Article

Real Estate Mutual Funds
June 06 , 2012

Bright side of real estate

Real estate investment is one of the best avenues to create wealth. Property prices are always on the upward journey and from the long term perspective they always stay a few percentage points above the general inflation levels. As a smart investor you must ensure that your money outdoes inflation by choosing growth assets. Property is a growth asset yet only a few fortunate people are able to leverage it as an asset for wealth creation because of many practical limitations.

Property investment in India has yielded an average of 14% per annum in the last decade. Here were talking about the average returns on real estate in different cities of India, as observed in the property index of India,  Of course, you might have heard stories of how this person or that person got extraordinary returns from real estate investment, but we will hold on to the average value. So if real estate is such a rewarding investment option, what is hindering people from investing in it?

Darker side

You will agree on the reasons that first of all property investment is a rich mans game. Big money, such as is beyond the dream of many an investor even today in 2012, is required to be in the game. Secondly many of those who can afford shun it because of cumbersome procedures of identifying suitable property, getting title deed, maintenance, etc. Thirdly liquidity might be an issue. Investors might not be successful in liquidating and exiting their investment at the exact moment of their need.

Real estate mutual funds

Many of these hurdles can be jumped over through real estate mutual funds. What is a real estate mutual fund (REMF)? It is a fund that works like the usual closed-end mutual fund scheme that manages money pooled from investors by investing in shares, bonds and money market instrument. The REMF would invest money solely in real estate and real estate related financial securities. Before we go on to details and give too many hopes, keep in mind that presently there are no REMFs in India. What we do have is real estate private equity (PE) funds that are close-ended funds not listed on exchanges. Sadly retail investors cannot participate in these as the minimum investment is as high as 5 crores. You might actually be able to identify a decent property for one-tenth the amount!

How real estate mutual funds would work

It seems Indias financial market regulator is a visionary. SEBI issued guidelines for real estate mutual funds in 2008. Real estate mutual funds may pick up in India soon. Real estate in India is on a high growth trajectory. Property and stocks are two asset classes whose returns are highly correlated to economic and business growth.

Now lets look at how exactly real estate mutual funds (would) work. A real estate mutual fund scheme is a scheme of a trust fund set up to manage pooled money of unit holders (like a mutual fund does) by investing in real estate. Real estate mutual funds are close-ended and its units are listed on stock exchanges.

REMFs must mandatorily invest a minimum of 35% of their total assets in real estate assets. These real estate properties must be located in Indian cities specified by SEBI or in SEZs. The property must have completed construction. For this purpose they cannot invest in open plots of land or under-construction property. The mutual fund can give out the property on lease and rentals received will form part of investors profits.  

Including the 35% investment discussed above, REMFs are supposed to invest a minimum of 75% of total assets in real estate property and real estate related securities of companies dealing with real estate properties or their development. Typically these securities could be in the form of equity shares, bonds and debt papers of such companies and mortgage backed securities. The rest 25% is allocated to any other financial securities.

How REMFs could be your answer

The greatest problem of investment lot would be resolved as the minimum investment amount may be as low as Rs 5000-10,000 as in other mutual funds. So for as little as Rs 5000 you can participate in the game.

You can save yourself all paper work pertaining to property. The REMFs custodian is required to verify and keep safe custody of the title deed.

Like other mutual funds that diversify your portfolio by investing in a number of stocks and other assets, real estate funds will actually diversify your real estate investments across different cities of the country. Nobody would want to enroll themselves for the cumbersome process of investing in numerous locations for the purpose of diversification. The fact is that REMFs are prohibited from investing more than 15% of total assets held as real estate property in a single project and unless explicitly specified in the offer document, not more than 30% of the total assets of all real estate schemes managed by a fund can be invested in a single city.

Arriving at the true value of property in a place is many times a challenge. REMFs will declare net asset value (nav) of the real estate scheme every day.

Finally the economic and social demon black money that is so rampant in property transactions will be reduced since these funds are required to channelize all financial transactions through banks.

Conclusion

Property is an all-time favourite investment avenue for the long term. This is true in India and other economies as well. Real estate investment is truly rewarding in term of capital appreciation and income generation through rent.

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