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Real Estate Investment Companies

The latest changes that the Capital Markets Board (CMB) has introduced to the Communiqué on Real Estate Investment Companies (REICs) have put these companies in line before the CMB to go public. Initial public offerings (IPOs), which had nearly ground to a halt due to the global financial crisis, seem to be livening up the real estate investment sector thanks to healing signs in the market and the latest amendments to the Communiqué, which soften IPO conditions for REICs.

Whereas before the amendments, REICs were supposed to offer a minimum of 49% of their shares to the public within one to five years depending on the amount of their capital (a period subject to further extension by the CMB), now they need only offer 25%. However, they only have three months to go public starting from their incorporation or conversion into an REIC, and if they fail to apply to the CMB within this period, they face the very real prospect of completely losing their REIC identity. Additional requirements imposed on REICs – to register their articles of incorporation with the trade registry or convene a general assembly for conversion within one month of CMB approval – demonstrate the CMB's determination to overcome any delays in the REIC process, even while arousing a modicum of anxiety among investors about meeting new, tighter deadlines.


Gökhan Eraksoy
Hakki Gedik

Another amendment introduced with the intention of encouraging involvement in the real estate sector is the removal of the three-year experience requirement previously demanded from leading investors. By easing the conditions for becoming a "leading investor," the amendments aim to increase the number of leading investors and thus the number of REICs operating in the market. Likewise, whereas previously all an REIC's board members were required to possess relevant sectoral experience, possession of experience by a majority of board members is seen as sufficient under the amended Communiqué. Where all these changes are correctly put in place, one may rightfully argue that increasing the minimum capital requirement of REICs from TL11.2 million ($7.4 million) to TL20 million and increasing the minimum asset value to be jointly owned by individual leading investors from TL16.8 million to TL20 million would cast a shadow over the benefits anticipated from these changes.

A further welcome change to the Communiqué is the opportunity for REICs to develop projects on mortgaged real property not owned by them, provided that the mortgage's value does not exceed 50% of the value of real property determined in the latest valuation report. In this case, the value of such mortgages should not exceed 10% of the net active value of the last three months' portfolio table. Additionally, REICs may include in their portfolio real property which does not carry any mortgages or any other encumbrances with the potential to adversely affect the property's value.

All these IPO-favoured changes are welcomed by the sector, as they have not only facilitated and speeded up the IPO process, but provided a way of eradicating abuse under the prior legislation, which granted REICs the opportunity to enjoy tax benefits by postponing the burdensome IPO procedures for as long as legally possible. At the same time, some have criticised the three-month period afforded to REICs to deploy the necessary personnel and hardware – and to establish the asset portfolio and file the IPO application with the CMB – as too short for a process that is subject to heavy regulation and detailed procedure. Critics allege that the companies would require longer preparatory periods to obtain the necessary skills and qualifications of a public company, and that the preparations for public offering should not be railroaded. Only companies incorporated or converted into REICs before the amendments were published on December 31 2009 may breathe easy under the new time constraints. Not only can they still avail themselves of the public offering periods granted to them before the changes; they can also benefit from the reduced public offering ratio of 25%.

All in all, the amendments to the REIC Communiqué offer investors enough enticements to bring interesting changes to Turkey's real estate sector. In light of the new changes, it requires no stretch of the imagination to label 2010 the Year of the REIC.

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