Making a case for ‘virtual realty' in India

ASSOCHAM is seeking the launch of REITs to allow investors to expand their portfolios with realty assets in ‘units.' Many investors have been waiting for the launch of real estate investment trusts (REITs) in India to expand their portfolios. The wait is still not over. They want to own a diversified portfolio of professionally managed realty assets through such trusts and real estate mutual funds (REMFs). Recently, the Associated Chambers of Commerce and Industry of India (ASSOCHAM) suggested to the Union government that such trusts be allowed. In a note to the government, the chamber says the Indian real estate sector lacked any monetisation vehicle for capital intensive verticals, such as commercial offices and malls. Since the funding requirements for real estate projects are significant, broad-based portfolio investments by individual investors are unfeasible. A possible solution is REITs and REMFs. The Securities and Exchange Board of India (SEBI), the market watchdog, have, with several conditions, already allowed the latter. These vehicles are primarily characterised by their investment in real estate assets and limited liability for unit holders. They generally engage in professional real estate management. A REIT is an investing entity which focusses on real estate. It is intended to offer the public a financial instrument akin to mutual funds, which is based on stocks. Investing in REITs is an option for investors who want to diversify their portfolios. REITs have enabled small investors in most developed economies to hold a diversified portfolio of real estate assets, which, otherwise, would not have been be feasible. The U.S., Australia, Japan, and Singapore are the among the more developed REIT markets, with a regulatory framework in place and significant representation of such listed instruments on their respective stock markets. Market sources say the performance of REITs in other countries has been comparable to equity funds. The chamber suggests that the government make it mandatory for developers to provide “home information packs” to their customers. These packs should carry copies of documents related to clearances, deals, valuations, development plans, implementation milestones, and impediments, if any. Such initiatives can act as confidence-building measures, especially in India where controversies and disputes plague real estate transactions, leading to dissatisfaction and mistrust. The chamber says that considering the magnitude of socio-economic value the real estate industry creates for the country, India's vision for 2020 needs to be closely linked with a vision for the industry. A more prosperous India in 2020 will be characterised by a better-organised real estate industry, transparent, efficient, and focussed on sustainable development. Mutual funds SEBI has allowed existing mutual funds to launch REMFs if they have an adequate number of experienced key personnel, market sources say. For new mutual funds exclusively for launching real estate mutual fund schemes, the SEBI stipulation is that their sponsors should have been in real estate business for not less than five years. They shall fulfil other eligibility criteria applicable for sponsoring a mutual fund. Every real estate mutual fund scheme shall be closed ended and its units shall be listed on a recognised stock exchange, the watchdog's guidelines say. At least 35% of the net assets of the scheme shall be invested directly in real estate assets. 0Balance may be invested in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets, securities related to real estate (including mortgage-backed securities) shall not be less than 75% of the net assets of the scheme. The SEBI guidelines also stipulate that no mutual fund shall transfer real estate assets among its schemes. No mutual fund shall invest in any real estate asset owned by the sponsor or the asset management company or any of its associates during the past five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights. R. RAMABHADRAN PILLAI