The Hindu Business Line : Funds for property

The approval by the Securities and Exchange Board of India of the guidelines for Real Estate Mutual Funds (REMF) is no doubt a significant step in their evolution in the country. Such funds are popular in the developed countries, giving investors a wider choice and the property market access to an expanded pool of funds. But in the Indian context, even in a conceptual sense, the idea bristles with difficulties. This is because the property market, for all its spectacular growth and recent appreciation, is still opaque from an investor's perspective: There is no uniformity of valuation, measurement or cost of conveyance across the country. Stamp duties, in the domain of the States, differ from territory to territory. Land registry in many places is not computerised and verification of title deeds is cumbersome even in major cities. In fact, there is much that the prospective real estate mutual funds must learn from the fast growing housing loan business segment.

The Reserve Bank of India has repeatedly warned housing finance companies of faulty documentation. It is not going to be any easier for the SEBI-approved custodian who will keep safe custody of the title deeds of properties for REMFs. Investment by a mutual fund in the property market is inherently more complex than disbursing home loans. One major reason for that of course is the dearth of marketable securities based on underlying home loan assets. In the US and other developed countries mortgage-backed assets and securitised instruments based on home loan receivables are popular with mutual funds. It is perhaps for that reason that the SEBI guidelines allow REMFs to invest in `other securities' beyond making direct investments in real estate properties; in mortgage-backed securities; and in equity shares and debt instruments of listed, unlisted companies dealing in property and property development. It is certain that the first REMFs will resemble sectoral funds and will have in their portfolio stocks of listed real-estate companies. Their advent, in turn, might spur many closely-held real-estate firms to go public.

REMFs have great potential and could well be the catalyst for a vastly more transparent, investor-friendly property market, where a prospective home-buyer as well as the investor will have new benchmarks in the form of the net asset values (NAVs) declared by these funds. For now these can be formed as close-ended funds and their units will be listed on a stock exchange. That is how the more conventional mutual funds from outside the UTI fold made their debut, and in the early days their market prices were at a sharp discount to the NAVs. Evidently, all the stake-holders of the REMFs — the funds, the investors and the regulator — will have to climb the learning curve.

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