With India’s appetite for commercial, residential and retail space growing stronger, real estate markets could no longer wallow in opacity and other imperfections since these adverse features could easily generate bubbles in the real estate market.
No doubt, the country’s apex bank, the Reserve Bank of India (RBI) has always been on its toes about potential asset-price bubble as it periodically ramps up the risk weightage on real estate loans extended by banks.
National wealth
There can be no two opinions that housing and real estate constitute not only a substantive proportion of national wealth but also a crucial and fast expanding component of the services sector of the economy.
Since both lenders and borrowers may have substantial real estate/housing exposure, financial balance sheets may be hit by any large gyration of prices in this sector.
Delivering a lecture on “India’s financial sector Reforms: Fostering Growth while containing risks,” the RBI Deputy Governor, Dr Rakesh Mohan, told his audience at Yale University early this month that “strong demand for housing and buoyancy in real estate prices in an environment of non-transparency could potentially pose risks to the banking system. In conjunction with interest rate cycles, the banking system as well as the regulator would need to be vigilant to future non-performing assets and the US-like sub-prime woes.”
Banking credit
Considering the reality that clamant demand for housing finance has emerged as a key driver of banking credit in the past few years and making due allowance for the burgeoning rush for commercial and retail market space by industry and corporate across the country, will it not be too much to expect the domestic banking industry to meet the genuine real estate demands of a growing economy?
No doubt, real estate funds set up to invest only in India have already raised a few modest sums, while Merrill Lynch forecasts that the Indian realty sector will grow from $12 billion in 2005 to $90 billion by 2015.
That the market regulator the Securities and Exchange Board of India (SEBI) is alive to the issue of tapping real estate investment for proper development of the financial market is revealed in its Annual Report (2006-07), tabled in Parliament on the last day of the winter session.
It points out that investment in real estate provides outlets for capital gains as well as periodic incomes. Over a longer term, real estate provides returns that are comparable with returns on equities. It further notes that the volatility in prices of real estate is lower than equities leading to a better risk return trade-off for the investment. No wonder, real estate investments made over longer periods of time provide an inflation hedge and yield real returns.
Tedious process
Having said this, SEBI has not refrained from asserting that real estate is distinct from other assets. The real estate investments are lumpy in nature and unaffordable to many.
The specific risk is high and personal diversification is very difficult. While the legal issues and lack of transparency make the probability of a mistake high, the illiquid nature of the markets makes the undoing of a wrong real estate investment a tedious process. Distress sales generate much lower returns than the fair value of the property, so argues the SEBI.
In view of these corking troubles, professional management labours to limit the risks in real estate investment while simultaneously bringing in such benefits as legal expertise, information on prices and regular maintenance and repairs.
Fully convinced that real estate investment schemes provide affordability to small investors enabling their participation in the property market as they help investors to diversify their investment portfolio across various asset classes and cut down the property specific risk, the SEBI has decided to allow the existing mutual funds in the country to float real estate investment schemes. In June 2006, the guidelines for Real Estate Mutual Funds were approved by the SEBI Board.
Investment Objective
A real estate mutual fund (REMF) scheme means a mutual fund which has investment objective to invest directly or indirectly in real estate property and should be governed by the provisions and guidelines under the SEBI (Mutual Funds), Regulations, 1996.
The structure of the REMFs, initially, would be close-ended and the units should be compulsorily listed on the bourses and net asset value (NAV) of the scheme should be declared daily.
As the annual report of SEBI states that “certain residual issues relating to valuation and accounting are being addressed,” market watchers and market participants keep their fingers crossed about the early launch of a real estate mutual fund in the country for the mutual benefit of retail investors and also to the realty industry.
No comments:
Post a Comment