The craze of New Fund Offers (NFO) which has catapulted the fortunes of the mutual fund industry in the last two-year period has been amazing. These schemes with their huge mobilization and popularity among the general public have definitely been the flavour of the season. Mutual Fund industry has seen many new product innovations in this period. The industry currently is growing from strength to strength and to sustain its interest in the investing public, product innovations should continue. An area of investment which though has huge potential but has not caught investor’s fancy is Real Estate Fund, which are structured just like a mutual fund scheme.

Typically, these funds own large properties, commercial office spaces, hotels etc. and earn rental income as well gain from capital appreciation. They buy, develop and sell property and share profits with investors as in any other mutual fund scheme. Thus they have the potential of being very popular with small investors. But sadly, Real Estate Funds are yet to take off in India in a big way.

The Real Estate market in India currently is on a high growth curve, and several factors such as a booming economy, favourable demographics and liberalized FDI regime, have helped it even further. There are certain issues though, such as land reforms and absence of substantial tax incentive for real estate development which need to be addressed.

The Indians traditionally have an affinity for fixed asset investments such as land and gold, and property has always been looked upto as an investment area which only the large ticket investors could afford. Due to the local nature of real estate and complexity of transactions, it is not easy for an investor on their own to identify opportunities in different cities and locations.

Real Estate Funds thus serve the most basic purpose which an equity-oriented mutual fund scheme does – make the investments relatively risk-free and convenient compared to direct investment in the underlying securities.

Today, Real Estate funds are available only to HNIs and institutional and global investors, with very high minimum investment criteria. Therefore the funds operating in India are more like Real estate venture capital funds than mutual funds with no/neglible retail participation at all.

Issues currently plaguing the sector are low liquidity in the sector, which is not very good and the investment horizon is very long term. There is very little transparency on the valuations front. Regulatory issues like waiving of stamp duty and annual property taxes to reduce the high cost involved are also very important.

Real Estate Funds are good for the industry as they help in bringing organized money in this fragmented market. India is one of the few markets, along with China, where the growth in real estate is sustainable.

Some of the Industry players who have taken the initiative are Kotak, HDFC, Anand Rathi, IL&FS, ICICI Ventures among others.

Kotak Realty Fund established in May 2005, is one of India’s first private equity funds with a focus on real estate and real estate intensive businesses. It operates as a venture capital fund. The fund’s corpus has been contributed by leading banks, domestic corporate, family offices and high net worth individuals. The fund is close ended and has a life of seven years. The Fund has raised around $ 100 million from domestic investors. The strategy of the fund is to make investment at project level with developers as well as at an enterprise level in realty development companies. The fund has the mandate to make investments in retail, hotels, healthcare, education etc.

HDFC Property Fund is a seven year close ended real estate venture fund called HDFC India Real Estate Fund. The fund has been launched in association with State Bank of India. HDFC holds close to 80 per cent and SBI the remaining stake while the fund is managed by HDFC Venture Capital Ltd. The scheme had a minimum contribution of Rs 5 crores per investor

AnandRathi Real Estate Opportunities Fund (AR REOF) is a close ended fund, for domestic and overseas investors. The fund focuses on growing markets such as Pune, Bangalore, Chennai, Hyderabad and other cities that are witnessing substantial urban development. The fund’s investment strategy is to focus on acquiring secured rental income producing real estate assets with quality blue chip tenants and picking up equity stakes in specified real estate projects being developed by reputed developers.

IL&FS Realty Fund is a private equity fund. The fund seeks to achieve a gross investment-level leveraged annual internal rate of return in excess of 25%. In addition, the fund will target a cash-on-cash stabilized yield on equity exceeding 8% per annum for income-generating projects.

ICICI Ventures has also launched a property fund, the funds seeks to invest in the commercial, residential, retail and other world-class real estate assets, both in developed and development projects, in the potentially growing cities of India. The fund seeks to deliver a compound annual rate of return in excess of 20-25% p.a over a 7 years tenor.

The progress has been very slow so far, and as of now there is a lot of ambiguity on this subject. Real estate fund so far has been a non-starter largely because of the roadblocks like varying stamp duty across states, lack of transparent valuation methodology etc. Increasing awareness about these kinds of funds operating in India and the advantages and convenience that they offer are sure to catch investor’s fancy sooner or later, and we feel it is just a matter of time before market regulators introduce investor friendly norms in this sector too.