Karnataka   

Windfall for the common man

Till now, investing in real estate has been the arena of rich people as property prices have been beyond the common man’s reach. With the impending introduction of Real Estate Mutual Funds (REMFs) and Real Estate Investment Trusts (REITs), the common man would be able to join the bandwagon and reap the benefits.

A mutual fund is pool of money collected from its shareholders and is managed by a professional investment firm called Asset Management Company (AMC). The AMC, which employs experts in fund management, invests the money in a variety of stocks, bonds, money market instruments, futures or commodities that meet the investment objectives of the fund. Mutual funds help investors to benefit from professional management and asset diversification.

Real Estate Mutual Funds (REMFs) are specialised mutual funds that invest a majority of the shareholder’s money in the real estate sector, directly or indirectly. A REMF will be a closed-end fund with limited tenure and no ongoing sale of units. The units will be listed on the stock exchanges and NAV (Net Asset Value) will be announced on a daily basis. The unit holders will be able to trade units on the stock exchanges, similar to shares.

These REMFs can invest directly in real estate (buying/selling property, managing property, leasing/renting), in MBS (Mortgage Backed Securities) and in equity shares/ bonds/ debentures of listed/ unlisted companies which deal in real estate.

A real estate investment trust (REIT) is a trust registered under the Indian Trust Act with the object of holding real estate assets or mortgages using the capital pooled from investors. REITs could be listed on stock markets or could be unlisted but will have to work under the guidelines of the Security Exchange Board of India (SEBI). The REIT has to distribute 90 per cent of the net annual income to unit holders.

Safety: It is safe and convenient to invest in REMFs/REITs as they are regulated by the SEBI, which has stringent regulations and ensures their smooth and transparent functioning.

Returns: Since direct investment in real estate earns more than 25-30 per cent per annum returns historically (except for the past one year or so, which has seen sharp fall and the turnaround is expected soon), it is most likely that REMFs/REITs would provide good returns to the investors.

Liquidity: Since direct investment in property is cumbersome and a time-consuming process and the liquidity is very low, REMFs/REITs are better alternatives to invest in real estate as they will be more readily convertible into cash as these units will be traded on the stock exchange.

Affordability: Buying any property individually is not affordable since the real estate rates have always beyond the common man’s reach. REMFs/REITs are better options as investors can reap the benefits of investment in real estate without putting in large sums.

Diversification: There is always risk in investing huge amounts in one property. Instead, the investor can choose REMFs/REITs, which invest in different property (like commercial, residential and industrial) in different parts of the country, thus spreading the risks.

The fund managers, who are experts in the field, would constantly watch the market conditions and deploy the funds accordingly so as to maximise the returns.

Direct investment in real estate is illiquid. Marginal gains may be washed off by stamp duty and capital gains tax. Considering the risk and economics of large investment, the yield from REMFs/REITs is expected to be highly attractive.

Revival of the economy is around the corner and real estate prices, which were sliding downwards for the past one-and-a-half years, have started moving upwards. The regulator (SEBI) may feel that this is the appropriate time to pave the way for introduction of REMFs and REITs for the public to invest.

It is likely that the minimum investment may be fixed as small as Rs. 5,000 to participate in REMFs/REITs, which would immensely help the common man.

(The author is the Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com)

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