Realty space to gain from real estate MFs: KPMG

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The Indian real estate sector, currently facing strong headwind due to the credit turmoil as well as high inflation, is set to get a breather from the market regulator SEBI's move to allow Real Estate Mutual Funds, says global consultancy giant KPMG.

"Real Estate Mutual Funds (REMFs) have a useful purpose and a role which until recently was missing in the real estate ecosystem. REMFs should help ease the situation and compensate to some degree the relative absence of public equity and challenging debt markets," KPMG's Executive Director and real estate head in India Jai Mavani said.

At present, not much equity funding is available to projects below 50 thousand square metres of built up area or 25 acres and there is hardly any domestic secondary market for stabilised income yielding assets.

"Besides, with foreign money not permissible in fully built up commercial, residential and retail assets, this is a good vacant space for REMFs," Mavani added.

REMFs would buy fully built assets and it should help unlock capital for developers. Also, with 15 per cent allocations, which REMFs would have towards under-construction assets, some additional equity should also be available for non-FDI compliant projects.

"Introduction of REMFs is certainly timely and well intended," he said, adding that "REMFs are ideally suited for such category of investors who are keen on investing in real estate but lack the technical sophistication or the resources to take direct positions."

SEBI had released the detailed text of guidelines to operationalise REMFs last week.

However, REMFs would not be able to outperform equity mutual funds, as they are a different investment class altogether and partly because of regulations, Mavani said. As per the regulations, at least 35 per cent of the capital has to be invested directly in real estate assets in

India and returns on stabilised income yielding assets generally do not exceed returns on equities.

The success of REMFs would depend on how much of capital REMFs are able to raise and more importantly how effectively they are able to deploy it. Also, the investment of REMFs would be in relatively illiquid assets like real estate, securities in under-construction projects and to a limited degree in mortgage backed securities.

Investors need to understand that REMF NAVs would not show quick movements like in the case of equity funds and should take a longer-term view and fund managers/investment advisers should communicate correctly, he added.

REMFs are restricted by the regulations from investing more than 15 per cent of their corpus in unlisted companies. Besides, REMFs have to mandatory invest at least 35 per cent of their net assets directly in real estate. Currently, there is no such minimum threshold requirement in the case of REMFs.

It is a useful product for small and medium investors who want exposure to real estate as well as for high net worth investors seeking asset diversification.