Track2Realty Exclusive: The question is why have not they blocked the mutual funds then? Pranay Vakil, Chairman of Knight Frank India has a simple take, “Because the mutual funds lobby is larger than the bankers’ lobby. They could not do anything about it. The companies into mutual funds are so large; they might just foray into banking.”
Everyone is not ready to buy this conspiracy theory though. Some of the financial analysts maintain even in the case of real estate mutual funds (REMFs), the rules for which were notified in May 2008, the regulator has held back permission to some entities.
The Association of Mutual Funds in India (AMFI) had earlier set up the Satwalekar Committee to study the introduction of Real Estate Mutual Funds (REMFs), which submitted its report in October 2000.
A sub-committee was further set up by AMFI whose recommendations were approved by SEBI in 2006. Due to residual issues like valuation, accounting, maturity of the scheme and investment restrictions, the REMF regulations were notified only on April 16, 2008.
However, in case of REIT there was no such initiative taken. Suresh Rangarajan, CEO, Artha Property believes in the highly unorganized sector with no industry status, needed for easier access to funds from banks and financial institutions, has resulted into inflow of a lot of black money into the sector.
Introduction of REITs will help India overcome this problem in a big way by institutionalizing the real estate sector and will also provide foreign investors with ample of opportunities to invest.
“Launch of REITs in India has been delayed because SEBI feels that Indian property markets lack depth and liquidity required for proper functioning of REITs. Other problems that exist with launching of REITs in India are absence of institutional grade space to compare real estate properties. Then there are no valuation models for audit and sales purposes, no requirements to be an evaluator and lack of specialized personnel in this domain. Non uniform state taxes, title issues with land and stamp duty on every sale and purchase which can effect Internal Rate of Return (the discount rate at which sum of your cash flows equals the initial cash investment) of REITs. REITs require asset and portfolio management expertise along with development and leasing expertise whereas in India there is no Real Estate education at corporate or university level and is not looked as a career option,” says Rangarajan.
Experts believe the absence of any one of the above elements could lead to an inefficient REIT market and trigger a collapse in the entire system. Some of the analysts even maintain that rather than a failed attempt it would be wise to build up each element over time before initiating REIT in India.
The Indian realty market needs to develop on the back of a research-driven, structured, investment approach, which has a long-term perspective.
..…to be continued
