Real Estate Mutual Funds India

Real Estate Mutual Funds India (REMFs)

Real Estate Investment Trusts India (REITs)

Indian Economy is growing like anything. It is growing even during the time of recession. Real Estate are one of the best appreciating asset classes. Real Estates of India traditionally grow at the rate of 20% Compounded annually in the long run.

But not the all the investors invest in Real Estate. Because Real Estate transactions are some what complicated and high value. And average investor does not have huge amount of money to invest in real estate. And that’s why the concept of Real Estate Mutual Funds also known as Real Estate Investment Trusts (REITs) came into exists.

Real Estate Mutual Funds (REITs) is the new financial product which came into exists in India since last 2-3 years. REITs are popular in USA since years.

After years of deliberation and planning, the Securities and Exchange Board of India has approved the launch of real estate mutual funds and issued a detailed set of guidelines. All you may now need to shell out is a sum as low as Rs 5,000 to Rs 10,000 to invest in real estate.

How would a Real Estate Investment Trust (REIT) work?

Since the product is at a very basic stage in India, it makes sense to look at international markets where a similar product -- the real estate investment trust (REIT) -- is quite popular. In the US alone there are hundreds of publicly traded REITs (just like we trade in shares or mutual fund units) with several hundred billion dollars in assets.

An REIT by its very nature will buy, develop and maintain property both for sale and rent and share profits with those who invest in such funds.

Like our regular mutual funds, real estate funds will also charge various fees for administrative and management expenses.

There are different business models for REITs. Some of them may focus on buying and selling property thus making money on increases in value.

Others may focus on renting or leasing commercial property. Yet others may finance mortgages and earn income through interest payments on property-related loans (just like your HDFC Bank, ICICI Bank or LIC Housing Finance does).

As with mutual funds you can choose different products based on the business model you prefer.

What is Real Estate Mutual Fund (REMF) & How it Works?

An REMF is a scheme much like any other closed-end MF scheme (that invests in shares and bonds) except for the fact that the new entity will invest in real estate. There are two conditions of investment set by Sebi.

First, it is mandatory for an REMF to invest at least 35 per cent of its corpus in completed real estate assets (read flats, row houses, bungalows, shops). These could be either residential or commercial properties, but must be finished and ready-to-use and not under construction.

The REMF will get title deeds and will be the owners of these premises - it's like you are buying a second home or a small office. Simply stated, instead of reading a moniker like 'Ms Shirin Batliwala' on the name-plate against, say, a first floor flat number at your building's entrance, you could now have a neighbour called 'HDFC Real Estate Fund'.

Your REMF will then rent out these properties and earn rental income that it will pass on to you - the unitholder. When your REMF's tenure ends, it will sell these properties and generate capital appreciation and eventually pass on these earnings to you. With as low as Rs 5,000, you can now own a part of this flat through your REMF.

Let us assume your REMF collects Rs 500 crore (Rs 5 billion) and invests Rs 200 crore (Rs 2 billion) out of it (40 per cent of the collections) in 40 flats costing Rs 5 crore (Rs 50 million) each. If you have invested Rs 10,000 in this fund, then your share out of the appreciation and rental income of these flats would be 0.0002 per cent.

The second investment condition of Sebi mandates that at least 75 per cent of the corpus should be invested in real estate or related securities. These can be debentures of real estate companies and mortgage-backed securities and equity shares of real estate companies listed on the stock exchange.

Under this, your REMF can also invest in 'under-development' properties. But it can neither buy barren land, nor can it undertake construction activities. What then?

It will partner with a real estate developer and then take a stake in a special purpose vehicle that the developer will have set up for constructing a particular project. Note that your REMF will take a stake in that project and not in the developer company or its other projects across the country.

Your REMF will buy unlisted shares in that SPV, not more than 15 per cent of its own corpus. Once the project is completed, the gains arising out of it are yours to the extent of your REMF's stake in the SPV. An REMF will be closed-end (this means limited tenure and no ongoing sales of units) and units will be listed on the stock exchanges. You will be able to trade units on the exchanges very much like shares.

REMF & REIT both are the different things. They are not the Same…!!!

In the 31 January 2008 issue of Outlook Money, we had carried the news about Sebi issuing a draft set of guidelines for Real Estate Investment Trusts or REITs (Blueprint Out For Real Estate Funds). So, what is the difference between a REIT and an REMF, considering they sound a little similar? REITs are also investment vehicles dealing in real estate. Like REMFs, they, too, are closed-end schemes and listed on stock exchanges. But there's a big technical difference between the two.

First, a REIT is mandated to distribute at least 90 per cent of the gains it makes in a year to those holding its units. Second, a REIT can invest only in finished projects and not those that are under construction.

Hence, it earns its major chunk from rental income. "While REITs help you earn a regular income, REMFs give you capital appreciation too," says Milind Barve, managing director of HDFC [ Get Quote ] MF and head of the sub-committee appointed by the Association of Mutual Funds of India to recommend norms for REMFs.

Sebi guidelines mandate REMFs to invest at least 35 per cent in completed and ready-to-use properties. They do, in that sense, resemble Reits to an extent and can, in fact, invest this portion in Reits.

REITS and REMFs run simultaneously in many countries across the world, especially in developed markets like that in the US. India is set to follow that path as Sebi has shown enough intent to allow the launch of both the products.