Friday, November 30, 2007

What's God got to do with a realty fund?

One of the favourite selling points for advocates of real estate investment across the globe is that "God stopped making any more land." The press conference to launch the ING Global Real Estate fund ended with this cliché, too.

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The ING Global Real Estate Fund, an open-ended fund of funds scheme for Indian investors, closes on December 14, 2007.

This will be India's first open-ended real estate fund and the first fund to offer Indian investors access to global property markets. The scheme will primarily invest in the Cayman Islands registered ING Global Real Estate Securities fund, which seeks to provide investors with diversified returns consisting of income and capital appreciation over time.

But, must one invest in this fund just because God stopped making any more land? Think of it, what all has God stopped making, since and well before the dinosaurs! No matter how scarce the supply of a commodity, without enough demand, its value is unlikely to go anywhere.

Real estate anywhere in the world, or for that matter any other asset class, is bound by this economic principle. The current buzz in the Indian real estate space is not to be seen in say the US, since the demand-supply cycles are at different stages.

Real estate development is typically concentrated in pockets where there is a confluence of three important factors - skilled manpower to develop projects, adequate infrastructure that aids such development and the purchasing power to support such projects.

Therefore, one might notice a lot of vertical development in places where all these three factors are abundant. Skylines in New York, Shanghai and our own Mumbai are a product of the confluence of these factors. So, it is imperative for the fund to identify such pockets and put its money in.

Since the ING Global Real Estate fund will act as a feeder fund for the Cayman-registered real estate fund, which is sub-advised by ING Clarion Real Estate Securities, a part of ING Real Estate, the portfolio will be decided in accordance with the requirements of global investors, read Americans.

With Americans staring at a slowdown, any return in double digits will be Christmas cake for them. But, for an Indian equity investor, it may look like chicken.

The mother fund has a large allocation to the Asia-Pacific, followed by North America & Europe. In selecting investments for the fund, the investment manager seeks out firms that derive at least 50 per cent of their total revenues or earnings from owning, operating, developing and/or managing real estate. The fund will not invest in properties, but in real estate investment trusts and real estate operating companies.

Besides, though the fund is overweight on the Asia Pacific region with an allocation of 43 per cent, it will not have any allocation to Indian real estate, which has been seeing a lot of activity. This is because the fund manager believes Indian real estate companies are overvalued. Also, he is not very comfortable with the land bank-based valuations.

The North American markets are beginning to see slower growth in rentals and UK real estate seems to have peaked, the fund house says, justifying its Asia Pacific overweight strategy.

Vineet K Vohra, managing director and CEO, ING Investment Management India said, "This fund opens up a new asset class for Indian investors. It aims to offer an investor returns that are better than a fixed income product, but with lower volatility than an equity fund. It is the right time to bring such a product to India, as in today's volatile markets it potentially helps lower an investor's portfolio risk due to its low correlation with Indian equity and bond markets."

The fund will invest across 21 countries and invests in commercial properties such as offices, shopping malls, healthcare facilities, hotels, apartments etc. As on date, the fund does not have any exposure to the US subprime housing sector, the fund managers said.

ING Clarion, the sub-advisor, manages many real estate strategies, one of them being the ING Global Real Estate fund, which was recently awarded a 5-star rating from Morningstar out of 231 funds, based on its above-average performance and below-average risk for the 5-year period ending November 30, 2006.

The fund is being positioned as a diversification play, but there seems to be an overlap of geographical and asset class diversification. Investors would be better off buying a global mutual fund for geographical diversification and some land near their ancestral home for asset class diversification instead of confusing both.

God might be long done with real estate, but the Indian mutual funds have just begun. The best is yet to come with SEBI hinting at introduction of new products. Wait for the REIT time.


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