Authors: Capital Markets Law Department, Atty. Mustafa Şahin

Introduction

Although real estate has traditionally been regarded as one of the most reliable investment areas in Türkiye, direct real estate investment does not offer a practical model for every investor due to the need for substantial initial capital, liquidity limitations, title deed and valuation processes, leasing and operational burdens, and operational challenges encountered during financing and sale stages. At this point, real estate investment funds (“REIF” or the “Fund”) stand out as an important collective investment vehicle that enables real estate investments to be structured within the framework of capital markets legislation, under professional management and the supervision of the Capital Markets Board (“CMB” or the “Board”).

The legal framework of REIFs is primarily regulated under the Communiqué on Principles Regarding Real Estate Investment Funds numbered III-52.3 (“REIF Communiqué”), which was issued based on Articles 52 and 54 of the Capital Markets Law No. 6362. The REIF Communiqué sets out the fundamental rules regarding the establishment of funds, their operating principles and rules, the issuance of participation units and their sale exclusively to qualified investors, investor disclosures, assets that may be included in the fund portfolio, valuation principles, and the termination and liquidation of funds.

Legal Nature and Fundamental Structure of REIFs

Pursuant to Article 4/1 of the REIF Communiqué, a REIF is an asset pool without legal personality, established for the purpose of operating, on behalf of participation unit holders and based on the principles of fiduciary ownership, a portfolio consisting of monies collected from qualified investors in return for participation units, real estate, independent units within the scope of real estate projects under Article 18/3 of the Communiqué, or real estate-based rights. The fact that the Fund is not a company, partnership or association means that investors do not directly become owners of the relevant real estate; rather, they become holders of fund participation units.

However, the absence of legal personality of a REIF is not absolute. Article 4/1 of the REIF Communiqué provides that the Fund shall be deemed to have legal personality on a limited basis for registry transactions, including registration, amendment, cancellation and correction requests before the land registry, as well as all trade registry transactions relating to the incorporation, capital increase or share transfer transactions of joint stock companies in which the Fund will become a shareholder. This provision demonstrates that, although the Fund is not a legal entity in the classical sense, it is granted a special transactional capacity to allow real estate investments and certain trade registry transactions to be carried out in the name of the Fund.

Pursuant to Article 4/2 of the REIF Communiqué, funds may be established for the purpose of investing in a specific real estate asset or operating in a specific sector, or without any limitation in terms of investment purpose. Accordingly, in practice, REIF structures may be established with a focus on residential properties, logistics, tourism, offices, shopping malls, healthcare, commercial real estate, mixed-use projects or project development.

The Role of the Portfolio Management Company in REIF Establishment: Is It Mandatory to Establish a PMC?

REIFs are established by portfolio management companies, real estate portfolio management companies, or real estate and venture capital portfolio management companies that have obtained an operating license from the CMB. However, in practice, investors or project owners wishing to benefit from a REIF structure are not required, in every case, to establish a separate portfolio management company (“PMC”). As expressly stated in the establishment guide provided, a REIF may be established either through the incorporation of a new PMC, or through the creation of a special fund based on a contractual relationship with an already established and licensed PMC, granting certain investors the right to acquire fund participation units.

This point is highly significant from a practical perspective. Establishing a PMC is a comprehensive and time-consuming process involving capital requirements, organizational structuring, licensed personnel, internal control, risk management, fund services units and CMB authorization processes. By contrast, where an existing licensed PMC is engaged, it is possible to establish a REIF tailored to a specific investment strategy or project without the investor or project owner having to establish a separate PMC. The guide also notes that where an existing licensed PMC is used, only the REIF application will be required and the process may be reduced to approximately 2 to 3 months, whereas structures requiring the establishment of a new PMC may take approximately 12 to 15 months.

That being said, working with an existing PMC does not mean that the management and representation authority of the Fund is transferred to the investors. Pursuant to Article 7 of the REIF Communiqué, the founder is responsible for representing and managing the Fund, supervising its management, and ensuring that the Fund’s activities are carried out in accordance with the fund bylaws and issuance document, in a manner that protects the rights of participation unit holders. The founder disposes of fund assets in its own name but on behalf of the Fund. Furthermore, the founder’s outsourcing of services, including portfolio management services, does not eliminate the founder’s responsibility. Pursuant to Article 8 of the REIF Communiqué, the fund assets must be managed in favor of the investors and with due regard to investor interests.

Segregation of Fund Assets and Investor Protection

One of the most important features of REIFs in terms of investor protection is the segregation of fund assets. Pursuant to Article 5 of the REIF Communiqué, fund assets are separate from the assets of the founder, the portfolio custodian and the portfolio manager. Fund assets may not be pledged or provided as security, except in cases where loans are obtained, financing is secured, hedging derivative transactions are entered into, or similar transactions are carried out on behalf of the Fund, provided that such transactions are for the account of the Fund.

In addition, fund assets may not be disposed of for any other purpose, even if the management or supervision of the founder or the portfolio custodian is transferred to public authorities; they may not be attached, including for the collection of public receivables, may not be subject to interim injunctions, and may not be included in a bankruptcy estate. This regulation is one of the main reasons why the REIF model offers a more institutional and protected structure compared to direct real estate investment.

Assets That May Be Included in the Fund Portfolio and Investment Principles

Article 4/3 of the REIF Communiqué regulates in detail the assets, rights and transactions that may be included in the fund portfolio. Accordingly, the fund portfolio may include real estate, real estate-based rights, real estate projects within the scope of Article 18/3 of the Communiqué, capital market instruments issued by real estate investment companies, shares of joint stock companies whose assets, according to their financial statements prepared in accordance with the legislation to which they are subject, continuously consist of at least 75% domestic real estate investments, real estate certificates, participation units of other REIFs, and receivables arising from deferred sales of real estate included in the portfolio.

Article 18 of the REIF Communiqué sets out the fundamental principles regarding the investment activities of the Fund. Accordingly, the fund founder or portfolio manager may, on behalf of the Fund and for the purpose of generating trading profits or rental income, purchase, sell, lease, rent out, or enter into purchase or sale promise agreements in relation to real estate such as land, plots, residences, offices, shopping malls, hotels, logistics centers, warehouses, parking lots, hospitals and similar properties. However, as a rule, buildings and similar structures to be included in the fund portfolio must have obtained occupancy permits and condominium ownership must have been established. The guide also clearly sets out these investment opportunities within the scope of Article 18 of the REIF Communiqué.

This structure demonstrates that REIFs are not merely a passive real estate ownership model; rather, they offer a flexible structure allowing for different investment strategies through rental income, capital appreciation, project development, deferred sales, real estate-based rights and certain capital market instruments.

Minimum Portfolio Size and Portfolio Limitations

Pursuant to Article 17 of the REIF Communiqué, within no later than one year following the date on which the sale of participation units to qualified investors begins, the fund portfolio value must reach the minimum amount determined by the Board, and the monies collected from participation unit holders must be directed to investments within the portfolio limitations stipulated under the Communiqué. If the fund portfolio value fails to reach the minimum amount determined by the Board by the end of this period, the Fund’s investment activities may be terminated and the liquidation process may be initiated.

Article 19 of the REIF Communiqué is important in terms of portfolio limitations. The fundamental principle is that the predominant portion of the fund total value must consist of real estate investments. In this respect, at least 80% of the fund total value must consist of real estate investments. In addition, diversification rules are stipulated, such as the rule that the aggregate value of investments each exceeding 20% of the fund total value may not exceed 60% of the fund total value. However, certain portfolio limitations may not apply to funds established solely for the purpose of investing in a specific real estate asset or a specific sector.

Project Real Estate Investment Funds

Article 18/A of the REIF Communiqué sets out special principles regarding project real estate investment funds. This regulation is particularly important for REIFs established for the purpose of investing in residential development projects. Pursuant to Article 18/A of the Communiqué, a “project real estate investment fund” may be established specifically for the purpose of investing in projects where more than half of the total gross area of the independent units to be developed will be used as residences. The title of funds to be established within this scope must include the phrase “project real estate investment fund”.

The portfolio of project REIFs primarily consists of lands on which projects will be developed, real estate projects and limited financial instruments permitted under the Communiqué. The Fund may develop projects on lands owned by itself, or may invest in projects on lands owned by third parties through revenue-sharing or construction-for-land-share agreements. However, since this structure involves higher project and construction risks compared to classical rental-income-focused REIFs, certain security mechanisms are envisaged under the Communiqué. As also stated in the guide, all legal permits for projects to be included in the portfolio must be in place, the project must be assessed by an independent valuation institution, and security must be provided through mechanisms such as building completion insurance, letters of guarantee or progress payment systems.

Issuance of Participation Units and Qualified Investor Regime

REIF participation units may only be sold to qualified investors. In this respect, REIFs differ from classical investment funds offered to a broad investor base. Pursuant to Article 13 of the REIF Communiqué, an application must be made to the CMB for the issuance of participation units with an issuance document prepared in accordance with the standards determined by the Board and other application documents. No prospectus is required for the issuance of participation units; approval of the issuance document by the Board is sufficient.

With the 2024 amendments, the concept of a fund issuance agreement has also been expressly defined under the Communiqué. Accordingly, a fund issuance agreement is a standard agreement executed individually or collectively between the Fund and the participation unit holders, containing the minimum elements listed in the annex to the Communiqué. In practice, this agreement is of significant importance in terms of investors’ participation conditions, the Fund’s investment strategy, purchase and sale principles for participation units, exit mechanisms and the rights and obligations of the parties.

Valuation, Custody and Transparency Mechanisms

The reliability of REIFs arises not only from their being subject to CMB supervision, but also from the portfolio custody and independent valuation mechanisms applicable to them. Pursuant to Article 9 of the REIF Communiqué, the assets in the fund portfolio must be kept in custody in accordance with the portfolio custody legislation. Information, documents and records evidencing the existence of assets that cannot be physically or electronically held in custody and their ownership by the Fund must also be kept with the portfolio custodian.

Article 24 and the following provisions of the REIF Communiqué regulate valuation principles, while Articles 28, 29 and 30 govern transactions requiring valuation, the selection of the real estate valuation company and the principles to be followed in valuation reports. Due to the nature of real estate investments, determining the actual value of the fund portfolio is of critical importance for the protection of investor rights. Therefore, independent valuation processes for real estate to be included in or removed from the fund portfolio, as well as for significant real estate transactions, constitute an integral part of the REIF model.

Current Tax Framework

One of the most important factors in the preference for REIFs for many years has been the corporate tax exemption. Pursuant to Article 5/1-d/4 of the Corporate Tax Law, the income of real estate investment funds established for the purpose of operating a portfolio consisting, by nature of their principal activity, of real estate, real estate projects and real estate-based rights was exempt from corporate tax. However, following the amendment introduced by Law No. 7524 on the Amendment of Tax Laws, Certain Laws and Decree-Law No. 375, this exemption has been made subject, for income generated as of 1 January 2025, to the condition that at least 50% of the income derived from immovables be distributed within a certain period.

Under the current regime, in order for REIFs to benefit from the corporate tax exemption, at least 50% of the income they derive from the immovables they own must be distributed as dividends by the end of the second month following the month in which the corporate tax return for the accounting period in which the income was generated must be filed. For taxpayers subject to the calendar-year accounting period, this deadline corresponds in practice to the end of June.

In addition, even if the relevant distribution condition is satisfied, REIFs may be subject to a 10% domestic minimum corporate tax in respect of their immovable-derived exempt income. Conversely, if the distribution condition is not satisfied, there is a risk that the corporate tax exemption may not be available and that the relevant income may be taxed under the general corporate tax regime. Therefore, it may be stated that the former unconditional and full exemption regime has changed significantly as of 2025, and that the tax advantage of REIFs must now be assessed by taking into account the dividend distribution condition, the nature of immovable-derived income and the impact of the minimum corporate tax.

The withholding tax regime is also important for participation unit investors. Under the current regime applicable within the scope of Provisional Article 67 of the Income Tax Law, it is understood that the 0% withholding tax treatment is preserved for gains derived from participation units of venture capital investment funds and real estate investment funds that are held for more than two years. By contrast, different withholding tax rates may apply to participation units of other investment funds depending on the acquisition date, fund type and nature of the fund. Therefore, the full or limited taxpayer status of the investor, whether the investor is an individual or a corporate entity, the holding period, the acquisition date of the participation units and the nature of the income should be assessed separately for each investor.

Conclusion

Real estate investment funds enable real estate investments in Türkiye to be carried out within a structure that complies with capital markets standards, is professionally managed, subject to supervision and provides investor protection. By allowing investments to be made through fund participation units rather than through direct real estate acquisition, REIFs make real estate investment more institutional, scalable and manageable.

One of the most critical points for investors or project owners wishing to establish a REIF in practice is that it is not mandatory to establish a separate PMC. By entering into an arrangement with an existing and licensed PMC, it is possible to establish a REIF tailored to a specific project, sector or investor group. However, within this structure, the responsibilities relating to the representation and management of the Fund, compliance with legislation and protection of investor rights continue to remain primarily with the founder/manager PMC.

Nevertheless, when choosing a REIF structure, not only the ease of establishment or the protected nature of fund assets, but also the investment strategy, portfolio limitations, project development risk, investment committee structure, valuation mechanisms, fund issuance agreement, exit provisions and current tax regime must be assessed together. In particular, the dividend distribution condition and minimum corporate tax practice introduced as of 2025 do not completely eliminate the tax attractiveness of REIFs, but require these structures to be designed with more careful tax and cash flow planning. A properly structured REIF continues to constitute a strong and strategic model for the financing and professional management of real estate investments and for offering such investments to investors through a capital market instrument.