SEBI To Frame Norms For Real Estate Mfs

MUMBAI: The action never stops on the property front. Market regulator Sebi will soon unveil norms for real estate mutual funds (REMFs) as well as for Real Estate Investment Trusts (REITs).

The norms allow local asset management firms to raise money from investors here which would be invested in the realty sector — in projects and in the equity of both listed and unlisted firms. Sebi has finalised a concept paper on REMFs and, after taking the views of stakeholders, will seek approval from its board for this new product.

The introduction of realty mutual funds will open up a new investment horizon for local investors, many of whom are in no position to take an exposure directly to the real estate sector. The move also comes at a time when real estate, as a separate asset class, is fast catching the attention of investors. This is reflected in the number of real estate firms which are getting listed, apart from a growing pool of private equity funds waiting to invest in the sector.

Sebi has already finalised a concept paper on REMFs with the proposed norms being based on a committee headed by HDFC Mutual Fund CEO Milind Bharve. The committee went into a host of issues such as the computing of net asset values, valuation of properties, periodicity of disclosures and liquidity. Valuations need to be conducted not later than three months from the time of initial work on a property, persons close to the development said. Unlike in conventional mutual fund schemes, a critical issue in an REMF relates to providing liquidity.

In a normal mutual fund scheme, which comprises stocks or bonds, investors need to exit can be met by selling down the securities. That is not the case in an REMF since the underlying assets — property— is not a liquid asset. Mutual fund managers reckon that any REMF may have to be a closed-ended structure with an exit option only after a specified period, say three or five years.

Nilesh Shah, deputy CEO of ICICI Pru Mutual Fund, says there is investor appetite for such products. According to him, taking into account rental income and capital appreciation, investors can hope to earn returns of well over 20%.

In mid-2006, Sebi first came out with the basic guidelines for REMFs in India, although it has been on the drawing board for over six years. However, the committee appointed by the regulator has been grappling with issues of accounting and valuations for individual projects. The real estate sector does not have a regulator and arriving at a benchmark to guide investors could pose problems.

Much in line with the initial suggestions from Sebi, the committee for real estate MFs feels these funds should be closed-ended with a minimum of six to seven years duration, but they should be listed on the exchanges providing daily entry and exit points for investors. The initial amount to be invested could be in line with equity funds, just that the disclosures on the portfolio may be done every quarter, unlike monthly for equity funds, the report says.