Sebi's Draft Guidelines for Real Estate Mutual Funds
Seven years after the initial proposal, the Securities and Exchange Board of India (Sebi) has released its draft guidelines for real estate mutual funds (MFs), bringing relief and joy to the MF industry. The industry is now poised to convince domestic investors that this move couldn't have come at a more opportune time.
Diversification in Volatile Times
In these turbulent times, real estate serves as a viable diversification option due to its low correlation with equity and bonds. Moreover, retail investors can now invest in actual real estate projects with amounts as low as a few thousand rupees.
Industry Reaction
Mr. Vineet K Vohra, MD & CEO, ING Investment Management, stated, “Sebi’s move to launch realty MFs will not only foster diversification in the MF industry, but will also promote wider participation in the real estate sector.” Mr. Vohra further emphasized that this move will help bring the Indian market place closer to global norms.
Delivering Returns
A case in point is ING’s Global Real Estate Fund, which invests in shares of international real estate companies. Despite the recent stock market turbulence, the fund emerged unscathed and delivered positive returns. For instance:
| Investment | Initial Amount (Jan 10, '08) | Value (Apr 22, '08) |
|---|---|---|
| BSE Sensex | Rs 10,000 | Rs 7,900 |
| BSE Realty Index | Rs 10,000 | Rs 5,500 |
| ING Global Real Estate Fund | Rs 10,000 | Rs 10,800 |
Two Types of Real Estate Funds
Sebi has approved two categories of real estate funds:
- Real Estate Mutual Funds: Closed-ended funds listed on exchanges, investing in real estate projects and mortgage-backed securities. Daily NAV declarations will allow investors to exit any day, bid farewell to illiquidity in real estate investments.
- Real Estate Investment Trusts (REITs): Popular abroad, REITs offer fixed income returns through rents of commercial properties. Most REITs are exchange-listed and come with tax incentives for investors.
Key Differences
- REITs: Function like fixed income instruments (rents as coupons)
- Real Estate MFs: Seek capital appreciation (like a stock price increase) by investing in properties
Future Outlook
Industry officials, like ING’s Mr. Vohra, are hopeful that REITs will introduce greater liquidity to the real estate sector, free up developer capital for further investment, and transform the sector's dynamics. With the current real estate boom and sustained demand for homes and offices, this may be the ideal time for investors to own a share of the lucrative realty sector through real estate MFs and REITs. However, a smoother legislative framework and clear taxation policy are necessary to make these products investor-friendly.