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Boom builds base for real estate funds

Mumbai, Nov. 6: Real estate players seem to be upping their ante while pressing for real estate mutual funds (REMFs) even as Sebi weighs the nuances of the guidelines that will govern them.

“The guidelines for REMFs, when issued, shall contain detailed provisions for fair valuation of assets of the real estate sector where mutual funds can invest. Necessary steps/safeguards will be built into the guidelines at the appropriate time,” says S.C. Das, Sebi’s executive director, primary markets.

“The absence of standardisation for valuation poses a big problem. Besides, rationalisation of stamp-duty structures and amendment of foreclosure laws are necessary to facilitate the entry of REMFs,” says A.P. Kurien, president of the Association of Mutual Funds in India, which has submitted a set of recommendations to Sebi in this regard.

A fresh report by international property consultants Knight Frank makes a strong case for allowing retail investments in the sector through REMFs.

Sebi’s clearance for venture capital funds to invest in the real estate sector in April 2004 opened a new avenue for institutional funding. Several large financial firms and private equity funds have launched exclusive real estate funds (REFs).

The Knight Frank report says with the target internal rate of return (IRR) of these funds ranging from 15 per cent to as high as 30 per cent, this could provide a good route for lay investors who want to share the profits from this booming sector.

Interestingly, real estate analysts have often warned in the past that the current speculation driven boom in the sector may be short-lived. Even the Knight Frank report predicts that returns from commercial properties in Mumbai may fall from the current 10.5 per cent to 9 per cent, if the interest rates remain the same.

But the votaries of REMFs are not deterred by the prolonged quibble over the wording of the guidelines or the dire forecasts by some Cassandras.

At a recent meeting of the India chapter of Core Net Global ' an international association for corporate real estate and related professionals ' the industry brass rooted for the entry of REITs in Indian markets.

CoreNet Global, based in Atlanta, began its Indian chapter in 2001 with five members. Today, it has 70 members representing the biggest names in the realty industry, including K Raheja Corp, Cushman and Wakefield, and HDFC.

Speaking at the meet, B. Srinivas, Cushman and Wakefield’s national manager, capital markets group, said: “Given India’s nascent economic growth and the insatiable need for funds, large private equity investors will begin to examine a secondary market platform, such as REMFs, to exit.”

This is precisely the issue. The current real estate funds are close ended and they limit the exit strategies for the investor.

The Knight Frank report says with more and more professional players entering the sector, there has been a lot of demand for organised funding options and real estate investment schemes.

“Venture capital companies will now provide the much required capital inflow in the real estate sector and this has further brightened the prospects of this sector,” the report says.

The draft National Housing and Habitat Policy 2005, circulated by the Union ministry of urban employment and poverty alleviation, has also outlined a plan for bringing in REMFs.

“Through the pooling in of resources, REMFs will allow individuals with small amounts of cash to take advantage of returns available from the buoyant housing and real estate market. Larger funds will become available for investments in housing related projects,” the policy says.

A host of players like CanBank Mutual Fund, HDFC Mutual Fund, ICICI Ventures and others are waiting in the wings to throw their hat into the ring as soon as the sector is opened up.

“We will definitely float a fund once the sector opens up and the structures are made clear. We will look at both equity and debt instrument related mutual funds, though decisions will be taken after Sebi guidelines are known, “ says a senior official of CanBank Mutual Fund.

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