If you want to invest in real estate, you need lakhs, if not crores, of rupees, and you have to deal with unclear land titles, procedural hassles and high stamp duties. Real estate investment trusts (REITs) — essentially, real estate mutual funds that invest in buildings, and are less demanding in terms of capital and procedures — help you get around these limitations, but their birth is still awaited in India.
Even as market regulator Sebi (Securities and Exchange Board of India) gives its final touches to REITs, ING Mutual Fund and ICICI Prudential Mutual Fund have taken advantage of the greater latitude in product structuring and launched ‘real estate funds’.
ING Global Real Estate Fund
Of the two, this is the more interesting fund, both in imagination and utility for investors. Imagine becoming a part-owner of Citigroup Center in New York or Starwood Hotel & Resorts, Seattle. That’s what you will become if you invest in the ING Global Real Estate Fund (IGREF). This is an open-ended feeder fund that will simply transfer the money you invest to ING Global Real Estate Securities Fund (IGRESF).
IGRESF is a $4 billion US fund that invests in three avenues, across the world: units of REITs, shares of real estate companies, and holding companies that earn at least 50 per cent of their revenues from real estate. Says Vineet K. Vohra, chief executive officer, ING Investment Management: “The investment is across 100 securities. Each security holds 30-50 properties. So, on an average, an Indian investor gets access to around 3,000 properties.”
So, for example, IGRESF might invest in a REIT that owns floors in 30 commercial buildings. The REIT earns rental income, which it pays out as dividend to IGRESF, which will come to you. If and when the REIT sells the floor, it will pass on the sales proceeds to IGRESF, on which it could have made a gain or a loss.
With the opening of overseas investing, ING has come up with a smart way of circumventing the impasse on REITs in India, while delivering a good, unique product. What it is saying is that you can’t do REITs in India, but you can do REITs abroad. It’s not just smart positioning, it’s also a smart product. Says Delhi-based financial planner Surya Bhatia: “It provides good diversification, as it has low correlation with Indian equity.”
IGRESF has been an able performer. In the past five years, it has delivered a compounded annual return of 26 per cent in dollar terms and 22 per cent in Indian rupees. Says Bhatia: “Bonds give around 8 per cent. Even on a conservative note, if the fund can generate 12 per cent post-tax and has low correlation with Indian equities, why not invest here?” There are risks. One, properties can be unoccupied. Two, the rupee appreciating against other currencies. Three, IGRESF will be investing in shares, and share prices can fall. 
Although IGRESF will invest in shares, it will be considered a debt fund for taxation purposes, on account of being an overseas fund. So, your dividends will be taxed at 14.16 per cent. Long-term capital gains (over 12 months) will be taxed at 22.7 per cent with indexation benefit or 11.33 per cent without indexation, whichever is lower. Short-term capital gains (less than 12 months) will be taxed at the tax slab applicable to you. So, should you invest? Says Bhatia: “Those who have an exposure to Indian equities can invest 5-10 of their portfolio in this scheme.”
ICICI Prudential Real Estate Securities Fund
While the ING fund has got the REIT exposure by going global, the ICICI fund doesn’t have it because it is an India-only fund. It has, however, come up with an alternative to earn regular income: invest 51-100 per cent in debt securities of companies that are either into real estate or are directly or indirectly benefiting from it.
The remaining corpus of the three-year close-ended fund will be invested in shares of Indian companies in real estate or related sectors. Says Deven Sangoi, fund manager, ICICI Prudential Real Estate Securities Fund: “Today, real estate is considered highly risky and volatile. We have taken a conservative approach, and will invest a maximum 49 per cent in companies across real estate, cement, retail, steel and construction.”
To start with, the fund intends to invest 70 per cent of its corpus in debt instruments and 30 per cent in equities. Says Sangoi: “We are targeting returns of 15-18 per cent a year.” Like the ING Fund, the ICICI fund will also be taxed as a debt fund.
Should you invest?
Both schemes are vehicles for taking exposure to the real estate sector. Says Sangoi: “Real estate is a growth story. Housing demand is rising and supply is short. With rising incomes, and EMIs at par with rentals, people prefer to create assets rather than pay rents. All this makes real estate a good story over the next three to five years.” The ING Fund has a more interesting positioning. Says Vohra: “Real estate is driven by local factors. Prices in one country have low or no correlation with prices in another country, which makes it a good diversification instrument.”
The most important factor that impacts the real estate sector, the world over, is interest rates. If interest rates rise, demand for real estate falls, as do prices of debt instruments. However, says Sangoi: “Interest rates in India have peaked. Also, with the US Fed cutting rates, it appears interest rates will come down in the US as well.” Adds Vohra: “Over the next 18-24 months, more cuts are expected in the US, UK and Europe; Asia comes last in the cycle.”
While thinking about investing in real estate funds, another consideration to make is that Indian REITs are around the corner. Given that context, the ING fund scores because of its global positioning. As for the ICICI fund, perhaps, a better option would be to wait for Indian REITs to be launched.
No comments:
Post a Comment