David O'Byrne in Istanbul -

In the midst of a global economic crisis that has sent investors scurrying for safe havens and property prices tumbling across the globe, it might not seem like the best time to introduce a new real estate law that places unheard of restrictions in the way of foreign investors. However, that's precisely what Turkey has done.

Never a country to take the easy route, Turkey in July put a new amendment to article 36 of the Title Deed law No. 2644 onto the statute books. The amendment is now awaiting the publishing of regulations in order to allow it to be implemented. Banning completely the purchase of land and real estate by foreign companies not incorporated in Turkey, the new amendment also introduces severe restrictions on the purchases by individuals and by what it defines as "companies backed by foreign capital."

"It's a complete mess," says one senior lawyer at an Istanbul law firm that specialises in representing international companies, speaking on condition of anonymity. He points out that as it stands, the definition of "backed by foreign capital" includes Turkish subsidiaries of foreign companies, Turkish companies with foreign partners and even potentially any company quoted on the Istanbul Stock Exchange.

Worse, all purchases by "foreigners" will in future have to be vetted by special committees created by local governors, which will assess whether the real estate in question lies within a "security zone" and whether in the case of companies, the purchase can be shown to be a part of their operations as defined in the company's articles of association. "How will the land registrars be able to determine the shareholder structure of publicly quoted companies, and why are committees necessary to decide if a piece of property lies in a 'security zone'?" asks the lawyer, adding that the process also has no specified timeframe - something of a problem in property deals which tend to be time sensitive.

Damage done

This vetting process has already halted one project to renovate a block of derelict property in Istanbul's run-down former European quarter of Beyoglu. "Why shouldn't I be able to buy what property I want to buy?" Gerd Zerhusen, founder and CEO of City Center Invest, a real estate investment company backed by foreign investors, asks rhetorically.

No fly-by-night speculator, Zerhusen has spent the past five years sizing up derelict property, convinced that with the right restoration what was formerly high-end residential property can be returned to its former glory. However, his attempts at putting together a development block have been thwarted by the new law, with his final purchase of a derelict building halted indefinitely. "I have the money to buy, the owner wants to sell, but the sale can't go through because these committees have still not been established, so now the seller is looking for another buyer," explains Zerhusen, who complains that the new property law breaches Turkey's 87 international reciprocity agreements which guarantee citizens of those countries the same legal rights as Turkish citizens.

Such is Zerhusen's frustration that he's challenging the new law in the Turkish courts, pointing out that Turkey has reciprocity agreements with 87 countries, including all EU states, which guarantee reciprocal equal treatment before the law. "It's a straightforward case," says lawyer Emre Erdem of the Ertem law office, which is representing Zerhusen and City Center Invest. "The Turkish constitution recognises the supremacy of international treaties over domestic law, meaning legally it cannot be implemented against nationals of the country's with which Turkey has a reciprocity agreement."

Erdem cautions, however, that it may take up to two years to have this fact established in the courts. Such a long delay will almost certainly cause serious problems for those foreign entities that are caught in limbo having bought property, but find themselves unable to be issued with property deeds. Those affected include thousands of foreign nationals who have bought residential property both in Istanbul and in coastal developments. Also thought to be affected are a number of real estate investment trusts established in Turkey over the past two years that are backed by foreign capital, and real estate developers who are backing new residential and commercial development projects.

Despite the problems, none of the companies approached for the purposes of this article chose to make any comment. "They either simply don't know what is going on or they're hoping someone else finds a solution," offers Zerhusen.

However, any solution may be some time coming. The new property law replaced a previous more equitable law that was struck down in January this year by Turkey's constitutional court following an application by the country's main opposition party, the Republican People's Party (CHP), which claimed it was in breach of the constitution. Now the CHP is challenging the new more restrictive law, claiming it too breaches the constitution. "We're not opposed to sales of property to foreigners," insists CHP deputy leader Onur Oymen, pointing out that some EU countries have similar restrictions on property sales to foreign nationals.

However, while it's true several new EU member states were allowed impose temporary bans of up to seven years on sales of agricultural land to foreign individuals and companies in order to preserve rural agricultural communities, none has introduced such draconian restrictions as Turkey, a fact not lost on the European Commission, which is overseeing Turkey's process of accession to the EU. "Not only will Turkey be unable to join the EU with such a law in place, it won't even be able to begin negotiations on Chapter 4 of the accession agreement, dealing with free movement of Capital," a spokesman for the European Commission in Ankara told bne.

Send comments to The Editor