Real Estate MFs And REITs Come Cheap

Seven years after the proposal was first mooted, the Securities and Exchange Board of India (Sebi) came out with its draft guidelines for real estate mutual funds (MFs). This move has brought much joy and relief to the MF industry. Now, the industry is out to convince domestic investors that the move could not have come at a more opportune time. In these volatile times, real estate acts as a good diversification option due to its low correlation with equity and bonds. Besides, retail investors can now invest in actual real estate projects with amounts as low as a few thousand rupees.

Mr. Vineet K Vohra, MD & CEO, ING Investment Management, said, “Sebi’s move to launch realty MFs will not only foster diversification in the MF industry, but will also promote wider participation in the real estate sector”. Mr Vohra further said that the move will help bring the Indian market place closer to global norms. As for delivering returns, sample this… ING’s Global Real Estate Fund, which invests in shares of international real estate companies, emerged unscathed in the recent stock market turbulence.

The fund not only took the crash in its stride, but also delivered positive returns over the same time period. If you had invested Rs 10,000 separately in the BSE Sensex, BSE Realty index and ING Global Real Estate Fund on January 10, ’08, your investment would be worth Rs 7,900, Rs 5,500 and Rs 10,800, respectively, as on April 22, ’08. Sebi has given approval to two kinds of real estate funds. The first category is of real estate MFs, which will invest in real estate projects and mortgage-backed securities.

These will be closed-ended funds, listed on the exchanges. As their net asset values (NAVs) will be declared daily, investors will have the option to exit any day. So, you can now say goodbye to the old tradition of illiquidity in real estate investments. Real estate investment trusts (REITs, in short) constitute the second category of real estate funds. These products are very popular abroad. The most common version of this class of funds allows an investor to earn fixed income like returns through rents of commercial properties . Most REITs are listed on the exchanges and have tax incentives for investors.

Put simply, REITs work like fixed income instruments (rents as coupons), while realty MFs will seek capital appreciation (like a stock price going up) by investing in properties. For years, real estate was synonymous with lack of transparency in transactions and absence of an index, making it difficult to track prices. Various fund officials like ING’s Mr Vohra hope that the introduction of REITs in India will change all that. They are betting on such products ushering in greater liquidity to this asset class, as well as freeing up developer capital for further investment, changing the dynamics of the sector as well.

With the current real estate boom and no signs of any fall in demand for homes or offices, this may be the best time for investors to own a share of the lucrative realty sector. Real estate MFs and REITs offer the cheapest and most convenient way to do so. However, let’s hope that smoother legislative framework and a clear taxation policy will be put in place for these products, making them investor-friendly.

2 Comments

  1. Posted May 13, 2008 at 5:19 am | Permalink

    The Indian real estate sector is set to get a breather from the market regulator SEBI’s move to allow Real Estate Mutual Funds. Real Estate Mutual Fund Scheme means a scheme of a mutual fund which has investment objective to invest directly or indirectly in real estate property and shall be governed by the provisions and guidelines under SEBI (Mutual Funds) regulations. The SEBI added that the schemes will have to be close-ended with its units listed on a recognised stock exchange wherein the net asset value (NAV) will be declared daily. Real Estate Mutual Funds (REMFs) have a useful purpose and a role which until recently was missing in the real estate ecosystem. REMFs should help ease the situation and compensate to some degree the relative absence of public equity and challenging debt markets..At present, not much equity funding is available to projects below 50 thousand square metres of built up area or 25 acres and there is hardly any domestic secondary market for stabilised income yielding assets.Mr. Mayani added, “Besides, with foreign money not permissible in fully built up commercial, residential and retail assets, this is a good vacant space for REMFs.REMFs would buy fully built assets and it should help unlock capital for developers. Also, with 15% allocations, which REMFs would have towards under-construction assets, some additional equity should also be available for non-FDI compliant projects. Introduction of REMFs is certainly timely and well intended REMFs would help in creation of an alternative investment portfolio for small investors or households who do not have the technical ability and the means to directly invest in the sector, catalysing a sophisticated and liquid market for mortgage backed securities and mobilisation of retail funds for assets through a regulated institutional route.for more view- realtydigest.blogspot.com

  2. Posted May 13, 2008 at 5:53 am | Permalink

    Is that possible ? I think that will not be possible for that particular stanza level.

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