News: Indian realty MFs entry may trigger land buyouts

(ACERC 29/06/2006) New Delhi - The entry of real estate mutual funds (REMF) could trigger land acquisition by realty developers across the country, cutting down time and cost over-runs, according to players in the real estate segment.

Land acquisition has slowed down over the last couple of months after RBI norms virtually discouraged banks from providing funds to developers for purchase of land. Banks are allowed to lend only after developers get all the necessary approvals from the state and local authorities, which can happen only after the land is acquired.

The central bank's discomfort over the build-up of an asset price bubble also prompted it to raise the risk weight on exposures to commercial real estate from 125% to 150% in April this year.

REMFs will come in handy for land acquisitions, irrespective of the project size, according to Lalit Kumar Jain, president, Promoters and Builders Association of Pune. According to him, Pune will require around 30m square feet of IT space and 3,00,000 residential units over the next three years. The total fund requirement is estimated at around $2-3bn, and a good chunk of this funding could come from REMFs.

Besides, they will be able to trade in land and fund relatively smaller projects. Rohit Gera, director (operations), Gera Developments, is of the view that the entry of REMFs will further professionalise the construction industry.

These schemes can invest directly in real estate properties within the country or in mortgage (housing lease)-backed securities. They are allowed to invest in equity shares, bonds and debentures of listed or unlisted companies that deal in property and undertake property development. The structure of the REMFs, initially, shall be close-ended. The units of REMFs have to be compulsorily listed on the stock exchanges. Besides, the net asset value of the scheme shall be declared daily. Realty experts are of the view that this will make both REMFs and developers more accountable to retail investors.