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Ashish Shah

With the recent announcement of the much-awaited regulation of Real Estate Mutual Funds (REMFs), stakeholders are excited with the prospect of investing in the much-sought-after avenue of real estate. Currently, retail investors have limited options to diversify their portfolio. Their portfolio might be restricted to outright purchasing of real-estate assets or investing in listed Real Estate (RE) companies. Given the phenomenal rise in the prices, it is almost impossibl e to invest in a mall or a commercial property.

Effectively, an REMF can purchase properties like your neighbourhood mall or an office premises and get the two-fold benefit of income generated from rentals and capital appreciation.

Like all investments, real estate has its own risk and returns profile and, accordingly, provides an excellent avenue to lower the overall portfolio risks. Simply put, the returns from real estate are not correlated to those of equity or debt instruments. However, it would be interesting to observe how existing and new asset managers (mutual funds) cope with managing the unique nature of such investments in real estate. Put differently, unlike a securities-oriented portfolio, REMFs would require a refined understanding of the sector.

The funds would be directly exposed to macroeconomic trends and micro trends such as location of assets that determine the ultimate returns for its unit holders.

Fund managers (of mutual funds) prepared to view their investment into this asset class as different in terms of being actively involved in managing the assets, are the ones who are likely to succeed. For example, owning a listed security of a company that is governed by Securities Exchange Board of India (SEBI) and other regulations would pose an entirely different challenge to purchasing a mall owned by a local RE developer looking for an exit.

Accordingly, skills such as valuation of a property would be the new specialisation that would be vital to start the operations or convince the investor. Internationally, the valuation is a matured exercise where standards are set and followed in a transparent manner. Indian valuers are still coping with this challenge. Additionally, a deep understanding of nuances such as local laws, locational analysis and future potential of a specific property would be fundamental.

Unlike securities investment, asset managers will be required to play an active role in getting the desired returns for the unit holders. For example, mutual funds may be interested in entering tenant negotiations to enhance the rentals and instil continuous effort to enhance the property’s value through brand positioning.

Asset managers would be now required to either create teams or outsource key functions such as marketing of space to tenants, having the right tenants-mix that yield good risk adjusted returns and finally ensuring the physical upkeep and security of the properties. Such activities are entirely new dimensions of a typical asset manager’s role.

A vital component of the return to the unit holder is the ultimate capital appreciation of the underlying property. If the asset managers have been able to protect and enhance the value of the specific prime property, unit holders could expect good returns. However, exiting or selling a property is not as simple as selling a part of a security portfolio. Having access to good broker networks and market intelligence of the locality or suburb where the asset is based would be an invaluable benefit.

For a real-estate developer or an owner of an income generating assets it is important to consider what a typical REMF would look for while buying a property. Properties in prime locations are likely to have a distinct advantage of retaining higher rents and value, given that REMF would also focus on the potential sale value of its property. Good governance standards within the owner’s business and the ability to show strong processes to run the commercial property may also be crucial to making the property attractive.

Fundamentally, both investments in income-generating real-estate assets and regulations relating to Real Estate Investment Trusts (REITs) are still at the consultation stage while REMF guidelines have now crystallised. REITs are expected to distribute a majority (90 per cent) of their income from such assets to its unit holders while REMFs may plough the income back into the portfolio and make such funds available for new investments within the scheme. While the REITs are still not an option, as the regulation evolves, it would provide an alternative type of cash flow stream for investors.

More Stories on : Mutual Funds | Insight | Real Estate & Construction

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