Real Estate Funds in India

Real estate sector in India has assumed growing importance owing to liberalization in Indian economy. The consequent growth in business opportunities has escalated demands for commercial as well as residential space. Real estate sector in India is presently in a blossoming stage with indefinite growth options. Real Estate Funds in India has witnessed a steep rise due to the high returns it yields as is marked from the super-inflated real estate boom in India. Lots of Real Estate Venture Funds are storming towards India due to the high returns and maximum benefits. As per the estimation, a similar investment in developed countries would fetch a return of 3% to 4% whereas it fetches 12% to 15% in India. The realty sector in India is has achieved a newer heights and is a potential funds investment prospect. Both commercial as well as residential properties are more in functional practice to make rapid economic growth of the country easier.

What are Real Estate Funds

Real estate funds are very much similar to the mutual funds and are founded by a real estate professionals group to manage property for investors. Some of the real estate funds may not actually own property and may instead opt to invest in bonds or instruments secured by property. In the former case, the investors or unit holders earn money by getting a share in profits from sale of property or from the rentals on property owned by them. While in the second case, a coupon rate received on the investment in bonds or instruments is distributed among the investors or unit holders as dividend. This return is subjected to any administration, management, brokerage and\or marketing fee charged by the Real Estate Funds. Real Estate Funds have a longer lock-in period than equity funds. Maximum lock-in period is being 6 years.

Who can invest?

It is required to invest a minimum amount (i.e. 25 Lakhs as per the sources) in the Real estate funds therefore retail investors cannot enter this segment. At present the potential investors in the Real estate fund are banks, financial institutions, High Net Worth individuals and Corporates.

Types of Funds

Real Estate in a broad sense includes commercial, residential, IT development, Hospitality, Malls and SEZ projects. A real estate funds may target the development of all or any of these.

Indian Commercial Property Funds

Commercial property is like any type of property that is commercially used to earn profit. A sharp growth has been noticed in the commercial, industrial projects and specially office complexes for expanding business ands MNC's. This growth has generated a new scope and avenues for India real estate funds. This potential growth and maximum profits opportunities have encouraged financial assistance from all major domestic fund providers and also various foreign investors. The India Real Estate Prices have increased and so has the investments in Real Estate Funds India. India real estate investments have helped in the expansion of India Real Estate Market tremendously. Further the development of commercial properties in India has played an important role in our GDP growth.

Reforms initiated by the government of India - Attract Funds

The cooperating assistance from Indian government has further encouraged liquidity flow into the India real estate sector. Government of India has recently allowed Non Resident Indians (NRIs) to invest upto 100% (FDI) in Housing and Real Estate Sector. This policy of 100% Foreign Direct Investment (FDI) in the real estate sector in India, setting up real estate mutual funds coupled with other fiscal reforms like rationalization of stamp duty, property taxes etc. started by the Government are steps taken to continue to make the real estate a promising investment option. As an outcome of these policies, the foreign contributions in the India Real Estate Funds have been witnessing a steady rise of 40%-45% per year. The domestic financial institutions have also build up their investments like their foreign counterparts. This combined participation from both along with contributions of the corporate houses has accelerated further the growth of India Real Estate Funds.

The further participation of the real estate mutual funds has enhanced the quality of the construction practices. The 10th Five-Year Plan ending in 2007 has projected that SEBI (Securities and Exchange Board of India) would regulate India real estate mutual funds. Regulated under SEBI's Venture Capital Funds, these are closed-ended schemes with an initial public offer (IPOs) contributing to a discount on NAVs (Net Asset Value). Also, the Reserve Bank of India (RBI) allows resident Indians to invest $50,000 per annum overseas.

Major Players at Home and Outside

A slew of real estate funds promoted by both foreign and Indian financial institutions are competing to invest in the higher return segment. Some of the prominent companies promoting real estate funds in India are HDFC Property Fund, Kotak Mahindra Realty Fund, DHFL Venture Capital Fund, Kshitij Venture Capital Fund (A group venture of Pantaloon Retail India Ltd) and ICICI's real estate fund, India Advantage Fund. As per the sources, Tata group has also joined hands with private equity firm, Xander, to raise US$ 1 billion for an institutional retail real estate fund. DLF has raised US$ 2.24 billion in the country's largest initial public offering and has also entered into a joint venture agreement with Indian pharmaceutical major Ranbaxy group company Fortis Healthcare to set up hospitals across the country with investments of about US$ 1.5 billion.

Furthermore, there is also a large number of international investors pumping in foreign funds in India like US-based Warburg Pincus, Morgan Stanley (Morgan Stanley Real Estate Fund (MSREF), Blackstone Group, Broadstreet, Columbia Endowment Fund, Hines, Tishman Speyer, Sam Zell's Equity International, JP Morgan Partners to name a few.

Real Estate Mutual Funds are also known as Real Estate Investment Trusts (REITs) globally. The essential difference between a REIT and a mutual fund is that investments made in REIT are traded in real estate stocks and not invested in stock of companies. It provides a heavier liquidity than MFs. As per an earlier guideline by SEBI, the NAV of REMFs were required to be disclosed daily but a recent proposal of a quarterly disclosure of NAV is drawing serious speculations from the realty segment.