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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Real Estate in India, part 3: Modes of Investment in Real Estate: Direct Investment, Real Estate Companies, Real Estate Mutual Funds, Real Estate investment Trusts.
1 answer/comment
11:51:51 AM, 16th April, 2019
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
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    In the last post (link below), we talked about the valuation of real estate assets and some terms used in direct real estate investing. But, we can get exposure to the real estate asset class.

    Real Estate as an asset class can provide high yield and diversification to the stock market. The primary benefit is the hedge against inflation as the property prices increase with the inflation (actually at a faster rate). For example, the RBI House Price Index reached to 266.7 in Q2 2018-19 from its base of 100 in Q4 2008-09 i.e. a more than 10% annualised increase which is a couple of percentages higher than the average CPI in this period.



    DIRECT INVESTMENT

    This means directly buying an asset. The first issue is that you need to invest a lot of money at once to get into such an investment. The second issue is that direct real estate investment requires some specific skills in choosing the asset and understanding the contract terms. Another issue is that once you get into such investment, liquidating the asset may become challenging. Lack of diversification is also a big challenge. As these investments are large, an average investor may not have the funds to create a diversified portfolio.

    The major risk factor in real estate investments apart from the liquidity risk is interest rate risk as to the increase in real interest rates not only increases the mortgage payments but also can decrease the demand of assets resulting in lower prices.



    REAL ESTATE COMPANIES

    One way to get exposure in real estate assets is simply invested in the securities of the companies who develop and manage real estate assets such as DLF and Godrej Properties Limited.

    Investing in securities solves the illiquidity issue and offers professional management, investors should be aware of the increases risk exposures they are taking by investing in such companies. Apart from the industry-specific risks linked to interest rates, the investor is taking exposure to the risk associated with the capital structure of the company (credit risk) and the risk of bad management.



    REAL ESTATE MUTUAL FUNDS (REMF)

    SEBI allowed the creation of such mutual funds in the year 2008. Some of the characteristics of these funds are as follows:

    1. These Mutual Funds need to be closed-ended and need to be listed on a recognised stock exchange.

    2. At least 35% of the net assets need to be in direct real-estate investments.

    3. These funds cannot get involved in lending or housing finance activities.

    4. At least 75% of the net assets need to be in real estate assets, mortgage-backed securities and equity shares or debentures of companies engaged in dealing in real estate assets or in undertaking real estate development projects.

    5. These funds are valued every three months.


    Because REMFs are closed-ended funds, they can be somewhat illiquid compared to investing in securities of the companies of the real estate companies. The benefit is the low ticket size, higher liquidity than direct investment and professional management.



    REAL ESTATE INVESTMENT TRUSTS

    A REIT in India means a trust registered under the SEBI (Real Estate Investment Trusts) Regulations, 2014 and allowed to invest in Real-Estate assets by pooling funds from many investors.

    REITs issue units in a public or a follow on offering. The issue is that a minimum of two lakh rupees needed to be subscribed as per the regulations. Also, non-traded REITs can create a liquidity challenge for the investor.

    India’s first REIT was launched by Embassy Office Parks last month (i.e. March 2019) backed by Blackstone Group LP.






    Related Links

    https://www.wisejay.com/openhouse/261/Real-Estate-in-India-part-2-Appraisal-and-Valuation-for-Direct-Real-Estate-Investment-Carpet-Area-Bu

    https://dbie.rbi.org.in/DBIE/dbie.rbi?site=statistics

    https://www.sebi.gov.in/legal/regulations/dec-2017/sebi-real-estate-investment-trusts-regulations-2014-last-amended-on-december-15-2017-_38449.html


    https://www.sebi.gov.in/legal/circulars/may-2008/notification-on-real-estate-mutual-fund-schemes-and-initial-issue-expenses-_6500.html

    https://www.livemint.com/money/personal-finance/india-s-first-reit-is-finally-here-should-you-invest-1552826505402.html

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