PROJECT REAL ESTATE INVESTMENT FUNDS

I. INTRODUCTION

With the amendment introduced by the Communiqué on the Amendment to the Communiqué on the Principles Regarding Real Estate Investment Funds (III-52.3) (III-52.3.f) (“Amendment Communiqué”), published in the Official Gazette dated July 17, 2024 and numbered 32604, a new dimension has been brought to the regulations regarding Real Estate Investment Funds (“REIFs”), and a special type of fund has been established under the name PREIFs. PREIFs are collective investment instruments structured exclusively for qualified investors, providing the opportunity to invest in projects where more than half of the portfolio is allocated to residential use. This study addresses the definition, legal structure, investment restrictions, and implementation principles of PREIFs within the framework of the Law and the Communiqué; and examines in detail the innovations introduced by Article 18/A of the Communiqué. In addition, the structure of PREIFs has been comprehensively addressed in terms of fund establishment procedure, portfolio composition, collateral framework, transitional compliance arrangements, and investor rights; and the potential role of these funds in urban transformation processes and their possible contribution to housing finance have been evaluated.

The year 2024 has witnessed a significant innovation in the field of real estate investment funds, and a new era has begun in the financing of real estate projects under the name of PREIF. With the Amendment Communiqué, REIFs have been allowed to invest in residential-oriented projects, thereby aiming to overcome certain restrictions in the existing REIF system1.

The PREIF regulation enables fund portfolios to be directed towards real estate projects in which more than half of the total gross area of the independent units is allocated to residential use, thereby aiming to contribute to housing production. This step is the result of a search for solutions to the production difficulties experienced in Türkiye due to financing inadequacies despite dynamic and high housing demand. Indeed, in the past, the investment scope of REIFs being limited to completed assets or those with an occupancy permit prevented the financing of projects under construction. Within the framework of the Communiqué that entered into force in 2016, independent units of projects carried out by TOKİ, Iller Bank Joint Stock Company, and municipalities together with their subsidiaries, which had obtained a construction permit, became eligible to be included in REIF portfolios regardless of their completion rate. However, due to the narrow scope of this regulation, private sector projects could not provide a significant expansion in priority housing production2. Considering the earthquake risk of the existing housing stock and the urgency of urban transformation needs, there is a need for instruments that will accelerate housing production and create new financing sources for the sector. In this context, the Capital Markets Board (“Board”) introduced a new type of fund, the PREIF, through the amendment made to the Communiqué; thereby enabling real estate projects to be supported by a financing model under the supervision of the capital markets and portfolio management, with transparency, reporting, and assurance mechanisms.

II. LEGAL BASIS AND DEFINITION OF PREIF

PREIFs, in terms of legal infrastructure, form part of the existing REIF legislation. The Communiqué issued by the Board on the basis of the Law regulates the establishment, activities, and portfolio restrictions of REIFs. Article 18/A, added by the Amendment Communiqué, stipulates that a PREIF may be established exclusively for the purpose of investing in certain residential projects. Therefore, a PREIF is not a separate legal entity but rather an asset established within the framework of the internal regulation of the REIF and managed on the basis of the principle of trust ownership. Pursuant to this principle, the fund manager is obliged to carry out all decisions and transactions exclusively in a manner that safeguards the interests of the unit holders. However, the Communiqué provides that the fund shall be deemed to have legal personality solely for land registry transactions such as registration, deregistration, and correction, as well as commercial registry transactions such as incorporation and capital increase of companies in which it will participate3. A PREIF is a collective investment instrument that raises participation units from qualified investors and channels such funds into specific real estate projects.

Like REIFs, PREIFs are also subject to Articles 52-54 of the Law. According to Article 52 of the Law, these funds are an asset without legal personality, established by portfolio management companies with the resources collected from qualified investors in return for participation units, for the purpose of managing a portfolio created on the basis of the principle of trust ownership on behalf of investors. Article 53 of the Law stipulates that the fund assets must be kept strictly separate from the assets of the founder and the portfolio custodian, and that the fund assets may only be used in accordance with the interests of the unit holders. Article 54 of the Law grants the Board the authority to determine the procedures and principles on fundamental regulatory matters such as the establishment of funds, portfolio restrictions, valuation principles, internal regulations of the fund and issuance documents, participation unit issuance, and public disclosure obligations4. Since PREIFs legally constitute a sub-type of REIFs, the general provisions set forth in the above articles also apply to PREIFs in the same manner. Within the scope of these general principles, participation units have no nominal value, and the unit value of the fund is calculated by dividing the total value of the fund by the number of participation units in circulation. This value must be calculated at least once a year and notified to qualified investors5. However, as will be explained below, in order for PREIFs to operate in line with their objectives, the Communiqué prescribes certain special conditions that differ from those applicable to other REIFs.

PREIFs are a fund model developed by drawing inspiration from global practices. The Real Estate Investment Trusts (REITs) in the United States, which promote real estate investments through collective structures, as well as open-ended real estate funds in Germany, the OPCI (Organisme de Placement Collectif en Immobilier) in France, and similar investment structures in the United Kingdom and Luxembourg, stand out as the main models that guided the design of PREIFs in Türkiye. In Türkiye, unlike these international examples, PREIFs are structured exclusively for qualified investors and do not provide direct access to retail investors, as is the case with publicly traded Real Estate Investment Companies (REICs) or REITs in the United States. Nevertheless, by offering the opportunity for indirect participation in large-scale real estate projects with relatively smaller contributions, they enable the institutional and qualified individual investor base to collectively participate in projects6. By their nature, PREIFs aim to generate value appreciation upon the completion of projects, while also offering high risk and potentially high returns. Since they are generally long-term investment instruments, they may also be more limited in terms of liquidity compared to other types of funds.

In terms of establishment procedure, PREIFs are subject to the approval of the Board in parallel with the procedure prescribed for REIFs. Pursuant to Article 6 of the Communiqué, the portfolio management company, as the fund founder, submits to the Board the internal regulation of the fund containing the minimum elements specified in the Communiqué, together with the custody agreement signed with the institution from which the fund will receive custody services, the application form, and other necessary documents, requesting authorization for establishment. Within this scope, the Amendment Communiqué further specifies the qualifications of the real estate appraiser required to be included in the organizational structure of the fund founder and the manager. Accordingly, the person in this position must hold a real estate appraisal license and have at least 3 years of sectoral experience, and it is stated that this position may also be filled by a member of the board of directors possessing such qualifications. If the application is deemed appropriate, Board approval is obtained, the establishment of the fund is announced in the Turkish Trade Registry Gazette, and the issuance of participation units commences. Specifically, for PREIFs, it is mandatory that the investment strategy be directed toward the residential projects defined in Article 18/A of the Communiqué and that this objective be explicitly stated in the internal regulation of the fund. The fundamental characteristics and conditions of PREIFs regulated by Article 18/A of the Communiqué can be summarized as follows:

A. Scope of Residential-Oriented Investment and Fund Name Requirement

PREIFs are structured as funds that can invest only in residential projects meeting certain qualifications. Pursuant to the legislation, in projects to be included in the portfolios of these funds, at least 50% of the total gross area of the independent units must be allocated to residential use. In other words, PREIFs are specialized structures that focus on financing residential-oriented real estate projects. Fulfillment of this condition must be confirmed by a report prepared by an independent real estate appraisal company authorized by the Board. In addition, pursuant to the Amendment Communiqué, it is mandatory that the fund name include the phrase “Project Real Estate Investment Fund”7. The use of this phrase clearly defines the fund as a residential-oriented project fund for investors and market stakeholders and ensures that PREIFs are structurally distinguished from classical REIFs that do not include projects in their portfolios.

B. Portfolio Structure and Investment Restrictions

The portfolio structure of PREIFs has been defined within the framework of Article 18/A of the Communiqué and restricted to certain types of assets. Accordingly, a PREIF portfolio may consist solely of land designated for project development, incomplete real estate projects, and the money and capital market instruments specified in the relevant article. Investments made in incomplete real estate projects during the project development process may continue to be retained in the portfolio following their completion. Completed projects included in the portfolio must comply with the residential usage ratio requirement set forth in Article 18/A of the Communiqué, namely that at least 50% of the total gross area of the independent units must be allocated to residential use.

In addition, cash assets in the PREIF portfolio may only be invested in short-term and liquid instruments. As explicitly stated in the Communiqué, these assets are limited to participation units of investment funds that include in their name the terms short-term or money market, reverse repos, lease certificates (sukuk) issued by the Republic of Türkiye Ministry of Treasury and Finance Asset Leasing Company, public debt instruments, time deposits, and participation accounts.

Moreover, the requirement stipulated under Article 19 of the Communiqué for traditional real estate investment funds, which requires that at least 80% of the total fund value consist of real estate investments, and the provision allowing investment of up to 20% of the total fund value in shares of joint-stock companies whose financial statements, prepared in accordance with the legislation to which they are subject, show that at least 75% of their total assets consistently consist of domestic real estate investments, do not apply to PREIFs. The regulation allows project development-oriented funds, by the nature of their investment process, to hold higher proportions of liquid assets in their portfolios during certain periods8.

C. Project Development Methods and Investment Methods

PREIFs may realize their investments not only through projects to be developed on land they own, but also by participating in projects carried out on land owned by third parties or the public. Pursuant to subparagraph (d) of Article 18/A of the Communiqué, funds may participate in such projects by entering into revenue-sharing agreements or construction in return for land share agreements; they may establish rights of superficies, or acquire residential-type independent units from ongoing projects by purchasing them for inclusion in their portfolios.

For land registered in the name of the fund at the land registry, it is mandatory that within three years at the latest, all legal procedures required for the commencement of the construction of a real estate project meeting the conditions set forth in subparagraph (e) of Article 18/A of the Communiqué be fully completed. The rights arising from revenue-sharing agreements to which the fund is a party must, as prescribed in the Communiqué, be secured by mortgage, guarantee or suretyship, or other forms of collateral deemed appropriate by the Board. The fund founder is responsible for ensuring that such collateral is adequate to safeguard the rights of the fund.

However, if the counterparty to the agreement is a bank established under Law No. 4603 of 15.11.2000 on Ziraat Bank of the Republic of Türkiye, Türkiye Halk Bankası Joint Stock Company, and Türkiye Emlak Bankası Joint Stock Company, or a bank established under Law No. 6219 of 11.01.1954 on Türkiye Vakıflar Bank Turkish Joint Stock Company, or the Savings Deposit Insurance Fund, the Housing Development Administration of Türkiye, Iller Bank Joint Stock Company, municipalities and their subsidiaries, affiliates, and/or companies in which they hold the privilege of nominating members to the board of directors, then the collateral requirements under subparagraph (d) and subparagraph (e) of Article 18/A of the Communiqué shall not apply9.

D. Collateral Framework and Safeguards

Pursuant to subparagraph (e) of Article 18/A of the Communiqué, it is mandatory that all necessary permits under the relevant legislation be obtained for real estate projects to be included in the fund portfolio, that the project plans be prepared and approved, and that all legal documents required for the commencement of construction be complete and accurate. These matters shall be verified by independent real estate appraisal companies authorized by the Board. In addition, such projects must be secured by at least one collateral method. The collateral methods include building completion insurance, bank letters of guarantee, a progress payment system, or other methods deemed appropriate by the Board. This multi-tiered safeguard framework aims to protect investors against risks that may arise during the development phase of the project.

Subparagraph (f) of the same article requires that all construction activities related to real estate projects included in the portfolio be carried out under a contract regulating the mutual rights and obligations of the parties arising from such works, and by contractors possessing the qualifications specified in Article 22 of the Communiqué. These construction activities cover a wide range of works, including site preparation, construction, drilling, installation, alteration, improvement, renovation, development, and assembly. According to Article 22, such contractors must hold an A or B group contractor license pursuant to the Regulation on the Classification of Building Contractors and the Maintenance of Their Records. In addition, the selection of the contractor and the contract terms must be approved by the board of directors of the fund founder.

Finally, pursuant to subparagraph (g), the issuance and redemption of participation units, as well as transfers between investors, may also be effected in kind within the framework of the principles set forth in Article 16 of the Communiqué. The aforementioned article allows the consideration for participation units to be paid not only in cash but also through the registration in the land registry, in the name of the fund, of real estate or real estate-backed rights included in the fund portfolio, or by transferring independent units of real estate projects to the fund. Likewise, investors, in return for the participation units they redeem to the fund, may receive, instead of cash, real estate or real estate-backed rights from the fund portfolio10.

III. CONTRACTUAL CONDITIONS AND FUND ISSUANCE AGREEMENT

In the case of material changes to fund activities, investors are granted an exit right to protect their rights. In funds where participation units can only be redeemed at the end of the fund term, before any amendments to the internal regulation of the fund or the issuance document that may affect investor decisions enter into force, investors are provided with the opportunity to exit the fund by redeeming their units, based on the decision of the investment committee or the board of directors of the fund founder. If requested by investors, such amendments are postponed until the first date on which redemption transactions can be carried out. The fund assets are entirely separate from the assets of the founder and service providers; they may not be pledged, mortgaged, seized, or included in the bankruptcy estate, and may only be used in line with the common interest of the investors. This structure enables PREIFs to operate within a framework reinforced by collateral mechanisms and protective of investor rights.

One of the significant innovations introduced by the Amendment Communiqué is the requirement to sign a “fund issuance agreement” Pursuant to paragraph 13 of Article 13 of the Communiqué, it is mandatory for fund founders to sign a fund issuance agreement with investors, containing the minimum elements specified in the Communiqué, prior to the sale of participation units to qualified investors. This agreement may be executed either individually or collectively between the REIF and the investors. The primary purpose of this regulation is to simplify the issuance document, which is among the disclosure documents, and to consolidate the rights and obligations between the investor and the fund under a clearer and more binding legal instrument. Within this scope, it has been envisaged that certain elements previously included in the issuance document be transferred into this agreement. It is also required that a copy of the signed fund issuance agreement be published on the relevant fund’s Public Disclosure Platform (“PDP”) page in accordance with the principle of transparency and public disclosure.

IV. TRANSITION PERIOD AND COMPLIANCE REGULATIONS

Pursuant to Provisional Article 2 added to the Communiqué, applications pending before the Board as of July 17, 2024 shall be concluded in consideration of the new provisions introduced by the Communiqué. Funds that had issued participation units as of that date and whose portfolio structures comply with the provisions of Article 18/A of the Communiqué may apply to amend their disclosure documents for the purpose of including the term “Project” in their fund names, by declaring to the Board that a fund issuance agreement, executed with all unit holders pursuant to paragraph 13 of Article 13 of the Communiqué, has been duly signed (Provisional Article 2/2). Such applications must be submitted to the Board within one month from the effective date of the Communiqué. The Board may extend this one-month period where reasonable grounds exist.

In addition, existing funds that had issued participation units as of the effective date of the Communiqué are required to comply with the provisions of paragraph 13 of Article 13 of the Communiqué and the disclosure document standards set out in Annex/2 by December 31, 2024. As part of the compliance process, fund founders are obliged to declare to the Board that a fund issuance agreement, executed in accordance with paragraph 13 of Article 13 of the Communiqué, has been duly signed with all unit holders. During this period, amendments to the disclosure documents shall be subject to the provisions of subparagraph (b) of paragraph 2 of Article 14 of the Communiqué; and, where reasonable grounds exist, this period may be extended by the Board for a maximum of six months.

Through the amendments to the Communiqué, REIFs are now permitted to be established under an umbrella fund structure. Under the previous regulation, each REIF was issued as a standalone fund, whereas the new regulation enables portfolio management companies to establish sub-funds with different investment strategies under a single umbrella fund. Within this framework, a PREIF may also be issued as a sub-fund under such an umbrella structure. The portfolio and liabilities of each sub-fund are segregated from those of the others, and investors are liable solely with respect to the assets of the relevant sub-fund. This segregation legally prevents the debts or risks of one sub-fund from affecting the other sub-funds or the umbrella fund. To ensure the functionality of this structure, the first sub-fund issuance application under an umbrella fund must be submitted within six months following the registration of the internal regulation of the umbrella fund. In addition, the Amendment Communiqué has introduced a significant change regarding the commencement date for the sale of participation units. The six-month period following the receipt of the approved issuance document by the fund founder has been extended to one year, in parallel with the Venture Capital Investment Funds Communiqué. This structure provides operational efficiency and cost advantages in fund management and also allows for the diversification of thematic sub-funds under the same fund founder, focusing on different types of projects (such as residential, commercial real estate, or tourism projects).

V. CONCLUSION

PREIFs are among the new generation of collective investment instruments introduced into the Turkish capital markets by the Board’s Amendment Communiqué. Unlike the traditional real estate investment fund structure, PREIFs have a structure that invests directly in projects, can include real estate under construction and development in their portfolios, and thus provide financing to the housing production process at an early stage. In this respect, the PREIF represents an investment model that provides financing not only for the purchase and sale of completed real estate but also for the production process of real estate.

The requirement that at least 50% of PREIF portfolios consist of projects allocated to residential use aims to ensure that the funds primarily contribute to housing supply. This rule is directly linked to social and economic objectives such as increasing housing supply, accelerating urban transformation practices, and overcoming the financing bottleneck in housing production. This limitation imposed by the legislation both clarifies the fund’s investment strategy and stands out as a factor that enhances transparency and trust in the eyes of investors.

Within the PREIF structure, investors are able to participate indirectly in large-scale real estate projects—ordinarily difficult to access—through fractional ownership via participation units. This mechanism promotes the liquidity of real estate assets; in other words, high-value properties are made liquid within the fund structure by being divided into participation units and distributed among qualified investors. For institutional investors, as well as insurance and pension companies, this model creates an opportunity to participate in the real estate sector through capital market instruments, without the necessity of direct property acquisition.

The clear segregation of fund assets from those of the fund founder, the portfolio manager, and the custodian, together with the fact that the fund may not be pledged, mortgaged, seized, or included in the bankruptcy estate, demonstrates that PREIFs provide a high level of legal protection for investors. In addition, provisions requiring that projects to be included in the fund portfolio be approved exclusively by real estate appraisal companies authorized by the Board, that collateral (such as bank letters of guarantee, building completion insurance, or a progress payment system) be mandatory, and that construction activities be carried out only by contractors holding the required group license, make the PREIF structure a risk-controlled model subject to institutional oversight.

In this context, having investment decisions regarding projects undertaken made by investment committees established within the fund ensures that decision-making processes are conducted under professional and collective oversight. In particular, since practices such as the acquisition by the fund of an ongoing project or the development of a project on third-party land may increase project development risks, the balancing of such risks through collateralization and valuation mechanisms has been systematically regulated by the Board.

The PREIF model may serve as an alternative source of financing for contractors and project developers, particularly during periods when access to traditional bank financing becomes constrained. At the same time, the ability to include incomplete projects in the fund portfolio enables the funds to become an integral part of the real estate production process. This characteristic renders PREIFs not only an investment instrument but also a structure capable of directly influencing the production side of the sector.

From the investor’s perspective, PREIF participation units may be redeemed not only in cash but also in kind (for instance, by acquiring an independent unit from the project). Through this arrangement, investors may directly acquire housing from the project, thereby enabling participation units to function as a means of home ownership. In addition, income generated from the sale or lease of independent units included in the fund’s portfolio may be distributed to investors. In this respect, PREIFs stand out not only as vehicles for capital appreciation but also as structures capable of providing regular cash flow, such as rental income.

In conclusion, PREIFs are a distinct investment instrument that enable project-based financing in the real estate sector through capital markets, channel qualified investors into projects under institutional structures, and in this respect provide the sector with an alternative funding mechanism. Considering their strict regulatory framework, collateral and valuation system, investor protection rules, and the legal safeguarding of fund assets, the PREIF model not only enhances transparency and predictability for investors but also introduces a disciplined financial infrastructure to real estate production processes. Implemented under the regulatory role and supervisory mechanisms of the Board, this structure contributes to the deepening of Turkish capital markets while at the same time directly enabling the development of institutionally qualified real estate projects in the real sector.