza Meydan Sok.
No: 20 K: 22 Maslak
34398 Istanbul, Turkey

Telephone: +90 212 365 9600
Fax: +90 212 365 9666