Institutionalising Investment in Real Estate through REMFs

The media is awash with reports of the real estate boom, while the visible bustle in residential and commercial projects across urban stretches further confirms that real estate in India has arrived.

Investors in property have grown multi-fold over the last few years,
but there are still some fence sitters who are skeptical of venturing
into any deal, with fears of a “bubble” thrown in now and then.

Even within the investors’ community, only a small fraction dares to invest in commercial property, which yields far higher returns than safer options like residential plots and apartments.

Tapping the vast potential that exists for investment in commercial
property, and to draw more investors to all segments of real estate,
the Real Estate Mutual Funds were launched in June 2006.

Inspired by the REITs in USA and other developed countries
which have mopped up massive investments from small investors,
the REMFs in India are operating on a small scale currently.
The Securities and Exchange Board in India is likely to bring
about regulations on their functioning, as these are being
reviewed by the Association of Mutual Funds in India (AMFI), SEBI and
the Institute of Chartered Accountants of India.

Issues being taken up include valuation norms and the periodicity of revision of
the NAV of these stocks. A full fledged functioning of REMFs would offer
advantages to the entire gamut of real estate players, from investors
to developers. While the wary individual gains from the expertise
of the REMFs, the developer finds a supportive credit system at an affordable
cost.

However, REMFs would have to adhere to regulations
that would safeguard investors, ensure transparency in accounting
practices while reporting NAVs and check on the customer’s credit history and legitimacy. The REMFs would therefore be following a framework similar to the mutual fund model to ensure safe investments.

Meanwhile, domestic Venture Capital Funds are the new entrants into
the money market in India, some with their focus solely on investments
in real estate. It is likely that these VCFs would also follow the framework
of the REMFs.
In order to make REMFs in India a success, a sound regulatory
framework and favourable tax advantages would certainly help.

How do REMFs operate?

Real Estate Investment Trusts are either open or close-ended
companies or trusts that own, manage or lease properties
with the intention of investment.

The value of units and stocks allotted
is computed on the basis of the Net Asset Value or NAV. These
Trusts invest directly or indirectly into real estate projects.

An investor can purchase shares in a REMF, the way he would
purchase units in a mutual fund and enjoy ownership of the
property the REMF has invested in, proportionate to his investment.

The REMFs in India are currently close-ended, and the units
listed on the stock exchanges. The NAV of these schemes is
declared for every working day.

Photo: Blocks Under Construction – Suburban Kolkata – India (12287678003) by Adam Jones from Kelowna, BC, Canada, licensed under CC BY-SA 2.0, via Wikimedia Commons.