Real Estate Funds in India – Awaiting a Welcome

One sector that has assumed growing importance owing to liberalization in economy in India is its real estate sector. The consequent increase in business opportunities has escalated demands for commercial and residential space. Real estate India is currently in a nascent stage with unlimited growth options. Though unorganized unlike its counterparts in developed countries, this sector is luring foreign investors in a big way.
Proactive measures taken by the government has encouraged liquidity flow into the real estate sector from the organized sectors in India as well as foreign lands. Foreign investments in India have seen a steady rise of 40%-45% per year whereas Indian financial institutions have stepped up their investments as well. The combined investment from both along with significant investments from corporate houses has pumped in billions.
Real estate investment in India lures heavy weight investors with its lucrative returns. It is estimated that a similar investment in developed countries would fetch a return of 3% to 4% whereas it fetches 12% to 15% in India.
The huge funds that are entering the real estate market were bound to cause a stir in an already booming sector. A slew of real estate funds promoted by both foreign and Indian financial institutions are competing to invest in the higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, DHFL Venture Capital Fund, Kotak Mahindra Realty Fund, Kshitij Venture Capital Fund (A group venture of Pantaloon Retail India Ltd) and ICICI’s real estate fund, India Advantage Fund. Regulated under SEBI’s Venture Capital Funds, these are closed-ended schemes with an initial public offer (IPOs) contributing to a discount on NAVs (Net Asset Value).
Moreover, there is also a long list of international investors pumping in foreign funds in India like US-based Warburg Pincus, Blackstone Group, Broadstreet, Morgan Stanley (Morgan Stanley Real Estate Fund (MSREF), Columbia Endowment Fund, Hines, Tishman Speyer, Sam Zell’s Equity International, JP Morgan Partners to name a few.
The 10th Five-Year Plan ending in 2007 has proposed that SEBI (Securities and Exchange Board of India) would regulate the real estate mutual funds in India. These can invest in real estate in India directly or indirectly. SEBI would introduce the real estate mutual funds (REMFs) as close ended units and list in stock markets.
Globally, REMFs are also known as Real Estate Investment Trusts (REITs). The essential difference between a REIT and a mutual fund is that investments made in REIT are traded in real estate stocks and not invested in stock of companies. It provides a heavier liquidity than MFs.
As per an earlier guideline by SEBI, the NAV of REMFs were required to be disclosed daily but a recent proposal of a quarterly disclosure of NAV is drawing serious speculations from the realty segment.
The REMFs or REITs once introduced in the country are expected to bring in more liquidity and heighten the organization level of the emerging real estate market in India. REMFs are to be introduced in India following their success stories in some major economies like US, the UK, Japan, South Korea, Singapore, and Hong Kong. These shall lessen the tax burden on entities by exempting corporate and capital gains tax. At least 90 per cent profits from REITs are distributed as profits through dividends.
But India shall have to wait till the end of this year to welcome REMFs as no consensus has been reached at on the valuation norms to be followed. India doesn’t have an organized valuation system adding to the deadlock. Property valuation is tagged to be the deciding factor in launching REMFs as it does in other countries.