Property Investment Opportunities in Turkey
Since the beginning of 2002, an organized and international property market has started to develop in Istanbul. Accordingly, the interest of local and foreign investors in the property market in Istanbul progressively increased every year.
Return on real estate investment in Istanbul has reached a peak between in 2003 and 2004 with an average annual return of 12.5% in real terms for office investments, 10% for shopping centre investments and 11.5% for logistic property investments.
The Emerging Trends in Real Estate Report prepared by ULI and PWC provides an outlook on European real estate investment and development trends. According to the 2009 publication of this report, Istanbul is ranked as the third most attractive investment market in Europe after Munich and Hamburg. The report indicates that Istanbul is still one of the most attractive markets for investment professionals.
The survey showed that the majority of the respondents rated the property market in Istanbul as a buy except for the retail sector. The strongest buy recommendation was given for the office market explaining that the A class office supply in the central business district is not sufficient to meet the demand and the land supply is limited and expensive. On the other hand investment prospects had declined from the historical peak of 7.2 points in 2008 to 5.4 in 2009. However the report remarks that Istanbul will be the top ranked investment market in Europe again as it was in 2008.
Key factors which attract investors to the real estate market include;
- Houses that are illegally constructed are likely to be demolished which would directly reduce the supply.
- A large number of low quality houses will be replaced by new ones or are expected to be demolished. This also puts pressure on housing supply.
- The Mortgage loan system recently introduced in Turkey
- The immature retail market brings significant growth prospect for the retail property.
The real estate sector attracts foreign investment in two ways. The first is the property purchases of foreign real persons and the second is the foreign direct investments of foreign or multinational companies.
Deloitte Turkey’s report “Real Estate Investment in Turkey: From Reluctance to Appetite, 2009” explains the legal and tax framework regarding real estate investments by foreign investors. The framework can be briefly explained as follows:
The government has made some improvements to the Title Deed Law regarding real estate acquisitions in Turkey by foreigners. The law regarding the amendment of the Title Deed Law numbered 5782 has entered force as of July 15, 2008. The amendment of this law has become the sole law regulating:
1. Real estate acquisitions by foreign real persons and foreign companies incorporated abroad,
2. Real estate acquisitions in Turkey by companies which are incorporated or partly owned in Turkey by foreign investors.
These two can be briefly explained as follows:
1. Foreign real persons can acquire real estate within the boundaries of Turkey provided this right is reciprocal, and complying with legal restrictions. The law also regulates that foreign real persons are entitled to acquire real estate and rights only up to 10% of the total parcels of the area within the boundaries of the application plan for zoning and local zone plan in a central district or district terms.
Foreign legal entities incorporated abroad can only acquire real estate in accordance with the Petroleum Law, the Tourism Law and the Industry Zones Law.
2. Companies incorporated or partly owned in Turkey by foreign investors are entitled to acquire real estate or rights which are related to the activities set forth under the articles of association of such company. The same will be applicable for the assets and deals and share deals between foreign investors and local companies. Real estate acquisitions in military zones, security zones and strategic zones are subject to Turkish General Staff approval.
Foreign investors can acquire real estate and rights by obtaining the approval of the governorship where the real estate is located. Investors should file an application to the relevant governorship together with the required documentation listed in the same article. The commission will carry out the assessment of the application file in line with the written opinions provided by the governmental authorities in question.
A quick guide to investors about the tax framework is as follows:
1. Corporate income tax: 20% of net profit including capital gains from real estate transactions and rental income.
2. Personal taxation: Real persons receiving rental income from property are liable to 15% income tax which increases progressively to a top marginal rate of 35%.
3. Value added tax: 1%, 8%, 18% depending on the types of goods and services. Residential apartment units smaller than 150 m2 are subject to 1% VAT, all other real estate is subject to 18% VAT.
4. The registration of real estate is subject to a title deed fee. The fee is calculated at 1.5% of the acquisition/transfer value; payable both by the buyer and the seller.
5. Real Estate (property tax): The taxes for 2009 are; 0.1% for buildings used for residence, 0.2% for other building (those used as factory or office), 0.1% of land in general and 0.3% for building sites land per annum of registered value.