Realty to widen investment options

Early launch of real estate investments products would ensure wider participation of individuals in the booming realty sector. SEBI must move quickly to facilitate early launch of real estate mutual funds (REMF), now that the Institute of Chartered Accountants of India (ICAI) and Association of Mutual Funds of India (AMFI) have firmed up valuation norms.
For any REMF, valuation of property it owns would hold the key to attracting investor interest. And therein lies the complication. In the case of an equity mutual fund, the market price of the underlying securities determine the net asset value (NAV) of a unit.
However, a real estate mutual fund would have substantial direct ownership of land and built-up property, and that would see little fluctuation in its market price on a daily basis. A pertinent question is how will the value of property be determined. We hope the ICAI and AMFI have comprehensively addressed this in the valuation norms.
The structure of the REMFs, as approved by SEBI board in June 2006, would be close ended, at least in the initial stage. That would help the fund manager, as he would not be required to hold high cash balance to deal with redemption pressure when a fund under performs in the short term.
Introduction of REMF would also benefit developers of properties because it would provide a long-term alternative to bank finance or overseas borrowing. Rasing equity through the capital markets has been another source of finance for real estate companies, but that is an option available only to a limited number of entities with a proven track record.
Participation of REMFs in property development projects can serve to improve corporate governance of such companies. It can also ensure that property valuations are better aligned with demand and supply rather than speculation. SEBI must also issue guidelines for formation of real estate investment trusts (REITs) and the finance ministry must spell out tax treatment for such entities in the budget.

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