Real estate has been one of the hottest asset classes in the last few years with prices sky-rocketing because of rising demand and limited supply. However as an investment, real estate suffers from some serious problems. Buying a home costs millions or more and involves a number of practical inconveniences like arranging for a home loan and maintaining your property. Fortunately a new product called real estate mutual fund (REMF) eliminates many of these problems and allows retail investors to invest in real estate in a much more flexible and convenient manner.
What is an REMF and what are its advantages?
An REMF is like a mutual fund for real estate assets. In other words the asset management company (AMC) invests in a range of real estate assets around the country and creates a fund based on those assets. Investors can buy shares in those funds which are traded on a daily basis on stock exchanges. The value of the shares depends on the value of the underlying real estate assets.
REMFs have many advantages over direct investment in real estate.
~ It allows investors to invest according to their income and financial circumstances.
~ The portfolio of real estate assets will be a lot more diversified than a single home with assets ranging from office space to residential properties all around the country as well as securities based on the real estate sector.
~ Investors don't have to deal with the legal and maintenance hassles of owning property and can instead rely on the professional expertise of the AMCs. Finally if they need quick money, these funds are liquid assets which can be sold conveniently and rapidly.
When will REMFs be available in India?
There is no announced date but recently in April, market regulator SEBI announced guidelines for REMFs which means that Indian asset management companies will soon be able to offer them to retail investors. There are already reports that HDFC will be among the first to launch an REMF in India.
The SEBI guidelines involve a number of details about how REMFs can invest their money. For example they will have to invest 35 per cent of their funds directly in real estate assets. There are limits on how much money can be invested in a particular city or project. These REMFs will have to arrange for a valuation of their assets every 90 days and will have to declare net asset value (NAV) daily.
Why you must be a bit cautious
Despite the strong performance of real estate in the last several years a few notes of caution must be struck. In terms of timing this may not be best time to invest in real-estate which is being hit by rising interest rates and a slowing economy. A proof of that is the fall in the BSE Realty Index that has lost approximately 40 per cent since January this year. However, for the one-year period since last May the index has gained 17 per cent in valu.
Even in the long-run, investors shouldn't assume that real estate will see extraordinary returns like in the recent past. In the past, real estate has benefited from rising demand because of a growing economy combined with limited supply, in part, because of legal restrictions like floor space index (the ratio of area that can be built to the floor area on which a building is erected) limits and urban land ceiling laws. Such restrictions have gradually been reduced which means that in the future, real estate prices may not grow as fast as previously.
Another problem is that as with any new scheme, REMFs won't have much of a track record and investors won't be able to make detailed comparisons between different funds. The funds themselves will be on a learning curve about the subtleties of investing in real estate.
Finally investors who own their home should keep in mind that they already have a huge exposure to real estate in their portfolio. They may want to limit how much extra exposure they want to the real estate sector.
Despite the above caveats, the arrival of REMFs is an exciting opportunity for Indian retail investors and for the real estate sector. It will allow far more investors to put their money in real estate and diversify their portfolios. In turn this will generate tens of thousands of crores which will help develop the real estate sector and the country as a whole.