News: Investors zero in on Indian real estate funds
(TP 07/05/2006) Mumbai - A little over week back, Prime Minister Manmohan Singh urged non-resident Indians (NRIs) to invest in real estate back home. He promised his government would help them in this.
Close on the heels of this announcement, came the news that the Finance Ministry has told the capital markets watchdog Sebi (Securities and Exchange Board of India) to take a final view on allowing mutual funds to unveil schemes which could invest in real estate. Media reports, quoting officials, said Sebi was of the view that there were legal constraints in opening up, considering that investment in real estate was not a permissible activity. However, the government has said that like in the case of gold, Sebi’s regulations could be amended to allow mutual funds to launch real estate schemes. Real estate mutual funds invest in projects directly, to develop real estate. This could be in the form of investments in the securities issued by such companies or in securitised assets.
In the US, Real Estate Investment Trusts (REITs) are a major draw. These trusts control assets aggregating $500bn. In India, the returns on real estate in several cities have been quite attractive, which is why there is a scramble now to cash in while the going is good.
Of late, the real estate market has matched, and in some cases, outperformed the stock-market boom, with no retail participation at all. But soon retail investors may get a slice of the property boom if Sebi permits mutual funds to launch real-estate funds.
At the moment mutual funds can invest only in such companies’ listed debt and equity paper and up to 5 per cent in unlisted stocks. There are only 60 listed infrastructure, construction and real-estate companies. Some say retail investors will benefit from real-estate funds because it will help them to diversify their portfolio across asset classes and markets. Others say the move will in the long and medium term, motivate real-estate companies or trusts to enter the stock market. That’s because real-estate funds will be close-ended listed funds.
Experts say Sebi’s move may lead to the formation of real-estate investment trusts in India. A real estate investment trust is a mutual fund that buys a real estate project and is close-ended and listed. If the project has a rental revenue model, that is, it is leased out and REITs continues to own it, the fund is treated as a debt fund and if it’s sold off, that is, the ownership changes hands, it’s treated like an equity fund. Worldwide, REITs account for more than $ 1 trillion in assets.
Some real-estate companies believed to be interested in setting up real-estate trusts are RNA, Pantaloon, Piramals, HDFC and L&T.
Another interesting recent development is that Sebi has approved the proposals of some 20 venture capital funds (VCFs) to invest in real estate in India.
Real estate VCs attract funding from three sources — domestic institutional investors and banks, which account for 50-60 per cent of the funds raised; corporate houses and high networth individuals, which account for 20-30 per cent of the investment; and NRIs and PIOs who chip in with another 20 per cent.
Given the current realty boom across the country, there’s not been much of problem in building a fund corpus, which after deployment, promises attractive returns to its investors. The Indian real estate sector promises to be a big draw for foreign investments into the country. Real estate investment requires a long term commitment from investors and the fact that foreign investors are willing to commit billions of dollars in this sector, demonstrates their growing confidence in the Indian economy. Also if channelised appropriately, the Indian realty sector could catapult the growth of several other sectors in India.
Real estate development in India is estimated to be in the region of $15bn, growing at a pace of about 30 per cent each year. It has been projected that there is a demand for 66 m square feet of IT space over the next five years.
Close on the heels of this announcement, came the news that the Finance Ministry has told the capital markets watchdog Sebi (Securities and Exchange Board of India) to take a final view on allowing mutual funds to unveil schemes which could invest in real estate. Media reports, quoting officials, said Sebi was of the view that there were legal constraints in opening up, considering that investment in real estate was not a permissible activity. However, the government has said that like in the case of gold, Sebi’s regulations could be amended to allow mutual funds to launch real estate schemes. Real estate mutual funds invest in projects directly, to develop real estate. This could be in the form of investments in the securities issued by such companies or in securitised assets.
In the US, Real Estate Investment Trusts (REITs) are a major draw. These trusts control assets aggregating $500bn. In India, the returns on real estate in several cities have been quite attractive, which is why there is a scramble now to cash in while the going is good.
Of late, the real estate market has matched, and in some cases, outperformed the stock-market boom, with no retail participation at all. But soon retail investors may get a slice of the property boom if Sebi permits mutual funds to launch real-estate funds.
At the moment mutual funds can invest only in such companies’ listed debt and equity paper and up to 5 per cent in unlisted stocks. There are only 60 listed infrastructure, construction and real-estate companies. Some say retail investors will benefit from real-estate funds because it will help them to diversify their portfolio across asset classes and markets. Others say the move will in the long and medium term, motivate real-estate companies or trusts to enter the stock market. That’s because real-estate funds will be close-ended listed funds.
Experts say Sebi’s move may lead to the formation of real-estate investment trusts in India. A real estate investment trust is a mutual fund that buys a real estate project and is close-ended and listed. If the project has a rental revenue model, that is, it is leased out and REITs continues to own it, the fund is treated as a debt fund and if it’s sold off, that is, the ownership changes hands, it’s treated like an equity fund. Worldwide, REITs account for more than $ 1 trillion in assets.
Some real-estate companies believed to be interested in setting up real-estate trusts are RNA, Pantaloon, Piramals, HDFC and L&T.
Another interesting recent development is that Sebi has approved the proposals of some 20 venture capital funds (VCFs) to invest in real estate in India.
Real estate VCs attract funding from three sources — domestic institutional investors and banks, which account for 50-60 per cent of the funds raised; corporate houses and high networth individuals, which account for 20-30 per cent of the investment; and NRIs and PIOs who chip in with another 20 per cent.
Given the current realty boom across the country, there’s not been much of problem in building a fund corpus, which after deployment, promises attractive returns to its investors. The Indian real estate sector promises to be a big draw for foreign investments into the country. Real estate investment requires a long term commitment from investors and the fact that foreign investors are willing to commit billions of dollars in this sector, demonstrates their growing confidence in the Indian economy. Also if channelised appropriately, the Indian realty sector could catapult the growth of several other sectors in India.
Real estate development in India is estimated to be in the region of $15bn, growing at a pace of about 30 per cent each year. It has been projected that there is a demand for 66 m square feet of IT space over the next five years.
posted by InCar Group Press Room at 11:32
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