Real Estate Mutual Funds As a New Rising

During the past days, investing into real estate represented an exclusive investment alternate that was only available to a small and an exclusive group of experts with a lot of capital to invest. With the passage of time and the Act of 1960 in US, the opportunity to invest in real estate was made available even to small investors. Investing in real estate is attractive because despite historical returns on real estate that are either equal to or slightly lower than common stocks (Reilly and Brown, 2000), real estate possesses very favorable risk characteristics. Specifically, real estate has comparatively lower standard deviation and low positive or negative correlations with other asset classes in a portfolio context (Goetzmann and Ibbotson, 1990).

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

Real Estate Mutual Fund is a simple idea, and works like any other mutual fund. A number of people invest small sums and invest the amount so collected in real estate instead of in shares or debt and soon we will be having the same in INDIA also.

Evolution of REMF and its Strategic Formation

Real estate mutual funds or REMFs have evolved greatly in the US, where the concept of REIT or real estate investment trust is popular. (The difference between the two, say experts is purely technical. Because REITs are trusts, the tax implication is minimal; REMFs are governed by the same tax rules that govern all mutual funds.)Unlike property, REMF units are securities and can be easily bought or sold on the stock exchanges.
Normally, REMFs owns big commercial office spaces and hotels, and do earn rental income. There are some REMFs that focus on capital appreciation, while others earns from mortgages. The REMFs buys, develop and sell property and share profits from any capital appreciation on the sale of property with their investors. Apart from sale and purchase of property, real estate funds also make money from rentals on the commercial property owned by them.
These trusts/funds are popular with small investors. Reason being investor gets to gain from any boom with even a small starting investment (usually the equivalent of Rs 5,000 or so). Investing all corpus in a single property can be a riskier preposition so they diversify their investments in properties in various locations, to reduces the risk and volatility. And finally, the experts managing the fund take care of the legal hassles; investors are not involved.

REMF in INDIA

THE REAL estate sector has been booming for the last three years, and has started attracting investments from private equity investors for quite some time in order to tap its growth potential. Despite concerns expressed by the R.B.I about the asset price inflation bubble, including in the real estate sector, the sector has witnessed entry of 40-50 private funds over the last 12-18 months and garnered crores of investment.

Real estate funds are available now a days in India also but as if now they are confined only to high net worth individuals, and institutional and global investors. That is the reason players like ICICI Venture, HDFC, Kotak Mahindra and Kshitij Venture Capital (Pantaloon), all of which have floated real estate fundsPrivate equity funds are targeted at high net worth individuals (HNIs) and the minimum investment levels are kept at Rs 10 lakh to crore of rupees, which is far away from the reach of a small investor. Therefore it is more important to have Securities and Exchange Board of India's norms for launching real estate mutual funds (REMF).REMF in India shall be governed by the provisions and guidelines under SEBI (Mutual Funds) regulations. The structure of the REMFs, will be close-ended initially. The units of REMFs will need to be compulsorily listed on the stock exchanges and NAV of the schemes to be declared on daily basis. The REMFs shall appoint a custodian who has been granted a ‘certificate of registration’ to carry on the business of custodian of securities by the Board. The custodian shall safely keep the title of real estate properties held by the REMFs.

These schemes can invest 1) directly in real estate properties within India; (2) Mortgage (housing lease) backed securities (3) Equity shares/ bonds/ debentures of listed/ unlisted companies which deal in properties and also undertake property development and in (4) Other securities.
Varied mixes of the above options could be opted by a scheme in the same way as equity, debt and balanced mutual funds are opting presently. The thrust of each scheme could differ in terms of objective, longevity and size of investment in each project.

Though the recent guidelines did not specify longevity of schemes, international experience pegs it between 5-9 years. As per Mr.Ved Prakash Chaturvedi, managing director of Tata Mutual Fund,” The average longevity of the REMF globally is 78 year; while in absolute terms it varies between five and nine years." However, tax benefits are available to investors only on schemes with equity investment of at least 65 per cent of the corpus, as it is applicable to equity mutual funds. The other schemes would be subject to taxes at the time of redemption or sale by the investor, as it is applicable to liquid (debt) funds.

Problem arises from lack of similarity in land laws, procedures and stamp duties for registration across states. There is no unanimity on implementation of urban land ceiling act and rent control acts. In certain places it is difficult for the owners to evacuate the non-paying tenants, leading to mounting of non-performing assets. Dispute settlement mechanism is tuned to the pace that is called for. All these aspects influence pricing and could be terms "risks involved". However, REMFs cannot be compared with equity investment, which many investors have mastered over a period of time. Though they have done wonders for real estate development in the US and UK. But REMFs have to gain confidence of the investors. Failure of the first two schemes may spoil the party. No doubt, REMFs provide another option of diversifying an investment portfolio. "These schemes are popular in the overseas markets and are perceived to be good diversification opportunities." All these benefits apart, there are apprehensions among some that lack of specific valuation benchmarks in real estate sector may lead to a repeat of plantation companies kind of scam