India Law Journal

India does not have any formal Real Estate Mutual Fund (“REMF”) or Real Estate Investment Trusts (REITs) – as they are known in countries like the US. Some leading financial institutions had in recent months taken tentative steps in setting up real estate funds. Real Estate Investment Trust (“REITs”) are publicly traded trusts or associations that pool investors' capital to invest in a variety of real estate ventures, such as apartment and office buildings, shopping centers, medical facilities, industrial buildings, and hotels. After a REIT has raised its investment capital, it trades on a stock market just as a closed-end mutual fund does.

REIT can also be said as an investment vehicle established for the benefit of a group of real estate investors. A REIT is managed by one or more trustees who hold title to the assets of the trust and control its acquisitions and investments. There are three types of REITs: (i) Equity REITs buy properties that produce income, (ii) Mortgage REITs invest in real estate loans (iii) Hybrid REITs usually make both types of investments. All three are income-producing investments, and most of a REIT's annual income is distributed to investors. Thus, the yields on REITs are often higher than on other equity investments.

SEBI has given the green signal to some 20 venture capital funds to invest in the buoyant real estate trade. But retail investors have been deprived of an opportunity to partake in the buoyancy in the Indian real estate sector. REITs are expected to be established in India by next year, and mutual funds too could emerge as major players in the sector. Market regulator SEBI recently announced guidelines for REMFs which means that Indian asset management companies will soon be able to offer them to retail investors. The essential difference between a REIT and a mutual fund is that investments made in REIT are traded in real estate stocks and not invested in stock of companies. It provides a heavier liquidity than MFs.

The REMFs or REITs once introduced in the country are expected to bring in more liquidity and heighten the organization level of the emerging real estate market in India. REMFs are to be introduced in India following their success stories in some major economies like US, the UK, Japan, South Korea, Singapore, and Hong Kong. These shall lessen the tax burden on entities by exempting corporate and capital gains tax. At least 90 per cent profits from REITs are distributed as profits through dividends. REMF is like a mutual fund for real estate assets. In other words the asset management company (“AMC”) invests in a range of real estate assets around the country and creates a fund based on those assets. Investors can buy shares in those funds which are traded on a daily basis on stock exchanges. The value of the shares depends on the value of the underlying real estate assets.

REMFs have many advantages over direct investment in real estate as it allows investors to invest according to their income and financial circumstances, the portfolio of real estate assets will be a lot more diversified than a single home with assets ranging from office space to residential properties all around the country as well as securities based on the real estate sector and the investors don't have to deal with the legal and maintenance hassles of owning property and can instead rely on the professional expertise of the AMCs. Finally if they need quick money, these funds are liquid assets which can be sold conveniently and rapidly.

The SEBI guidelines involve a number of details about how REMFs can invest their money. For example they will have to invest 35 per cent of their funds directly in real estate assets. There are limits on how much money can be invested in a particular city or project. These REMFs will have to arrange for a valuation of their assets every 90 days and will have to declare net asset value (NAV) daily.

An REMF is a scheme much like any other closed-end MF scheme (that invests in shares and bonds) except for the fact that the new entity will invest in real estate. There are two conditions of investment set by SEBI. As per SEBI guidelines it is mandatory for an REMF to invest at least 35 per cent of its corpus in completed real estate assets (read flats, row houses, bungalows, shops). These could be either residential or commercial properties, but must be finished and ready-to-use and not under construction. The second investment condition of SEBI mandates that at least 75 per cent of the corpus should be invested in real estate or related securities. These can be debentures of real estate companies and mortgage-backed securities and equity shares of real estate companies listed on the stock exchange. Thus REMF will allow far more investors to put their money in real estate and diversify their portfolios. In turn this will generate tens of thousands of crores which will help develop the real estate sector and the country as a whole.