Special Note

Aug 17, 2012

Lifting the reciprocity principal for foreigners in Turkish real estate market and its implications for GCC countries
Chief Economist F. Ozlem Derici oderici@atayatirim.com.tr

Direct Line: 90-212-3106273

Ata Invest ICM icm@atainvest.com ataicm@bloomberg.net Direct Line: 90-212-3106260

The Turkish government approved the decree to allow foreign residents to buy domestic real estate properties for 183 countries out of around 200 countries in the world (i.e. United Nations, Vatican City, Kosovo, Taiwan, TRNC) while the President approval was also taken by the early days of August. The new law abolishes the reciprocity principal that bans or limits the real estate purchases of residents from where Turkish residents are not allowed to buy real estate. As the passage of new reciprocity law provides considerable amount of real estate investment opportunities for foreign investors from Gulf Cooperation Council (GCC) countries, in this research note, we wanted to assess the new laws implications within the framework of Turkey-GCC relations. Previously, Turkey had reciprocity agreements with 54 countries and among GCC countries + Yemen, neither of them had reciprocity rights before the new legislation. Foreign residents and firms can acquire real estate in a country in three groups, namely free of reciprocity, restricted reciprocity and out of reciprocity, the latter meaning that those countries citizens cannot acquire real estate in Turkey. Countries that are kept out of reciprocity are not disclosed but according to news agencies, Syria, Armenia, North Korea, Southern Cyprus, Cuba, Nigeria and Yemen are excluded from the list of reciprocity free countries while China and Israel residents acquisition is limited to one residential unit. The situation of Russia and Ukraine was quite uncertain however government officials clearly stated that the limitations only cover border cities, thus Russian and Ukrainian residents are free of reciprocity as they have no border with Turkey. Georgia residents, on the other hand, as an example cannot buy a property from Artvin and Ardahan. This is the same for Greek, Bulgarian, Iraqi and Iranian residents as well. As an additional restriction, Greek residents are not allowed to buy a property in any of the coastal cities of Turkey including Istanbul. This bans Greece investors from buying property from 28 cities in Turkey. Two limitations on the acquisition are that a foreign buyer cannot acquire more than 30 hectares (this was 2.5 hectares in the previous law) and cannot buy more than 10% of the province where the property is located. As for the former, the Council of Ministers can extend the limit from 30 hectares to 60 hectares, when the acquirer submits the details of the project to be initiated. The new law would boost the demand for properties for personal use or personal investments, fund investment and project development purchases. The first one would mainly give rise to the sale of luxury residential units, shores and kiosks mainly on the coastal areas. The second group is basically driven by the real estate


funds issued abroad. Real estate funds abroad may engage in individual or block purchases to use it as an underlying asset to the fund. Note that there have been some initiatives to issue real estate funds in Turkey however the Capital Markets Board Laws related articles are not suitable for building and issuing such a fund. The final source of demand would come from startup projects for rental and on sale properties that are expected to be constructed on the acquired land by foreign investors. The new law allows the sale of real estate including farm land to foreigners without any reciprocity requirement. This is quite important as the government suspended the previous law which was enacted in 2002 due to national interest concerns in 2007. The main reason behind the decision was the neighbor countries` acquisition of lands around major water and energy sources from farmers with price levels considerably lower than the lands` market value. The law was then reconsidered in 2007 and enacted by excluding those countries and imposing reciprocity principle. According to the latest statistics by the General Directorate of Land Registry and Cadastre currently the highest 3 foreign real estate owners according to total area of immovables are Germans, Austrians and British citizens. The number of people acquired real estate in Turkey from those 3 countries is 29,219, 4,470 and 35,825 having 5,200, 1,243 and 685 hectares in Turkish territory. GCC countries ownership is quite weak with 10 hectares owned by 89 people. As this was mainly due to reciprocity restriction rather than low demand from those countries, the abolishment of reciprocity will considerably boost the real estate purchases and investments from the region.
ForeignOwnershipbyNationality* #of Areaof immovables immovables(m2)
Bahrain Kuwait Oman Qatar Saudi Arabia UAE Yemen GCC as % of total Total 8 11 0 0 53 3 0 75 0 117,944 1,065 14,418 0 0 82,122 4,375 0 101,980 0 89,358,947

#of owner
10 10 0 0 66 3 0 89 0 124,833

Source: General Directorate of Land Registry Agency, Ata Invest Research *AsofAugust152012

Implications

Foreign Direct Investment

Turkey was able to attract around USD 2bn USD 2.5bn FDI inflows per annum from real estate sales in the last couple of years. Following the abolishment of reciprocity real estate purchases are expected to rise to some USD 10bn according to sector representatives.


RealEstatePurchasesbyForeignors(mnUSD)
3500 3000 2500 2000 1500 1000 500 0 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source:CentralBankofTurkey,AtaInvestResearch

FDI generation from GCC countries and Yemen region is quite weak and we are not able to distinguish how much of this flow is real estate. Except for 2008, when Saudi Arabian National Commercial Bank acquired 60% of Turkiye Finans for USD 1.1bn, total FDI inflows from GCC region is around USD 200mn-USD300mn per year. This makes up some 1.5% of 2012 FDI inflows in 12-month rolling terms.

FDIInflowfromGCCCountries(12mrolling)
2500 FDIfromGCC(mnUSD,leftscale) 2000 ShareofGCCintotal(%,rightscale) 14 12 10 1500 8 6 4 500 2 0 200712 0 200810 200908 201006 201104 201202

1000

Source:CentralBankofTurkey,AtaInvestResearch

What implications the new law would bring differs according to the country`s own dynamics and business relationship with Turkey however the sector representatives uniformly emphasize that the GCC investors are ready to enter into the market as soon as the legislation takes into effect in practical terms. Among those Saudi Arabia and Kuwait tops the ranking. To name a few, the worlds one of the leading real estate firm with USD 30bn turnover, Saudi Bin Ladin Group decided to start an investment of USD 500mn in the Anatolian side of Istanbul while Al Omari Group established a startup firm named Nema Construction and signed a contract with Turkish Cathay to start a USD 20mn worth of housing project. Additionally, Kuwaiti Mena Real Estate established a new firm named Mena Turk.


Trade Relations
The ease in Turkish real estate market would also have some positive impact on trade relations as it would be easier for foreign investors to get familiar with Turkish markets and business environment. Currently GCC and Yemen makes up some 3.8% of Turkeys total trade volume with USD 4.9bn exports and USD 2.3bn imports since the beginning of the year.
Trade with GCC Countries (mn USD) 2005 GCC Trade Volume GCC in Turkey's Total Trade Volume (%) Exports to GCC Bahrain Kuwait Oman Qatar Saudi Arabia U.A.E. Yemen Imports from GCC Bahrain Kuwait Oman Qatar U.A.E. Yemen
Source: Turkstat, Ata Invest Research

2006 4,356 1.9 3,834 35 219 71 342 983 1,986 198 522 45 56 2 66 352 0

2007 6,576 2.4 5,842 77 221 92 450 1,487 3,241 274 734 119 90 24 30 470 0

2008 13,660 4.1 12,622 308 493 216 1,074 2,202 7,975 354 1,038 96 81 11 159 691 1

2009 6,743 2.8 5,764 114 211 106 289 1,768 2,897 379 979 24 184 17 86 668 0

2010 7,942 2.7 6,740 172 395 129 163 2,218 3,333 330 1,202 72 215 39 177 698 1

2011 10,173 2.7 7,603 160 297 215 188 2,763 3,707 273 2,569 111 270 57 481 1,649 0

2012 ytd 7,187 3.8 4,888 88 131 139 120 2,052 2,098 261 2,299 70 152 26 225 1,826 0

3,532 1.9 3,209 42 210 40 82 962 1,675 197 324 19 42 4 51 205 3

Tourism
Higher participation of foreign residents in real estate market would contribute to the number of tourists visiting Turkey as well. Especially from the Gulf region, there is a huge increase in the number of tourists visiting Turkey. In the first half of the year, incoming tourist from whole region rose 81.2% while total number of tourists has declined by 2.3%. As a reverse impact, tourism and trade relations with potential countries create great opportunities to market the available real estate projects for those investors coming from Gulf region.
IncomingTouristsfromGCCCountries 2010H1 2011H1 %change 2012H1
Bahrain Kuwait Oman Qatar Saudi Arabia UAE Yemen GCC as % of total Total 2,572 9,490 n.a 1,712 20,102 8,900 2,461 45,237 0.4 11,571,427 2,751 17,322 n.a 2,848 41,394 12,611 3,689 80,615 0.6 13,027,494 7.0 82.5 ... 66.4 105.9 41.7 49.9 78.2 5,229 28,430 n.a 5,490 81,954 19,494 5,453 146,050 1.1 12.6 12,723,978 -2.3

%change
90.1 64.1 ... 92.8 98.0 54.6 47.8 81.2

Source: Turkstat, Ata Invest Research

Hurdles

The main hurdle about the new legislation was the implementation problem. Though the law has passed through the Parliament and got Presidents approval, regulations that land registry agencies should follow were not delivered and although the investors line up to acquire both residential and business occupancies from real estate agencies the sale process could not be started due to uncertainties. However, following the Presidential approval, news agencies reported that land registry agencies in most touristic places like Marmaris and Alanya have received the lists and regulations, paving the way for sale to foreign buyers. We expect the process to be completed immediately to start full implementation. Ease of transaction is another concern for sector representatives. There is no specific suggestion on that but comments mostly focus on the fact that banks should work on keeping the process as smooth as possible for foreign investors. Besides, some sort of intermediary institutions that would function as escrows should be initiated according to some commentators. Escrows act as a guarantor that assures no funds or property will change hands until all of the instructions in the transaction have been followed. There is no such institutional setup in Turkey yet. Residence permits is another issue that needs to be addressed by the government. According to According to Minister of Environment and Urban Planning Erdogan Bayraktar, the government is currently working on a new legislation that facilitates and extends the stays of real estate investors. In conjunction with the Minister of Foreign and Internal Affairs, Ministry of Environment and Urban Planning plans to initiate regulations that would enable those investors to acquire residence permits and/or extended visas.

ANNEX Country List

Country
Afghanistan Albania Algeria Andorra Angola Antigua and Barbuda Argentina Australia Austria Azerbaijan Bahamas Bahrain Bangladesh

Restriction
Land, Office, Residential Office, Residential Subject to Ministry of Interior Permission Subject to Ministry of Interior Permission

Country
Granada Greece Green Bay Island Guatemala Guinea Guinea - Bissau Guana Holand Honduras Hungary Iceland India Indonesia

Restriction
Land, office, residential except for border cities and coastal cities Subject to Ministry of Interior Permission

Subject to Ministry of Interior Permission Subject to Ministry of Interior Permission Subject to Ministry of Interior Permission Subject to Ministry of Interior Permission

Land, Office, Residential Subject to Ministry of Interior Permission Land, office, residential subject permission of Ministry of Interior for the ones w ho are not forbidden under UN sanctions Land, office, residential subject to approval of Ministry of Foreign Affairs and permission of Ministry of Interior 5 residential

Barbados

Iran

Belarus Belgium Belize Benin Bolivia Bosnia - Herzegovina Botsvana Brazil Brunie Darussalam Bulgaria Burkina Faso Burundi Cambodia Camerun Canada Central African Rep. Chad Chili China Cibuti Columbia Comoros Costa Rica Crotia Czech Rep. Denmark Dominic Rep. Dominica East Timor Ecuador Ecuador Guinea Egypt El Salvador Estonia Etiopia Fiji Finland France Gabon Gambia Gana Georgia Germany Source: New s reports

Except for border cities

Land, Office, Residential

1 residential

2 residential

3 residential

Land, Office, Residential

4 residential

Iraq Ireland Israel Italy Ivory Coast Jamaica Japan Jordan Kazakhstan Kenya Kiribati Kongo Rep. Kosovo Kuw ait Kyrgyzstan Laos Lebanon Lesetho Letonia Liberia Libya Lichtenstein Lithuania Luxemburg Macedonia Madagascar Malaw i Maleysia Mali Malta Marshall Islands Mauritus Mexico Micronesia Mogolistan Moldova Monaco Montenegro Moritania Morocco Mozambik Myanmar Namibia

2 residential, 1 office Land, Office, Residential Land, Office, Residential

Land, Office, Residential

Land, Office, Residential

Land, Office, Residential

6 residential Land, Office, Residential Subject to Ministry of Interior Permission Land, Office, Residential Land, Office, Residential

Land, Office, Residential Land, Office, Residential Land, Office, Residential


Country
Nauru New Zealand Nicaragua Nigeria Norw ay Oman Pakistan Palau Palestine Panama Papua New Guinea Paraguay Peru Philippines Poland Portugal Qatar Romania Ruanda Russia Saint Marino Samoa Sao Tome and Principe Saudi Arabia Senegal Serbia Rep. Seychelles Island Sierra Leone Singapore Slovakia Slovenia Solomon Islands Somali South Africa Rep. South Korea Rep. South Sudan Spain Sri Lanka St. Kitts and Nevis St. Vincent & Grenadins Sudan Surinam Sw aziland Sw eeden Sw itzerland T.R.N.C. Tacikhstan Tanzania Thailand Togo Tonga Trinidad and Tobaggo Tunusia Turkmenistan Tuvalu Source: New s reports

Restriction
Land, Office, Residential

Country
U.A.E. U.S.A Uganda Ukraine Uruguay Uzbekstan Vanuatu Venezuella Vietnam Zambia Zimbabw e

Restriction

Except for border cities, subject to permission of Ministry of Interior

Subject to Ministry of Interior Permission Land, Office, Residential Subject to Ministry of Interior Permission Land, Office, Residential

Land, Office, Residential

Land, Office, Residential Interior permission

Ministry of Interior Land, Office, Residential

Subject to Ministry of Interior Permission

Land, Office, Residential Land, Office, Residential

Subject to Ministry of Interior Permission Land, Office, Residential Land, office, residential subject to Ministry of Interior permission

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