This article was written by Personalfn for Business India and was carried
in its June 20, 2005 issue with the title 'What’s in it for you?’.
If you have been reading the business dailies even with a cursory glance,
there is one bit of news that would have caught your eye at regular
frequency – real estate/property funds. Some of the biggest names in
Indian business have either already launched such funds or have rolled out
ambitious plans to do so. In all the buzz surrounding real estate funds –
the obvious question on top of the discerning investor’s mind is – what’s
in it for me?
How they work
First let us understand what real
estate/property funds are all about. If you have a fair idea about how
mutual funds work, then you won’t have a problem understanding real
estate funds, because they both work towards a common cause – maximising
returns for the investor. Like mutual funds, real estate funds (or Real
Estate Investment Trusts – REITs as they are commonly referred to in the
US) are founded by a group of real estate professionals/experts to
‘manage’ property/real estate for the investor.
Mr. Ashwin Ramesh (CIO at Primary Real Estate Advisory, a real estate
management firm) elaborates, ‘The real estate mutual fund industry in
the US has evolved in to a concept called the REIT, the Real Estate
Investment Trust. It is a publicly listed entity, which basically passes
on at least 90% of its profits to investors. REITs typically own large
commercial office spaces, hotels and rely mainly on rental incomes.
However, there are some that are more focussed on capital appreciation
as well.’
REITs buy, develop and sell property and share profits with investors/unitholders
from any capital appreciation on the sale of property. Apart from sale
of property, real estate funds also make money from rentals on property
owned by them.
Some real estate funds may not actually own property as that may involve
above-average risk from volatility in property prices. Instead such
funds invest in bonds/instruments that are secured by property. The
coupon rate that they receive on these bonds/instruments is then
distributed to investors/unitholders as dividends.
Needless to say, this expertise comes at a cost to the investor. Real
estate funds like regular mutual funds charge fund management fees,
brokerage fees (for buying and selling property), administration fees,
marketing fees and the like. So investors clock a return on real estate
fund units only after accounting for fees and charges.
Asset allocation
While real estate funds have just
announced their arrival in the country, real estate as an asset class
has been around for some time. Mr. Ramesh opines, ‘Whenever a `new'
sector comes on the screen, there is an interest, in general. Real
Estate, though an old asset class, is for the first time being opened up
to retail Indian and foreign participation. The fact that the last few
years has seen rise in prices and volumes has helped the cause.’
So what value do real estate funds add to your portfolio? According to
Personalfn’s Asset Allocator, real estate has the most important role to
play in your portfolio and not without reason. You can survive without
stocks, bonds and gold, but you can’t live without property. To be sure,
the role of property in the individual’s portfolio is pivotal to say the
least and every individual must work at ensuring he has adequate
property in his portfolio.
The ‘rock’
in your portfolio
Age Group (Yrs)
%
of Assets
in Property
< 30
50%
30-45
40%
45-55
30%
> 55
30%
(Estimates according to Personalfn’s Asset
Allocator)
Merits
1. After stocks, there is probably no
asset class like property that can preserve the value of your portfolio
from the eroding effect of inflation. It is widely held that gold is
also a good foil to counter inflation. But over the years, gold has
performed poorly on the return parameter.
2. Another important touch a real estate fund adds to your portfolio is
that of stability. Although property prices can also be volatile, the
volatility is a far cry from what investors are used to seeing in stocks
for instance. When turbulence in global oil prices or economic upheavals
rock your portfolio, you can expect real estate/real estate funds to be
the rock in your portfolio.
Limitations
1. Real estate funds have the same risks
that are associated with equity/debt mutual funds. For instance i.e. you
could make the wrong choice while selecting a real estate fund in which
case you could be saddled with a non-performer. Although this is not a
limitation with real estate funds per se, it serves to highlight that
there can be poorly managed real estate funds just like there can be
poorly managed equity/debt funds.
2. If with equities three years is the minimum investment time frame,
then with real estate investments you need to be even more patient.
Buying property, developing it and then renting it out or selling it, is
a high gestation activity. It could take some time before your real
estate mutual fund actually starts making money.
Indian context
To be sure, the regulator (SEBI) has set
the ball rolling for real estate funds. However, it will be some time
before retail investors can begin investing in real estate funds. As of
now, the real estate window is open only to high networth individuals (HNIs),
institutional investors and global investors. ICICI Venture, with
mobilisations in the region of Rs 10 bn (Rs 1,000 crores) and HDFC
Property Fund (Rs 7.5 bn) are among the first off the block with their
real estate products. Pantaloon Group (Kshitij Venture Capital Fund) and
Kotak Group are some of the other names that plan to roll out real
estate funds soon. Not surprisingly, overseas investors have also taken
note of the opportunities in the Indian real estate segment. Tishman
Speyer Properties, a US real estate company, has already outlined plans
for the Indian property market in association with ICICI Ventures.
Others are also expected to make a move towards Indian shores.
Surely such a high level of investment requires enough property to
absorb it without any repercussions on the overall real estate market.
Mr. Ramesh thinks this is possible. He asserts, ‘Rs 30 bn (of inflows)
translates to Rs 3,000 crores. If you take real estate in a broader
sense to include residential, commercial, IT development, hospitality to
some extent, this amount can be absorbed. There are viable opportunities
to deploy such an amount. However, it will depend, to some extent on
government policies, which need to be liberalised so they do not choke
the free supply and market pricing of land.’
Without doubt, news of all this activity appears heady to the retail
investor. The question that is still left unanswered is – what’s in it
for him? Mr. Ramesh shed light on that: ‘We hope that the regulators do
allow AMCs to offer real estate soon simply because there is need for
capital on one hand and on the other there is need for the average
Indian to provide shelter for his family. By investing in mutual funds
that operate in the real estate space he will be able to periodically
invest (depending on his savings) in the same asset class that he
finally wants to make a lump sum investment in i.e. house.
Also purely for investment purposes and diversification across asset
classes, it makes sense for an investor to have the option of investing
in real estate, along with equities and debt. The issue of matching
inflows and outflows of the fund would need to be addressed at the AMC
level, though.’
At this stage maybe he can at best watch from the sidelines how real
estate funds work, observe their performance and make notes that will
prove useful at a later stage, when he will finally be permitted by the
regulatory body to invest in real estate funds. Given the potential of
the real estate market and the underlying investor interest, there is
every reason to believe that this will happen sooner than later.
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