• Property Certificates
  • April 15, 2017
  • "Property certificate" stands for capital markets instruments with equal nominal value representing a specific independent section (bağımsız bölüm), or a certain area of an independent section (bağımsız bölüm) of a property project, where the issue price of these certificates is used to finance an ongoing or upcoming property project.
    Similar Examples of Property Certificates in the World
    Property derivatives seen in different examples in England, Australia and the United States of America are similar to the property certificates that are intended to be rendered active in practice in Turkey, again. A typical property derivative transaction is the means to achieve securitization based on property via income, interest or swap1.
    Development of Property Certificates in Turkey
    Housing certificates set the pioneering example of the property certificates commonly used throughout the World, and especially in the United States. Housing certificates, which are similar to the property certificates, were initially regulated in 1989; whereas, property certificate regulations were legislated in 1995 amongst the capital markets laws and regulations.
    Housing certificates were first issued in 1989 by the Housing Development Administration of Turkey (Başbakanlık Toplu Konut ve Kamu Ortaklığı İdaresi ("TOKİ")), where the first example of its use was the İstanbul Halkalı Mass Housing Certificates. The said certificates were issued in return for 1 m2 each for 250,000 m2 of this mass housing, and were listed in the Istanbul Securities Market (İstanbul Menkul Kıymetler Borsası, currently known as Borsa İstanbul). In practice, these certificates were disappointing due to the high issue price, the price for goodwill (şerefiye) for acquisition of the housing, impossibility to become the owner of the property before 5 years, and income below the rate of inflation2.
    The first piece of regulation was enacted by the Capital Markets Board (Sermaye Piyasası Kurulu ("CMB")) via the Communique Regarding the Supervision of Property Certificates by the Board (Serial: III, No: 19), which was published in the Official Gazette dated 20.07.1995 and numbered 22349. The only example of this communique has been the property certificates issued in 1996 to finance the housing project by Türkiye Emlak Bankası A.Ş. in Istanbul Ataşehir3. Such practice could not continue due to the non-formation of a market price, and other elements, such as price, term and goodwill (şerefiye).
    Targets Identified with Property Certificates
    Through property certificates, it is especially intended to provide a source of financing to the construction sector for new housing or commercial construction projects.
    Another aim is to create the opportunity to invest in property for those classes without the sufficient financial background to afford the purchase price of a property via syndicated bank loan, or through their own savings, and to turn this opportunity directly into a whole property with a group of certificates by extending the investment to a longer period, or to a larger group of investors, or to sell back their certificates, and benefit from the increase in the income.
    In addition, it is intended that the investors engage in partnership with regard to the property income, which is subject to a speculation of increase. Final regulations also put forward the idea of creating an alternative source of funding for urban transformation that plays a determinative role.
    Final Changes to the Property Certificates
    The Communique on Property Certificates published on the Official Gazette dated 5 July 2013 (VII-128.2) ("Communique")4 stipulates the characteristics of the property certificates and the rules for their issue.
    According to the Communique, the primary performance (asli edim) for which the issuer is obliged is to grant ownership in the name of the holders of the property certificate, and the delivery of the independent section (bağımsız bölüm) within the framework of the prospectus (izahname), or the issuance document (ihraç belgesi) within the term set for performance. Accessory performance (tali edim) is the sale of the independent sections (bağımsız bölümler) corresponding to the property certificates subject to the property certificates, and the distribution of the sale proceeds to the property certificate holders pro rata to the number of their property certificates within the framework of the prospectus (izahname), or the issuance document (ihraç belgesi) within the term set for performance.
    Since 2013, the year that the Communique entered into force, there were no other examples of practice. Significant amendments were incorporated in 2016 and 2017 in order to render the Communique more practicality. As per the amendment dated 3 August 2016, following the end of the term for the use of the primary performance (asli edim), it is deemed that the investors who have not made an application for primary performance (asli edim), or have not fulfilled the conditions stated under the issuance document, have accepted the accessory performance (tali edim). Since there is no detailed provision in the Communique with regard to the foreign sale of the property certificates, obligatory provisions of Title Deed Law No. 2644, and that of the relevant legislation, should be taken into consideration in the prospectus (izahname) with regard to the execution of the primary performance (asli edim).
    In 7 March 2017, the Communique was updated again. Through this new amendment, if there are any independent sections (bağımsız bölüm) that remain unsold, the weighed market average of the three months before the end of the term is taken into consideration for the issue of the certificates corresponding to the independent sections (bağımsız bölümler) of the property. If this price cannot be calculated, or if the calculated price is determined by Borsa İstanbul or the CMB, value determination will be in accordance with a valuation report.
    In addition, with the final amendments, the requirement for a bank guarantee for the primary and accessory performances (asli ve tali edimler) have been waived, but terms and conditions regarding the requirements for the feasibility reports to be prepared by the audit firms have been regulated5.
    The final amendment especially dwells on the detailed regulation of the use of the funds obtained from the issue. In accordance with this new regulation, the funds obtained from the issue will not be pledged, used as security, cannot be attached for any purposes, including the collection of the public receivables, and cannot be subject to the distribution of assets in bankruptcy. In this respect, it is still not settled as to how the provisions of the Communique that contradict the obligatory provisions of the Enforcement and Bankruptcy Law No. 2004 will be enforced, and whether there will be an amendment to the laws enacted.
    Urban Transformation Projects
    If urban transformation projects within the scope of the Law Regarding the Transformation of Areas Subject to Disaster Risk No. 6306 are financed through property certificates, we encounter different regulations under the Communique. TOKİ and İller Bankası (Provincial Bank) have also been included in the system, along with their subsidiaries and affiliates for the financing of the urban transformation projects, which have recently been very popular. The requirements for the other issues that the property projects for the issuer is to severally own the land, and to turn the title deed of such property into construction servitude (kat irtifakı), or that construction servitude has been issued on the land for the benefit of the issuer, are not waived for the issuances of land and properties owned by TOKİ, İller Bankası (Provincial Bank) or their subsidiaries and affiliates are used for property projects.
    Pursuant to the new regulations under the Communique, with regard to the issuances for the urban transformation projects, if the Project is unfulfilled, or if a designated term longer than one year has lapsed, the property certificates can be redeemed at a price that is not less than the issue value (ihraç değeri) and, in addition to a penalty, if stated in the prospectus (izahnname) or the issuance document (ihraç belgesi).
    According to the final amendments, the feasibility projects for the urban transformation projects that TOKİ, İller Bankası (Provincial Bank), or their subsidiaries and affiliates that are guarantors for the urban transformation projects, feasibility and construction improvement reports can be prepared by the relevant institution. Also, pursuant to an amendment to the Communique, the CMB can determine different standards upon application with regard to the exceptions for urban transformation projects.
    Default in the Project
    According to the Communique, if it is evident that the construction project will not be completed within the term for the performance stated in the issuance document (ihraç belgesi), and in accordance with the principles thereunder, a feasibility report is prepared within 15 work days, and additional time is requested, provided that such period of time does not extend beyond 180 days. In the end of such period, or if no additional time is requested, if the construction project will not be completed within the term for its performance, it will be deemed as if the project has not been completed. In that case, the issuer needs to pay the redemption value (itfa bedeli) of the property certificates, and the penalty if stated in the issuance document (ihraç belgesi).
    According to the new amendment enacted in 2017, if the issuer does not undertake such obligation, a "property certificate holders meeting" is held, which is similar to the general assembly meeting under the Turkish Commercial Code, resolving for the Project to be completed, or that the return of the value obtained from the blocked fund be vested in the authorized body, and by means of sale of the portion of the property Project, which is subject to the issuance, but could not be completed, pro rata to the property certificates to their holders.
    Conclusion
    The property certificate model may be used for financing property projects at a low cost from the perspective of the issuers, and for investment or becoming a property owner, from the perspective of the investors. Such model can also be used for urban transformation projects. Following the efforts with regard to the practice of such model since 2013, a new housing Project will be offered to the public in which TOKİ is the issuer. Taking into consideration the final changes to the Communique, in relation to the urban transformation projects undertaken by the government, a successful pioneering example would take a leading role for the markets.

    1 Henderson on Derivatives > Part II The technology, the products and the ISDA definitions > Chapter 3 The third and fourth waves of innovation > Property index derivatives.
    2 Dolun, L. (2007). İpoteğe Dayalı Konut Kredisi (Mortgage). Ankara: Türkiye Kalkınma Bankası A.Ş. Ekonomik ve Sosyal Araştırmalar Müdürlüğü.
    3 http://gazipublishing.com/media/uploads/images/GIID-MAKALELER/SAYI-3/2016.02.02no.pdf.
    4 http://www.spk.gov.tr/apps/Mevzuat/MevzuatGoster.aspx?nid=171282.
    5 http://www.spk.gov.tr/duyurugoster.aspx?aid=20130705&subid=0&ct=c.