Article

Property Investments in Paper Format
January 30 , 2013

Property is a good-to-have asset for your portfolio to generate good returns beating inflation in the long term. Real estate in India has given returns of 14% in the 10-year period 2002-12. But not everyone can participate in property investment due to high cost of acquiring it. Besides there are n number of problems associated with real estate.

Identifying a good one is a mammoth task and paper work is cumbersome. Once you have it, it has to be maintained. If you get good tenants your life would be less stressful, else evacuating them can be a harrowing experience. Property tax and other utility bills need to be paid on time.

All these negative issues can be eliminated through real estate in paper format. Similar to structured financial products in paper format for gold you can invest in real estate in paper format and take benefit of property investment without actually owning a piece of it. The best thing about paper format real estate investment is that your money would be diversified across locations and builders.

In developed countries there are at least 3 variants of paper format of property investment. They are REITs, REMFs and real estate based mutual funds.

Paper format property investment in India

Real Estate Mutual Funds (REMFs) are close ended funds listed on stock exchanges. Minimum 35% of its assets are invested in real estate assets and minimum 75% are invested in real estate assets plus real estate securities including 35% in real estate assets. Securities market regulator SEBI had laid down regulations for REMFs in 2008 but it has not taken off yet for lack of clarity on rules. Sadly real estate industry in India is plagued with uncertainty over rules. It is an unregulated market.

SEBI drafted regulations for Real Estate Investment Trusts (REITs) in 2008 but like REMFs, it got no momentum, either. They are structured like trusts similar to REMFs but there is wide difference in their investment approach. REITs invest 100% in existing real estate projects (they can also invest up to 20% in under-development projects) for earning income which is distributed among unit holders. In India all we have so far is Real Estate PE funds, many of which carry the name REITs. However this is not to be confused with the REITs in SEBI's draft regulation. By nature private equity (PE) funds are not for retail investors.

We are left with Real Estate based Mutual Funds. In India we have Infrastructure mutual funds. These are equity mutual funds that invest in shares of infrastructure companies. These should not be confused for REMFs. Despite good performance of real estate industry in the past 10 years, shares of these companies haven't done well. Most of the infrastructure mutual funds came in 2007-08 period. Infrastructure is a broad term and includes other industries besides real estate. Until good and consistent track record of a mutual fund is established we advise against plunging into it.

Thus property investments in paper format have remained just there-in papers! Currently there is no option for retail investors for property investments in paper format. They would have to wait until properly structured products, coming under a regulator's purview, are launched.

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