A class asset

Investing in real estate just got easier. Following the Securities and Exchange Board of India’s (SEBI’s) nod to real estate mutual funds (REMFs), small investors can now grab a piece of the real estate investment pie. Even better, they will now have none of the problems associated with huge investments, tedious paperwork, high stamp duties and the property management expertise that direct investment in real estate usually entails. Investors now have a chance to diversify their investments, buy real estate for small sums and participate in an asset class that’s growing by the day. Says Jai Mavani, Executive Director, KPMG India: “REMFs provide the property market with an investor base. For investors, it offers an attractive investment option. Both parties benefit.”

Like any other mutual fund, REMFs invest money collected from a large number of investors in real estate assets, and earn income by renting or leasing the property, and/or through capital appreciation. Says Akhilesh Singh, Business Head, Emkay Midas Wealth Management: “People in India have traditionally liked fixed asset investments. But property has always been seen as an asset class that suited only high net worth individual (HNI) investors who could afford the large investments.”

But now, feel financial planners, retail investors will be able to participate in the real estate sector with investments of as little as Rs 5,000 to Rs 10,000. In comparison, real estate venture capital funds, available only to HNIs, institutions and global investors, require a minimum investment of around Rs 50 lakh. Says Surya Bhatia, Principal Consultant, Asset Managers: “Investors get to gain from the real estate boom even with a small investment.”

Diversify into real assets

REMFs spread out an investor’s risk to a different asset class, which does not usually move in the same fashion as the stock or the debt market. Hence, they offer investors an opportunity to diversify their investments. Also, REMFs are likely to give better returns than equityoriented real estate funds, as the former benefit from a booming realty market in addition to real estate stocks. Says Singh: “REMFs work like any equity-oriented mutual fund, and are a convenient way of investing in real estate.”

Bhatia feels that “after stocks, property is probably the only asset class that prevents the value of your portfolio from eroding under the effects of inflation”. He says that investors can get hefty annualised returns from REMFs over 3-4 years, similar to long-term equity returns. “Since real estate projects have higher gestation periods, investors have to be patient and not expect quick bucks,” adds Bhatia.

Another advantage of investing in a real estate mutual fund is that it lowers the volatility of your portfolio— property prices rise and fall, but not as fast as stocks.

It’s more liquid

The real estate sector is a lot more illiquid than, say, stocks. Besides, there is little transparency of valuations.

But REMFs will add more liquidity as they improve money flow in the property market. For investors, REMF units can be bought and sold as easily as stocks, making them far more liquid than direct real estate investment. Says Suman Memani, Research Analyst at Religare Securities: “SEBI has mandated that these funds should be close-ended and listed on the stock exchange, and like any mutual fund scheme, their net asset value (NAV) should be declared every day.

Investors can, thus, track their real estate investments on a daily basis.” On the other hand, direct investment in real estate calls for an in-depth knowledge of the property market. Says Mavani: “Investing in real estate requires a lot of expertise.

Due to complex transactions, it is not easy for an investor to identify profitable opportunities in different cities and locations. A fund manager’s understanding of the local market will solve this problem.”

It’s cheaper, too

Also, investors do not have to incur huge costs when buying or selling real estate mutual fund units. The only charges include transaction costs such as brokerage and asset management fees, as well as routine expenses that are deducted from the NAV. In sharp contrast, investors have to pay a stiff stamp duty to buy physical real estate. REMFs, thus, reduce an investor’s cost substantially.

Moreover, investors should look at the investment pattern of the fund they want to invest in—issues like whether it invests in real estate assets for rental and lease income or also seeks capital gains through price appreciation. Investors must also look at the composition of other real estate securities such as debentures, bonds or equity.

Investment in real estate has always been a traditional form of acquiring assets in India, like buying gold. Finally, for small investors, investment in property will be a breeze.

The ABC of real estate funds Investment limitations: The schemes will invest in real estate, generally income-generating units. They may acquire uncompleted or underdevelopment projects, but their value shall not exceed 20 per cent of the total net asset value (NAV). The fund shall not have more than 15 per cent exposure on a single project, and not more than 25 per cent of real estate projects of a single group of companies. Asset allocation: At least 35 per cent of the net asset of the scheme shall be invested directly in real estate assets, while the balance may be invested in mortgage-backed securities, securities of companies dealing in real estate assets or in real estate development projects and other securities. Altogether, investment in real estate shall not be less than 75 per cent of the total assets. Dividends: Real estate funds shall distribute 90 per cent of income by way of dividends every year. Nav disclosure: A fund’s NAV shall be disclosed daily. Also, the fund house has to get each asset valued by two valuers accredited by a credit rating agency. The NAV will have to be computed using the lower of the two values. The fund structure: A real estate mutual fund will be close-ended and its units will be listed on recognised stock exchanges.

The investment rationale Four benefits that real estate investment funds offer investors: Regular income: Real estate funds will invest in a wide variety of property like office malls, apartment buildings, hotels and retail malls. A fund earns rental income and distributes the same as dividends. The yields on commercial property can be around 9-10 per cent. As 90 per cent of the income will be distributed, investors can hope to earn a stable 7-8 per cent annual return on their investments. Diversification: Real estate funds allow investors to diversify their portfolios, largely made up of volatile bonds and equity instruments, and, hence, lower the risk. Real estate MFs can invest in different types of assets like office spaces, residential spaces, malls, hotels, etc. Hedge: Real estate funds can also offer investors a hedge in case returns from other assets are negative. When stock prices fall, real estate funds can become a safe haven. Investors can allocate about 10-15 per cent to real estate mutual funds. Easy entry and exit: For only a few thousand rupees, investors can get entry into the real estate sector. Then, they can sell real estate mutual funds immediately in the stock market unlike, say, real estate assets that take time to dispose off.