Turkey has been going through the rapid economic growth and large-scale urbanization since the 1950’s. Consequently, the real estate industry of Turkey has emerged into an advanced industry with multiple stakeholders including the real estate investment trusts (REIT). The companies of this type usually operate in the largest cities of Turkey where the economic activity is the highest. 5 most populous cities in Turkey that will be growing in the nearest future and that are of interest for the REITs are Istanbul, Ankara, Izmir, Bursa, and Antalya. The real estate sector amounts for almost 20% of the GDP (Investment Support and Promotion Agency of Turkey, 2013).
There are some other factors that drive the development of the real estate market in the Turkish cities. These factors include the increase in the household income level, modernization of the existing housing, activity of multinational and local companies and the need for them to move into bigger and modern offices. Thus the role of the real estate market and the real estate investment trusts is expected to be much more important in the future than nowadays (Onder, Tas and Hepsen, 2014). Turkey has an ambitious goal to become a regional leader by 2023 and much focus will be given to the construction and real estate market development (Investment Support and Promotion Agency of Turkey, 2013).
In general, real estate investment trusts operate similarly to the investment companies and have the right to manage portfolios consisting of real estates, real estate based projects and capital market instruments related to the real estates (PriceWaterhouseCoopers, 2013). In Turkey, REITs have been very useful, because they reduced the problem of insufficient liquidity in the real estate sector. REITs brought together the savings of individual and corporate investors and provide the finances for realization of the large real estate projects (PriceWaterhouseCoopers, 2013).
According to the state regulations, the companies can be established at the very beginning as REITs or converted into REITs based on the existing joint stock companies. In both cases, the Capital Markets Board and the Ministry of Industry and Commerce of Turkey need to approve of the registration of a new REIT (Akiciogly & Akgul, 2010).
REITs in Turkey are always registered as joint stock companies with a share capital of not less than US$12,666,000 in the domestic currency. Minimum 50% of the REIT’s assets have to be invested in the real estate or the rights to real estate. Up to 50% of the assets can be invested in the permitted investments, for example investing in commodities or commodity futures, investing in gold and precious metals, conducting commercial, industrial or agricultural activities, etc. The Capital Markets Board, which is a regulatory state agency, supervises the operations of the REITs in Turkey (Akicioglu & Akgul, 2010).
The first REITs were introduced in the capital markets of Turkey in 1995 and the first initial public offering took place in 1997. Nowadays, there are 30 REITs, shares of which are traded on the Istanbul Stock Exchange (Önder, Tas, Hepsen, 2014). In 1996 there were only two REITs, but in 10 years the number of REITs tripled and recently has grown to 30 REITs.
Source: Capital Markets Board of Turkey
In comparison with the REIT sectors in the developed countries, the REIT sector in Turkey is relatively small, but it shows the growth potential (PriceWaterhouseCoopers, 2013). In order to boost the development of the Turkish REIT sector further, the government and the Capital Markets Board of Turkey introduced a number of favorable terms for the companies that would like to work as REITs. For example, Turkish REITs do not have to pay any corporation and income taxes. Moreover, Turkish REITs are not required to pay out annual dividends. Thus, Turkish REITs can direct all their profits into the new investments (Altinsoy, 2009).
Development of REITs in Turkey where the economy is volatile is not surprising. The real estate has always been a useful investment tool as it provides a hedge against inflation (Akkaya, Kutay, Tukenmez, 2005). In addition, REITs offer more stable revenues to the investors. In Figure 1, it can be seen that despite the economic crisis of 2001, the REITs’ revenues did not fall and continued to grow steadily.
Figure 1 Dynamics of Revenues in 1998-2003
____Istanbul Stock Exchange ___ Foreign Exchange ___ REIT’s revenues
Source: Akkaya, G. Kutay, N., Tukenmez, M. Real Estate Investment Trusts and Fundamentals of Real Estate Investments: A Case of Turkey
In contrast to the investing in traditional forms of equity, investing in real estate calls for a set of unique skills and financial resources, which can often be a challenge for smaller investors and private investors. Therefore REITs were introduced as a means to attract sufficient finance and expertise into the real estate market of Turkey. The new financial organizations were able to reach the very beneficial integration of capital markets and real estate markets (Aydinoglu, 1998).
Nowadays, the REITs offer a large number of opportunities to the investors. There are three investment approaches for REITs - equity, mortgage, and hybrid. Equity REITs own real estate and their revenue usually comes from rent and investors receive relatively steady dividend payouts. This type of REITs is the most popular in Turkey. Traditional investments include office buildings, shopping centers and housing. Mortgage REITs loan money to the real estate owners and their revenues depend on the earned interest. Some mortgage REITs also invest in the mortgage-based securities. Mortgage REITs do not own property, and income can be affected by the changing interest rates. Hybrid REITs are a combination of equity and mortgage REITs. They own property and also have the loan funds (Akkaya, Kutay, Tukenmez, 2005).
REITs offer investors some other valuable opportunities. The income from REITs is usually stable and provides a relatively high return. Shares of the REITs can be easily converted into cash, because they are traded on the major stock exchanges. REITs have a diversified portfolio, which reduces the risks for investors. Performance of REITs is monitored on a regular basis by the state and non-state agents, such as appraisal firms which are professional organizations certified by the Capital Markets Board of Turkey (Önder, Tas, Hepsen, 2014). Finally, in Turkey a large number of real estate transactions are under-recorded in order to avoid taxes. REITs may overcome this problem in the future when they become more popular with investors. They are much more transparent than the private companies that operate in the real estate market (Aydınoğlu, 2004).
There is also an opinion that REITs will be able to contribute to overcoming the problems of disorganized development of the Turkish cities. REITs will help to improve the development by setting up the higher standards for the whole industry (Aydınoğlu, 2004).
Market performance of REITS in comparison with Istanbul Stock Exchange -100 companies
Source: Arson, C. Turkish REITs and Real Estate Market. MIPIM. March 2012
One can see from Figure 1 that REITs have been outperforming the other companies that are traded in the Istanbul Stock Exchange. However, the revenues received by REITs also depend on the state of the Turkish economy. When the economic growth slows down, the REITs start to experience some liquidity problems. The sharpest fall occurred in 2008 due to the economic crisis and increased inflation (Arson, 2012).
If to analyze the existing REITs in Turkey, there is one leading company that is called Emlak Konut REIC. This company was founded in 1953 and has been operating as a REIT since 2002. Housing Development Administration of Turkey is its main shareholder. Nowadays, this company is the leader in terms of its market value, land inventory and real estate portfolio. The paid-in capital of $1.3 billion and the authorized capital of $1.4 billion help this company to dominate in the real estate sector in Turkey (Emlak Konut REIC, 2015). Some other well-known REITs in Turkey are Torunlar, Is, Sinpas, Kiler, Akmerkez, Akfen, etc., but they are too far from the level of the Emlak Konut REIC (Arson, 2012).
In conclusion, Turkey has been restructuring its economy since the economic crisis of 2001. Financial markets have played an important role in attracting the resources for investment, including investment in construction and real estate. REITs have been introduced in 1995, but they began to operate actively in the 2000s. Now there are 30 REITs and Emlak Konut is the leading company. Shares of REITs are traded at the Istanbul Stock Exchange and share prices usually depend on the overall economic situation in the country. When there was an economic crisis in 2008, there was a sharp decline in the share prices. However, since 2009 the Turkish economy has been growing and REITs were able to attract sufficient resources in order to start the new large scale real estate projects in the key cities of Turkey. With the introduction of REITs, the financial system and real estate sector of Turkish economy became more advanced and attractive for the foreign investment. The real estate companies have shifted to the new level of development. Experts believe that in the future when the financial market becomes more developed, REITs will contribute greatly to the development of the real estate sector in Turkey.
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