Real estate fund: A promising investment destination

Real estate is an investment option that gives high returns. The high returns are due to capital appreciation. Regular returns in the form of rentals are a low 5-6 per cent. But high returns comes at a cost as investing in real estate is very cumbersome. Selecting the right property that would give good returns is a time-consuming process.

The cost of buying and selling properties is very high. It requires you to commit large amounts of funds at one go. Funds are locked up for a long time and the investment is pretty illiquid. Hence, a large number of investors stay away from this form of investment.

This drawback was mitigated to a certain extent when some of the prominent companies and banks promoted real estate funds. These are venture funds with a focus on real estate, regulated by the Securities and Exchange Board of India (SEBI), under the category of venture capital funds. They are close-ended schemes.

The offer document of these funds is privately circulated. The amount of investment is very high with the minimum amount being Rs 25 lakhs. The funds are very popular with the high net worth individuals (HNI). The schemes did away with the problems of selecting and managing properties. However, the problem of liquidity remained as they had a lock-in period ranging from one year to six years. The number of investors who could participate in these funds was very low.

All this is set to change with the recent policy guidelines introduced by SEBI. It can change the way we approach real estate investing. SEBI has paved the way for the launch of real estate mutual funds (REMF). REMF like other mutual funds are based on the concept of pooled diversification. Relatively small investments of individual investors are poled in and managed by professional managers. REMF will have an investment objective to invest directly or indirectly in realty and will be governed by SEBI (Mutual Funds) Regulations.

The funds will be initially close-ended and their units will be compulsorily listed on the stock exchanges ensuring liquidity and transparency. The real estate mutual funds will have to declare their net asset value on a daily basis. According to SEBI guidelines, all these funds will have to appoint custodians who will safe-keep the title of real estate properties held by the funds. These schemes can invest directly in real estate within India.

A minimum of 35 per cent of funds are to be invested in real estate properties. The balance can go into mortgage-backed securities, shares, bonds or debentures of companies listed or unlisted dealing in properties and property development, and in other securities like debt and money market instruments.

REMF will be a good investment option for small investors who want to be part of the real estate action. The investment will be very liquid and can be redeemed easily. It provides for diversification of risk. REMF will operate exactly like the conventional equity funds. However, the underlying property markets are not as well-developed as the equity markets. This could lead to a few glitches, which will be solved over time.