REITs Sparkle in the Market 

REITs play an important role in the development of real-estate industry which in turn is critical to national economies. Obtaining the finances needed for large-scale projects by issuing shares, REITs greatly contribute to proper urbanization and in addition to that they provide new opportunities to investors through turning the real-estates that are in their portfolio into high-liquidity securities.  REITs which make real investments with the resources they obtain through capital markets have begun to flourish all over the world after 1990s. However, when we look back we see that first steps were taken in the U.S. The U.S. Congress granted REITs license in 1960. The purpose of the Congress in that attempt was to enable small investors to become sharers in big profit-bearing real-estates by buying REIT shares. The financial strength created by small investors’ purchase of REIT shares would be used by REITs, new and larger-scale real-estates would be formed and hence small investors would become sharers in these large real-estates. In the first thirty years, the aim of the U.S. Congress has not materialized and REITs could not become active in the real-estate market.

The role originally assigned to REITs was assumed by banks, insurance companies, real-estate funds and especially by foreign investors from Japan. Whereupon with a law passed in 1986, returns from REITs shares were given some tax advantages and these companies were granted the permission to operate and manage the real-estates they have. Despite that new law, as a result of the savings-credit crisis in early 1990, the real-estate supply which has been going on swiftly from the 1980s and of the burdens placed on banks and insurance companies; real-estate prices in early 1990 in the U.S. decreased by 30-50% and financing capabilities have dramatically shrunk. But with such developments as; the fall in real-estate prices in the course of time, end of the crisis and the perception of the new law although belatedly, it was understood that the most viable real-estate financing method is through REIT shares. Thus REITs have quickly become popular primarily in the U.S. market and then in every market.                      

 The Reasons Why REITs Have Become Popular

The real motivation behind the emergence of REITs is the fact that for the most of the time investors are not able to make high-yielding real-estate investments with their own money. In addition to this, there appear some other reasons for the popularity of REITs in financial markets… For example; the low correlation between REIT shares and the other shares is quite important with respect to portfolio diversity and hence to the reduction of portfolio risk as a result of this diversity. In other words REIT shares, which respond to market shocks differently, are a significant tool for diversity in lowering the risk. Another factor that is as critical as risk in preferring a financial instrument is, the instrument’s yield. Besides with their supremacy with regard to risk, REITs are also more advantageous than other investment instruments relating to yields. Another criterion for evaluation that is to be looked at after analyzing risks and yields is risk-deducted returns. Risk-deducted returns of REITs are higher than other financial investments and as a result of this REIT index brings a higher return for each risk undertaken.  The investor diversifies his portfolio spreading risks and he not only does this but can also turn his investment into liquidity by selling his REIT shares at the stock market anytime he wants. In this respect, REITs remove the problem of converting the real-estate investment into liquidity by the purchase not of the real-estate itself but the shares of a company which invested in it. While they benefit from the opportunities available at stock markets, they are minimally affected by macroeconomic imbalances and the daily speculative ups and downs of the market thanks to their long-term life cycle and their being fixed investments. Again, researches also show that rises in real-estate prices do not remain below inflation rates. The role also of tax incentives in this popularity of REITs can not be denied.

Various tax incentives granted to REITs by the government since they operate as organized, under control and as publicly traded have a great supportive influence also on the establishment of such partnerships. One of the most significant economic advantages of REITs is their providing resources to the finance of such large-scale real-estate projects as, shopping centers and business centers. Usually, a company aiming to realize such kind of projects has to bear the entire financing burden. For companies own resources of which are insufficient, this situation mostly means financing through credit, that is to say, interest burden. Additionally, even if own resources are sufficient, equity cost is in question. However, these big projects can be financed with the money obtained through the sale of REIT shares to the people. 

Development of REITs in Turkey

The first legal arrangement concerning REITs, which we can define as private portfolio management companies operating by investing in real-estate and in projects based on real-estate, was prepared by the Capital Markets Board (CMB) in 1995. The first REIT was founded in 1996 and REITs have begun to be traded at the Istanbul Stock Exchange (ISE) after 1997. As of November 2007, there are 13 REITs trading at the ISE. Returns of REITs, which have a social aspect in addition to the development function every new financial instrument serves in the Turkish context, have shown variations from time to time due to high inflation and economic crises. While a downward trend that ended with a 70% discount was observed in the 1999-2002 period, an improvement in the market has begun after 2003 with falling discounts and even a slight premium. As of the end of September 2007, total market capitalization of the 13 REITs trading at ISE was 3.4 billion YTL and the total net asset value was around 3.6 billion YTL. A major disadvantage faced by the REITs in Turkey is that they are not known enough by the players at financial markets. This lack of recognition not only reduces the demand for REITs but also causes them to respond to short-term negative shocks like the other financial investment instruments do. Because of that, among the suggested works to be done by REITs in the coming period there must be a creation of publicity budget by all REITs and their speeding up publicity and public relations activities. Players in the financial market of Turkish economy, who have been facing crises and the assault of short-term money since 1990, have unfortunately incurred a loss of confidence. As a result of that, investors have begun to put their savings into short-term instruments.

This financial composition of Turkey has removed the advantages of REITs which are a long-term, safe and at the same liquid investment. In this regard, as compared to other financial instruments, the transformation of this situation in Turkey and restoring of confidence to the markets are much more important for REITs.  When we look at the real-estate purchase pattern in Turkey we see that it is different from that in the West. While finance of almost all real-estate investments in Turkey is obtained from own resources, in the U.S. 70% of housing investments are made by institutional capital. Whereas, this rate is only around 5% in Turkey. At the same time, while around 3% of these investments in Turkey are financed through capital market instruments, the same rate for the U.S. is 60%. The chief reason for this difference is long-term credits which have been impossible to use in Turkey due to years of high inflation and high interest rates. In spite of all these, positive developments in REITs are also observed. According to the “Global REIT Report 2007” published by Ernst&Young, Turkey ranked 9^th among 15 countries with a total return rate of 24.33%. With this rate of return, Turkey got ahead of such countries as, America, Holland, Belgium, Hong Kong and England in the ranking. Turkey, which ranks 8^th in the world with its 15 REITs, ranks 13^th in terms of market size with 1 billion 747 million dollars. Authorities commenting on the report have said that there occurred a shift from North America to Asia and Europe with respect to REIT formation and also that high financing costs await REITs in the next year.