Glitches in property market may require to be ironed out
The objectives behind the setting up of REMFs are to provide the property market with an investor base and investors with an attractive investment option so that both benefit.
THE SECURITIES and Exchange Board of India recently spelt out its guidelines for real estate mutual funds (REMFs). However, it seems unlikely that any REMF will be launched in the near future, considering the ground realities.A real estate mutual fund invests in the real estate market and is governed by existing SEBI mutual fund regulations. Despite the nomenclature, an REMF is different from other mutual fund schemes that investors are getting used to in this country. There are, of course, significant commonalities: like other MFs an REMF is based on the concept of pooled diversification. Relatively small investments of individual investors are routed through professional fund managers who have explicitly stated investment objectives.
For REMFs, the SEBI has prescribed the following investment avenues: direct investment in real estate properties within India; mortgage backed securities; equity shares /bonds/debentures of listed/unlisted companies that deal in properties and also undertake real estate investment; and other securities. There will be safeguards for investors woven into the regulation. These are similar to those available for mutual funds. A daily declaration of net asset value (NAV) by the REMF and listing of its units on a stock exchange will ensure liquidity and transparency for investors.
Close ended products
For now the funds will be close ended, that is, they will run for a specific period after which they will be automatically redeemed. Other regulatory safeguards include the provision for appointment of a custodian certified by the SEBI to carry on the business of a custodian. To him will be entrusted the job of safekeeping (title deeds and other relevant documents) by the fund. All these features — regulation, investment objectives, structure — are common to all mutual funds, whether an REMF invests — like the MFs we are familiar with — in the securities market or in the property market. To put it differently, the regulator is trying to fashion investment vehicles to invest in the property market by emulating those that are by now well established in the securities market. The difference lies in the areas open to them for investment. It will be an understatement to say that the property market in India is very dissimilar to the securities market. Not even the pre-reform stock markets can be compared to today's realty scenario.
No defined class
While there has been a class of investors in the share market for equity and debt instruments, it is very difficult to visualise a similar group investing in the real estate market for the usual reasons of return and capital appreciation. That is not to say that there have been no investors in the property market: only, they are an amorphous lot that cannot be easily categorised into small investors, institutional investors and so on. The objectives behind the setting up of REMFs are to provide the property market with an investor base and the investors with an attractive investment option so that both benefit. Secondly, there is very little transparency in the property market, particularly when compared with stock markets of the day. There is also considerable heterogeneity. For instance, units of measurement, stamp duties and hence the cost of conveyance vary across States. In Tamil Nadu, a basic land measure of one ground (2,400 square feet) is used. This is not common elsewhere. There is an obvious case for evolving a national standard for measurement, valuation and registration. The pernicious influence of unaccounted money on property prices is too well known.One can argue that it took the stock markets substantial time and regulatory prodding to reach the stage they are in .The share markets were always subject to uniform all-India legislation, namely, the Securities Contract Regulation Act, and since the early 1990s have been under the jurisdiction of the SEBI. Equally important, stock market practices including exchange administration across the country have tended to be uniform.Listing of shares in one or more exchanges provided the liquidity. It is unlikely that the mutual fund industry in India would have made such headway if the country did not have a stock market tradition. A whole range of intermediaries — brokers, underwriters, registrars — have been an integral part of the capital market. After the SEBI took upon itself the task of licensing the intermediaries there has been a great deal of uniformity, which made monitoring their activities and hence disseminating information on the market and its participants much easier. In fact, it is the ability of the market mechanism to generate reliable news that has made India the number one destination for portfolio investments from all over the world. The way real estate mutual funds are being introduced in the country suggests that they can become an important investment avenue, operating exactly like the more conventional funds. It is hoped that all the glitches in the property market will be ironed out in a reasonable time.
C. R. L. NARASIMHAN