The tax advantages of REIFs, which we can say that the fund portfolio size can increase by an average of 1 billion TL each year, allows more resources to be allocated for investments. Currently, there is no tax burden on dividends obtained by non-resident foreign institutions from funds.
We see that the REIF market, in which a total of 47 real estate funds have received investments, including the funds that are in the issuance period and have received investment for the first time, has developed especially in the last 3 years. The first rescript in this area was published by the CMB in July 2014, and many funds were established by obtaining the necessary permissions from the beginning of 2017. The tax advantages of REIFs, which we can say that the fund portfolio size can increase by an average of 1 billion TL each year, enables more resources to be allocated for investments.
The earnings of real estate investment funds are exempt from corporate tax, so corporate tax, which is still 22 percent, is not paid. This exception is also applied to financial income such as deposits, participation accounts and repo. A special withholding tax is envisaged within the fund over the exception earnings of real estate funds, but the rate of this withholding is still applied as zero. Since the withholding tax is considered as paid even if it is zero, if the fund distributes profit, there is no additional dividend withholding tax. (15 percent withholding tax rate in normal dividends) Due to this structure, there is no tax burden on the dividends of non-resident foreign institutions from funds.
The income generated by the investors from returning their fund participation certificates to the fund or disposing them in other ways is subject to 10 percent tax deduction according to the Income Tax Law. There is no annual income tax declaration for these incomes, so the 10 percent tax withholding for individual investors is the “final tax”. At this point, another wish of the sector is to apply the ratio as zero for the revenues obtained from the fund participation certificates for a long time, for example, the income obtained from the participation certificates held for 5 years.
Liquidity risk is relatively low
Two important problems for the real estate investor are the possible loss of value and the liquidity risk. Similar concerns exist for foreign real estate investors. If the foreign investor has bought the real estate for investment purposes, he will be willing to return to cash at any time. The most important advantage of the real estate fund compared to physical real estate investments is its relatively lower liquidity risk. It can be said that it is attractive in this respect.
There is also the opportunity to get citizenship with REIF participation ratio.
It is ensured that foreigners determined by the CMB, who have purchased at least 500,000 US Dollars or equivalent foreign currency or Turkish Lira, on condition that they hold the REIF participation share for at least three years, can acquire Turkish citizenship exceptionally.
When we look at the definition of qualified investor; domestic and foreign investment funds, pension funds, investment trusts, brokerage houses, banks, insurance companies, portfolio management companies, mortgage finance institutions, pension and aid funds, charitable foundations, funds established under the relevant article of the Social Insurance Law, as publicly beneficial associations and other investors to be determined by the CMB to be similar to these institutions in terms of their qualities, and real persons and legal entities holding at least TL 1 million of Turkish Lira, foreign currency or capital market instruments as of the date of issue of capital market instruments are defined as qualified investors.
Market is effectively managed by institutional investors in REIFs
The automatic participation application is an application that is valid for workplace-based private pension plans and has been implemented to encourage employees to save money for their retirement. In the standard funds to be established with automatic participation application in BES, at least 10 percent of the investments will be directed to REIFs. The return opportunity that REIFs promise to their investors in the medium and long term is in line with the long-term investment strategy of pension funds. At the same time, with these funds, investors can have the opportunity to invest in a medium and long-term, asset-based capital market instrument with growth potential, which is an alternative to money markets that occasionally face severe volatility. Medium and long-term investments in these funds allow institutional investors to manage the real estate market effectively and sustainably.