An insight into real estate mutual funds that allow small investors to benefit from the healthy returns investments in the real estate sector offer
Real estate mutual funds (REMFs) make it possible for everyone to use the real estate boom to earn handsome returns. You don't need to buy property to actually benefit from the high capital gains it offers. You can go the real estate mutual funds way.
Advantages of REMF
Retail investors will be able to participate in the real estate sector. In case of venture capital funds, the minimum investment size is around Rs 1 crore. For REMFs, this is expected to come down to about Rs 10,000. Retail investors will have one more investment option to diversify their portfolio.
Institutional investors will get a good exit option by way of transfer of assets to REMF. Real estate as an asset class provides excellent risk adjusted returns along with low correlations with other asset classes.
The real estate sector will get an additional source of capital via retail investors' money. Companies' operations will become more transparent and accountable.
Returns investors can expect
The US REITs have delivered high yields and have a low correlation to other asset classes, helping investors balance the risk-reward characteristics of their portfolios. The US REIT market produced an average annual income return (Morgan Stanley REIT Index) of 6.96 percent for the period December 1993 to January 2003 and an average annual total return of 10.1 percent for the period June 1993 to June 2003.
Risk Factor
REMFs derive their risk from the underlying asset i.e. property. However, the risk gets reduced substantially because of diversification across multiple investments. Of course, they are riskier than diversified equity funds as REMFs focus on only one sector i.e. real estate.
Ideal investment horizon
REMFs are going to be close-ended funds as per SEBI regulations. Thus, you do not have the option of selling the units back to the fund. You can sell units only on the exchange. The investment horizon would be equal to the fund tenure. Also, as real estate projects have long gestation, it is advisable to stay invested for a long term.
How the fund works
They will invest in real estate projects, mortgage backed securities as well as in equity, debt and debentures of real estate companies. They will earn returns from properties by way of rents and capital appreciation. They will also get interests, dividends and share price appreciation from securities of real estate companies.
Choosing a fund
If you want a steady income stream, you should go for a fund that invests most of its corpus in stabilized rent producing properties. If you want quick appreciation, you should go for a fund that invests in the early stages of development projects.
Proposed portfolio allocation of the fund across sectors, such as office, retail and residential is significant. For example, the office sector is popular worldwide for its stable income yields, while retail is considered aggressive. As REMFs are close-ended, you should look at the tenure of the fund. This should match your investment horizon.
WHAT do you do when home markets get choppy? Shop outside, right? Well, not quite when it comes to investment. In fact, even though the Indian economy and capital markets are increasingly becoming influenced by global forces, people prefer to invest locally here.
Reason? Analysts say it is largely due to lack of understanding of global market trends and apprehensions of a volatile market which have changed the investor beliefs and behavior. Or perhaps, made him more cautious in his approach.
So what’s the takeaway for the moment? Should the investor wait-and watch for the ground situation to improve or look for greener pastures by rejigging his portfolio? Opinions differ, but most fund managers believe the need of the hour is to balance one’s high investment concentration to Indian markets with appropriate global diversifiers such as investments in a global real estate mutual fund (REMF). When we look at the Indian market, we see people taking on extreme risk. They live in a world of high returns and high risk. You earn in this economy, your pensions are in this economy, and your investments are also in the same economy. So, you are running high concentration risk.
GO GLOBAL
With Indian avenues getting saturated, there’s a growing realization that local people are already fully invested in India, and it makes sense to diversify. According to ING Clarion Real Estate Securities research, the global real estate market size is expected to grow from $23.6 trillion as of December 2006 to $33.3 trillion by 2010. In developed markets, investors place up to 50% of their financial portfolios in overseas assets. Half of this, feels Vohra, should be in diversifiers such as alternative assets, including real estate and commodities. Given that global investment is new to India, an allocation of at least 20% to global real estate will give investors an optimum decrease in risk and growth in returns. The idea is to give lower volatility than an equity fund and greater returns than a bond fund. In fact, a person who has followed global asset diversification would have been spared the pain that the Indian markets have seen in the last few months.
In the first quarter of 2008, ING’s Global REMF has given a return of 9% when the Indian markets were falling and has outperformed all equity funds, gold and debt in that period. Its return since its inception six years ago is in excess of 20%. The majority of these investments are via REITs that have low volatility versus equities and more real income than bonds.
Financial planners are, however, not so upbeat on this asset class. Experts assert that you should invest in a global REMF if you have surplus funds. You must think about investing in a global REMF only if your financial planning goals are satisfied. The product is yet to prove its mettle in the Indian market. Thus, you should carefully evaluate the underlining assets where this fund will invest and be fully aware of risks involved before taking any exposure. It is, however, safer to invest in a fund, which receives rent by leasing properties than a fund that allocates money in new projects. If satisfied, you can look to park 20% to 30% of your surplus fund in a global REMF.
LOOK BEFORE YOU LEAP
Before investing in this fund, analysts recommend that you should bear in mind three crucial factors: These are not principal protected investments and you should not chase performance. Global markets are at least 50-100 times bigger than Indian capital markets and it is important to pick the right manager with experience, presence and track record before you venture overseas, and currency and sovereign risks are essential ingredients for any offshore investments. Therefore, you must choose markets carefully to manage these risks.
Diversification point of view, global REMFs does make sense but the recent sub prime crisis has affected its returns. “It is a flexible investment option providing advantage of a transferable security/asset class, which could be in the form of the units provided by trust/fund house managing it. However, there is a concern of the impact of rising interest rates and appreciating rupee on the returns of this fund.
Though rising interest rates impact real estate, rates across the globe don’t move in tandem. Interest rate cycles may vary by a year or two from country to country. This has a huge impact when you are running a global portfolio because you can latch on to these different cycles and smoothen things off. Similarly, currency movements are never one sided, they move in cycles.
Real estate MFs - Easy On The Pocket
Real estate MFs and REITs offer the cheapest and most convenient way to own a stake in the booming lucrative property market in India
THEY SAY bureaucracy in India can be slower than the most patient snail. So, more than seven years after the proposal was first mooted, the Securities and Exchange Board of India (SEBI) came out with its draft guidelines for real estate mutual funds (MFs). This move has brought much joy and relief to the MF industry.
Now, the industry is out to convince domestic investors that the move could not have come at a more opportune time. In these volatile times, real estate acts as a good diversification option due to its low correlation with equity and bonds. Besides, retail investors can now invest in actual real estate projects with amounts as low as a few thousand rupees.
Sebi’s move to launch realty MFs will not only foster diversification in the MF industry, but will also promote wider participation in the real estate sector the move will help bring the Indian market place closer to global norms. As for delivering returns, sample this... ING’s Global Real Estate Fund, which invests in shares of international real estate companies, emerged unscathed in the recent stock market turbulence. The fund not only took the crash in its stride, but also delivered positive returns over the same time period. If you had invested Rs 10,000 separately in the BSE Sensex, BSE Realty index and ING Global Real Estate Fund on January 10, ’08, your investment would be worth Rs 7,900, Rs 5,500 and Rs 10,800, respectively, as on April 22, ’08. Sebi has given approval to two kinds of real estate funds. The first category is of real estate MFs, which will invest in real estate projects and mortgage-backed securities. These will be closed-ended funds, listed on the exchanges. As their net asset values (NAVs) will be declared daily, investors will have the option to exit any day. So, you can now say goodbye to the old tradition of illiquidity in real estate investments. Real estate investment trusts (REITs, in short) constitute the second category of real estate funds. These products are very popular abroad. The most common version of this class of funds allows an investor to earn fixed income like returns through rents of commercial properties. Most REITs are listed on the exchanges and have tax incentives for investors. Put simply, REITs work like fixed income instruments (rents as coupons), while realty MFs will seek capital appreciation (like a stock price going up) by investing in properties.
For years, real estate was synonymous with lack of transparency in transactions and absence of an index, making it difficult to track prices. Various fund officials hope that the introduction of REITs in India will change all that. They are betting on such products ushering in greater liquidity to this asset class, as well as freeing up developer capital for further investment, changing the dynamics of the sector as well.
With the current real estate boom and no signs of any fall in demand for homes or offices, this may be the best time for investors to own a share of the lucrative realty sector. Real estate MFs and REITs offer the cheapest and most convenient way to do so. However, let’s hope that smoother legislative framework and a clear taxation policy will be put in place for these products, making them investor-friendly. BDV-270534-BDV
Real estate mutual funds (REMFs) make it possible for everyone to use the real estate boom to earn handsome returns. You don't need to buy property to actually benefit from the high capital gains it offers. You can go the real estate mutual funds way.
Advantages of REMF
Retail investors will be able to participate in the real estate sector. In case of venture capital funds, the minimum investment size is around Rs 1 crore. For REMFs, this is expected to come down to about Rs 10,000. Retail investors will have one more investment option to diversify their portfolio.
Institutional investors will get a good exit option by way of transfer of assets to REMF. Real estate as an asset class provides excellent risk adjusted returns along with low correlations with other asset classes.
The real estate sector will get an additional source of capital via retail investors' money. Companies' operations will become more transparent and accountable.
Returns investors can expect
The US REITs have delivered high yields and have a low correlation to other asset classes, helping investors balance the risk-reward characteristics of their portfolios. The US REIT market produced an average annual income return (Morgan Stanley REIT Index) of 6.96 percent for the period December 1993 to January 2003 and an average annual total return of 10.1 percent for the period June 1993 to June 2003.
Risk Factor
REMFs derive their risk from the underlying asset i.e. property. However, the risk gets reduced substantially because of diversification across multiple investments. Of course, they are riskier than diversified equity funds as REMFs focus on only one sector i.e. real estate.
Ideal investment horizon
REMFs are going to be close-ended funds as per SEBI regulations. Thus, you do not have the option of selling the units back to the fund. You can sell units only on the exchange. The investment horizon would be equal to the fund tenure. Also, as real estate projects have long gestation, it is advisable to stay invested for a long term.
How the fund works
They will invest in real estate projects, mortgage backed securities as well as in equity, debt and debentures of real estate companies. They will earn returns from properties by way of rents and capital appreciation. They will also get interests, dividends and share price appreciation from securities of real estate companies.
Choosing a fund
If you want a steady income stream, you should go for a fund that invests most of its corpus in stabilized rent producing properties. If you want quick appreciation, you should go for a fund that invests in the early stages of development projects.
Proposed portfolio allocation of the fund across sectors, such as office, retail and residential is significant. For example, the office sector is popular worldwide for its stable income yields, while retail is considered aggressive. As REMFs are close-ended, you should look at the tenure of the fund. This should match your investment horizon.
WHAT do you do when home markets get choppy? Shop outside, right? Well, not quite when it comes to investment. In fact, even though the Indian economy and capital markets are increasingly becoming influenced by global forces, people prefer to invest locally here.
Reason? Analysts say it is largely due to lack of understanding of global market trends and apprehensions of a volatile market which have changed the investor beliefs and behavior. Or perhaps, made him more cautious in his approach.
So what’s the takeaway for the moment? Should the investor wait-and watch for the ground situation to improve or look for greener pastures by rejigging his portfolio? Opinions differ, but most fund managers believe the need of the hour is to balance one’s high investment concentration to Indian markets with appropriate global diversifiers such as investments in a global real estate mutual fund (REMF). When we look at the Indian market, we see people taking on extreme risk. They live in a world of high returns and high risk. You earn in this economy, your pensions are in this economy, and your investments are also in the same economy. So, you are running high concentration risk.
GO GLOBAL
With Indian avenues getting saturated, there’s a growing realization that local people are already fully invested in India, and it makes sense to diversify. According to ING Clarion Real Estate Securities research, the global real estate market size is expected to grow from $23.6 trillion as of December 2006 to $33.3 trillion by 2010. In developed markets, investors place up to 50% of their financial portfolios in overseas assets. Half of this, feels Vohra, should be in diversifiers such as alternative assets, including real estate and commodities. Given that global investment is new to India, an allocation of at least 20% to global real estate will give investors an optimum decrease in risk and growth in returns. The idea is to give lower volatility than an equity fund and greater returns than a bond fund. In fact, a person who has followed global asset diversification would have been spared the pain that the Indian markets have seen in the last few months.
In the first quarter of 2008, ING’s Global REMF has given a return of 9% when the Indian markets were falling and has outperformed all equity funds, gold and debt in that period. Its return since its inception six years ago is in excess of 20%. The majority of these investments are via REITs that have low volatility versus equities and more real income than bonds.
Financial planners are, however, not so upbeat on this asset class. Experts assert that you should invest in a global REMF if you have surplus funds. You must think about investing in a global REMF only if your financial planning goals are satisfied. The product is yet to prove its mettle in the Indian market. Thus, you should carefully evaluate the underlining assets where this fund will invest and be fully aware of risks involved before taking any exposure. It is, however, safer to invest in a fund, which receives rent by leasing properties than a fund that allocates money in new projects. If satisfied, you can look to park 20% to 30% of your surplus fund in a global REMF.
LOOK BEFORE YOU LEAP
Before investing in this fund, analysts recommend that you should bear in mind three crucial factors: These are not principal protected investments and you should not chase performance. Global markets are at least 50-100 times bigger than Indian capital markets and it is important to pick the right manager with experience, presence and track record before you venture overseas, and currency and sovereign risks are essential ingredients for any offshore investments. Therefore, you must choose markets carefully to manage these risks.
Diversification point of view, global REMFs does make sense but the recent sub prime crisis has affected its returns. “It is a flexible investment option providing advantage of a transferable security/asset class, which could be in the form of the units provided by trust/fund house managing it. However, there is a concern of the impact of rising interest rates and appreciating rupee on the returns of this fund.
Though rising interest rates impact real estate, rates across the globe don’t move in tandem. Interest rate cycles may vary by a year or two from country to country. This has a huge impact when you are running a global portfolio because you can latch on to these different cycles and smoothen things off. Similarly, currency movements are never one sided, they move in cycles.
Real estate MFs - Easy On The Pocket
Real estate MFs and REITs offer the cheapest and most convenient way to own a stake in the booming lucrative property market in India
THEY SAY bureaucracy in India can be slower than the most patient snail. So, more than seven years after the proposal was first mooted, the Securities and Exchange Board of India (SEBI) came out with its draft guidelines for real estate mutual funds (MFs). This move has brought much joy and relief to the MF industry.
Now, the industry is out to convince domestic investors that the move could not have come at a more opportune time. In these volatile times, real estate acts as a good diversification option due to its low correlation with equity and bonds. Besides, retail investors can now invest in actual real estate projects with amounts as low as a few thousand rupees.
Sebi’s move to launch realty MFs will not only foster diversification in the MF industry, but will also promote wider participation in the real estate sector the move will help bring the Indian market place closer to global norms. As for delivering returns, sample this... ING’s Global Real Estate Fund, which invests in shares of international real estate companies, emerged unscathed in the recent stock market turbulence. The fund not only took the crash in its stride, but also delivered positive returns over the same time period. If you had invested Rs 10,000 separately in the BSE Sensex, BSE Realty index and ING Global Real Estate Fund on January 10, ’08, your investment would be worth Rs 7,900, Rs 5,500 and Rs 10,800, respectively, as on April 22, ’08. Sebi has given approval to two kinds of real estate funds. The first category is of real estate MFs, which will invest in real estate projects and mortgage-backed securities. These will be closed-ended funds, listed on the exchanges. As their net asset values (NAVs) will be declared daily, investors will have the option to exit any day. So, you can now say goodbye to the old tradition of illiquidity in real estate investments. Real estate investment trusts (REITs, in short) constitute the second category of real estate funds. These products are very popular abroad. The most common version of this class of funds allows an investor to earn fixed income like returns through rents of commercial properties. Most REITs are listed on the exchanges and have tax incentives for investors. Put simply, REITs work like fixed income instruments (rents as coupons), while realty MFs will seek capital appreciation (like a stock price going up) by investing in properties.
For years, real estate was synonymous with lack of transparency in transactions and absence of an index, making it difficult to track prices. Various fund officials hope that the introduction of REITs in India will change all that. They are betting on such products ushering in greater liquidity to this asset class, as well as freeing up developer capital for further investment, changing the dynamics of the sector as well.
With the current real estate boom and no signs of any fall in demand for homes or offices, this may be the best time for investors to own a share of the lucrative realty sector. Real estate MFs and REITs offer the cheapest and most convenient way to do so. However, let’s hope that smoother legislative framework and a clear taxation policy will be put in place for these products, making them investor-friendly. BDV-270534-BDV
