Investors seeking to participate in the real estate sector through the mutual fund route may have to wait more. Though four months have passed after the Securities & Exchange Board of India (Sebi) permitted fund houses to offer real estate mutual funds (REMFs), not a single scheme has been launched. Industry players reckon it could take another six months for a realty offering to hit the market. A shortage of professionals, especially in the valuation of real estate, is seen as the biggest impediment.
Conceding that the launch of REMFs was some time away, AP Kurian, chairman of the Association of Mutual Funds in India (Amfi), said, ?Launching a real estate mutual fund is a slightly lengthy process and a fund house that intends to launch a REMF needs professional and experienced people to handle this fund. I think it will take other four-six months for the first REMF to be launched in India.?
Kurian added, ?The issue of valuations of the assets is also a big concern for the fund houses.? Sebi has made it mandatory to value each asset by two valuers, who are accredited by a credit rating agency, every 90 days from the date of purchase. The lower of the two values that the valuers come up with will be used in the computation of the net asset value (NAV) for the scheme.
Sandesh Kirkire, CEO, Kotak Mahindra Mutual Fund, also reckons that valuing of property is a big issue. ?Effective valuation for each underlying property has to be extremely clear. We also have intentions of launching a fund and are preparing, and will be able to launch a REMF only after a couple of months.?
The Sebi regulations say at least 35% net assets of the scheme will have to be invested directly in realty assets. The balance may be invested in mortgage-backed securities, securities (equities) of companies dealing in realty assets and related securities. Taken together, investments in realty assets, realty related securities (including mortgage-backed securities) should not be less than 75% of the net assets of the scheme.
Waqar Naqvi, CEO of Taurus Mutual Fund, believes the skill to execute the valuation process seamlessly is important. He says, ?Sebi has directed that each real estate property in a fund has to be valued every three months, which will be hard to execute and will add to fund costs.
Apart from that, valuation of property by two different valuers may not be according to a set standard, and may vary significantly. Sebi is also aware of these problems and we think that valuations problem will be further simplified in due course.?
A section of the fund management community believes the wait will actually benefit the funds as some expect the correction in real estate to continue for a while. Funds will then be able to enter at lower levels and get better returns for investors.