Although members of India's fund management industry are keen to keep up with East Asian markets that have jumped on the Reit bandwagon, the Indian market is several years away from introducing any real estate investment funds, says Alokita Jha, analyst at San Rafel, California-based Roulac Global Funds. Jha, who is based in Hyderabad, provides research to Roulac's recent global real estate fund.
Speaking at a FundsWorld conference in Mumbai, Jha says the government rejected initial proposals she had helped draft for real estate investment trusts (Reits) as long ago as 2001 because regulators distrusted the idea of leverage.
Recently the funds industry, represented by the Association of Mutual Funds of India (Amfi), discussed the idea of allowing real estate companies to set up their own funds, which could be sub-advised by mutual fund companies.
But although Sebi has not made any public comments on the proposal, Jha says regulators are likely to torpedo this idea too.
Officially, Sebi is interested in the idea. GN Bajpai, the chairman, says real estate investment vehicles are one area the regulator has considered because it wants to promote innovation in the asset management industry, and thus build scale in asset sizes as well as provide investors with new chances to raise their rates of return. Without going into details, however, he says Sebi has grappled unsuccessfully with the need to anticipate risks.
Fund houses would like to introduce Reits, which in the United States have consistently outperformed benchmark indices. They also pay handsome dividends for relatively low risk, which should appeal to risk-averse Indian retail investors. Because so few Indians own property - only a little more than 10% of Indians own property, versus around 70% in Western countries - Reits offer liquid, hassle-free and diversified access to the market.
Investment firms have come to realize, however, that the Indian market is not sufficiently developed to allow for Reits to operate efficiently. The property market is largely informal and full of unaccounted transactions, with virtually no institutional investment, a heavy state ownership, and massive trading expenses thanks to heaps of legislation controlling rents and prices.
The market needs to develop via more securitization and institutionalization; consolidation among the 130 or so listed property companies; standards to raise the quality of properties and to assign values to them; and liquidity.
To that end, Amfi has recommended a laundry list of reforms, some of which are very good ideas - such as amending the notorious Rent Act and abolishing stamp duties - but which are politically unlikely to get anywhere.
In the meantime, investors keen for exposure to Indian property can invest in the small mortgage-backed securities market, invest directly in project finance or invest in listed property companies' stocks and bonds.
"Once in the picture, these vehicles would be the talk of the town," Jha says. "But we need effort and participation on the part of reputed construction groups, asset management companies, financial institutions and governing bodies to facilitate the legislation, accompanied by reforms on the business side... We are years away from seeing real estate funds."
