Real estate mutual funds (REMFs) or real estate investment trusts (REITs) as they are known in the US were granted approval to operate in India in June 2006. REITs use the funds pooled in by small investors to invest and manage residential, commercial and industrial properties that generate income.
Like regular mutual funds, these instruments are listed and traded on
the stock exchange. Since the trust invests in a range of properties,
the small investor gets access to investment in large projects, earning
returns in the form of dividends.
However, before REMFs go live in India, a few amendments in the
legal and taxation laws governing them would guarantee a better
footing in the property market, suggests a joint research report by Moody’s Investors Service and ICRA Ltd.
One of the changes recommended by the above credit rating agencies is the lowering of property tax and stamp duty.
To avoid these taxes, investors adopt the power of attorney route in
property transactions, creating confusion on the ownership. Investors
also tend to indulge more in cash transactions to evade these taxes, generally
through shell companies.
Another recommendation suggested by the research report refers
to the title monitoring system in India which complicates ownership
matters further. Real estate companies are already under the scanner over
issues of non-disclosure.
The research report advocates total transparency in the information
real estate companies share on the size and number of projects
they execute, and their credit status. Moreover, the entry of
new property developers without a track record has made small investors
wary of the business.
For REMFs to be successful, ambiguities on the part
of real estate firms need to be removed.
