‘Investors should check credentials of the fund house before investing in REMFs’

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Friday , May 09, 2008 at 2228 hrs Milind Barve, managing director, HDFC Mutual Fund, was one of the key members of the team which has given final shape to the recently announced regulations by Securities and Exchange Board of India (Sebi) on Real Estate Mutual Fund (REMF). In an exclusive interview to Sai Prasan of The Financial Express, Milind Barve spoke on issues ranging from various features of REMF, NAV calculations of the schemes to the difference between investing in physical real estate and units of REMF. Excerpts:

How do you think, the introduction of the Real Estate Mutual Fund (REMF) will benefit investors, the MF industry, and the real estate sector?

Let us first talk about the investors. If a retail investor wants to invest in real estate, then it takes several lakh rupees to buy a house. But, with the introduction of REMF, small investors can invest a minimum of Rs 10,000 or more in the REMF and have real estate as an asset class in their portfolios.

As far as MF industry is concerned, it helps fund houses to get a part of the savings of money which can be managed in a transparent manner. Globally, the portion of the real estate as an asset class is a significant portion of the total saving component. It is not the same in India. So, real estate investments will grow at it’s a pace, with the introduction of REMF regulations. The guidelines have covered very exhaustively all the aspects on REMF. A very strong risk management mechanism is in place. However, the investor irrespective of its size big or small-- should be cautious while investing in the REMF. They should look at the track-record of the fund house offering the scheme before investing in REMF.

How different is Real Estate Infrastructure Trust (REIT) than REMF?

REIT is popular in the US, which is mostly structured as a company and not as a party. They invest in ready or completed properties. Their investment is aimed at generating income over a period of time. In the case of a REMF, it includes combined featrures, of both REIT apart from other features. For instance, 35% of the corpus of an REMF is required to be invested in ready to use property. And, 65% of the REMF corpus can be invested in other asset classes which can be unlisted shares with a developing site, debentures, mortgage backed securities and finally listed shares of the real estate companies.

The MF industry is of the view that the calculation of Net Asset Value (NAV) of a REMF is as complex as the valuation of a property and is difficult.to arrive at an accurate figure. So, how do you deal with this?

Whenever the regulator comes up with some new asset class first time in the country, some people get associated with finding difficulties with it. I would not look that these difficulties are insurmountable at all. The valuation needs to be done every three months. Fund houses have to take the services of a rating agency that will have a list of accredited valuers. The name of the valuers will be published. Two valuers will conduct the valuation of the property and the lower valuation of the property will be taken into count. I do not believe that it cannot be done.

The terms and conditions of offering the scheme are difficult for the smaller players to comply with?

It is not a question of big or small. It is a question of expertise. Some conditions are their in the regulations to test expertise and credibility. The fund house has to demonstrate that they have the expertise to mange the money. If any real estate developer wants to set up an MF and wants to offer REMF, then the entity should have five years of track record which I think is a very tough thing.

Taxation is another issue to attract the retail investors into this fund. What tax concessions do you expect from the government for this fund?

Investing in the mutual fund schemes already has some tax benefits. If you buy a real estate asset, it is treated long term if you hold for three years and you pay 20% tax along with other surcharges. And, if you put money in the REMF, then it is treated long term after one year which attracts 10% STCG. So, the taxation is almost double in the physical real estate.

Do you think with this investment instrument, the property rates will come down as the demand for the physical real estate will come down?

Most real estate buying is done by end users in India. The need oriented demand for the retail estate will continue and the investment oriented demand for the real estate may come down little bit. This demand for real estate – commercial, hospitality and retail – is so large that I do not think that this will impact prices significantly. It will take some time to raise funds though REMF so that the price trajectory of the real estate can come up or down. Today, the real estate funding is through institutional framework, who are specialised in the real estate arena.

Do you think that foreign fund flow will enhance with the introduction of REMF?

The FDI for real estate is guided by the regulations. There are number of international funds which are looking for good opportunities which will continue. I do not think REMF will make any impact on the foreign fund flows.

How attractive is the REMF that the investors will prefer to invest in it and not in the physical real estate?

Minimum ticket size is less in REMF which can get exposure across the country. The legal due diligence and completion of the due procedure is too complex in physical real estate. And, the tax rates are also competitive in REMF compared to the physical form.

How safe it is to invest in the REMF?