Investment in Real Estate Funds

Investing in Real Estate Funds is expected to generate hassle-free returns compared to investing in property, which required considerable capital investments. Moreover, it does not require expertise or experience in the real estate market as is the case with investment in property. Also, the post-tax returns from investment in Real Estate funds is to the tune of about 10-20 per cent, with a maximum lock-in period of six years, after which the investor is free to decide if he wants to exit or continue with his investment.

What are Real Estate Funds?

Real Estate Funds are generally closed-end funds that invest pooled funds according to the mandate for a given period of time, which is also called the life of the fund. These funds generally invest in residential developments or commercial assets depending on whether the fund has a mandate. These funds undertake yield transactions on behalf of investors followed by active asset management and monitoring so as to create and realise value.

Investors bear two types of costs, namely, management fee ad performance fee. Returns are also of two types, namely rental returns and capital returns. Rental returns are generally generated from commercial real estate funds which have a mandate for yield transactions. On the other hand, capital returns are generated on residential as well as commercial funds and are paid to investors when they exit the funds, or at the end of the life of the funds.

Investment in Real Estate Funds

Investment in Real estate funds is expected to generate healthy returns to the tune of between 12-15 per cent in India. Some of the major companies promoting Real estate funds in India are HDFC Property Fund, Kotak Mahindra Realty Fund, DHFL Venture Capital Fund, Kshitij Venture Capital Fund (a group venture of Pantaloon India Retail Ltd) and India Advantage Fund (ICICI’s real estate fund). Besides, there are also many foreign investors investing foreign funds in India. Some of these include US-based companies like Morgan Stanley (Morgan Stanley Real Estate Fund), JP Morgan Partners, Warburg Pincus, Broadstreet, Blackstone Group, Sam Zell’s Equity International, Tishman Speyer, Hines and Columbia Endowment Fund, among others.

These funds are regulated under SEBI’s Venture Capital Funds. They are closed-ended schemes with an initial public offer (IPO), contributing to a discount on Net Asset Values (NAV). As per the proposal put forward at the 10th Five Year Plan ending in 2007, it was decided that Securities and Exchange Board of India (SEBI) would regulate the Real estate mutual funds in India. According to this proposal, investment in real estate in India can be done directly or indirectly. SEBI would be in charge of introducing these Real estate mutual funds (REMF) as closed-ended funds and also list them on stock exchanges.

REMFs and REITs

Internationally, REMFs are also known as Real Estate Investment Trusts (REITs). The major difference between a REMF and a REIT is that REIT investments are traded in real estate stocks and not invested in stocks of companies as in the case of REMF. Besides, REITs provide a heavier liquidity than REMFs. However, both REITs and REMFs are expected to bring in more liquidity and bring about an impetus to the emerging real estate market in India. REMFs are expected to be introduced in India following their success in many other major economies. They would lessen the tax burden on entities by exempting capital and corporate gains tax. Incidentally, about 90 per cent of profits from REITs are distributed as dividends.