By Dr Sanjay Chaturvedi, LLB, PhD
Permitted in 2008 by SEBI, Real Estate Mutual Funds had perpetual problem of Daily NAV and Transparency in the sector. The Returns on Investment, (ROI) demanded was 35 to 60 by Real Estate Mutual Funds (REMF) from fund starved real estate industry. But where such huge returns went, it is a mystery by its self. REMF wanted its premium and Real Estate sector was never prepared for such type of exposures and transparency. The formal market was marrying informal markets and it all started in 2008 when SEBI permitted to establish REMF.
Initially the fund contribution was very high and as high as Rs.5 crore. Over the year when market matured the initial amount came to Rs.5 Lakh. The Indian market has 44 domestic real estate PE funds in total having a collective size of $11,226.8 million (Rs 49,813 crore). Since June 2010, these funds have invested around $717.95 million across the country. In the absence of clear regulation, there is no fixed fee that all funds charge. Usually, there is a onetime entry fee of 2% of the investment amount. In some funds there is an entry fee or the setup fee. For some others there are no such charges. However, there is an annual maintenance fee of 2%. In rare cases this is slightly higher than 2%. For example, the entry fee for the fund from Milestone Capital is around 2.5% of the total investment. But some funds give certain discounts depending on the investment size. In some large ticket deals of at least Rs 1 crore, the fund house may waive off the setup fee or reduce the annual charges. Then there is a performance fee that you have to pay by sharing your profit with the manager; This is usually a predetermined number. This is linked to the fund’s hurdle rate, which is usually 10-12%.
Only if your money gives a return higher than the hurdle rate, the manager would share the profit. According to data available, Kotak Realty Fund and Indiareit Fund have exited some of the projects. Exit would mean the fund made gains. Currently, Indiareit has four funds in the country and Kotak has three. HDFC Property Ventures, the real estate fund of India’s largest mortgage finance company, has also started exiting a part of its investment portfolio. Though domestic real estate PE funds in India are registered with the Securities and Exchange Board of India, there is no clear regulation on the disclosures. So the manager may promise you return but can’t make a commitment. Because of the absence of any definition on the operation of the real estate fund and its structure in India most do not commit or guarantee any fixed returns. Some may give you a lump sum at the end of your lock in period; some others may give you annualized return. But these gains never get transferred to the investor which was earned by the Funds during the course of their operations. Since there is no clear mandate by the Authority and Real Estate is an informal industry, the exact calculation of gains in terms of rupees is almost impossible.
The counter investments and appreciated investment in future assets always keeps the ball rolling and the exact investment cycle or amount of returns known to the investors. Then there aren’t any regular returns as such. Until the fund sells its holdings, there is no gain to be passed on. You will generally not get any return in the first year of the investment because it takes two three years to complete a real estate project, while you can sell your property next year, selling your share of investment in a fund may not be that easy. You can only sell your papers in the secondary market to another person, says a sales head of a well known real estate fund on condition of anonymity. The firm closed its first fund in 2009. The SEBI in 2008 had laid down the following rules governing the REMF: Invest at least 75% of the REMF scheme’s net assets in real estate companies and related securities From the above mandate of 75% a minimum of 35% to be invested directly into real estate Investments upto 30% only allowed in a single city Investments upto 15% only allowed in a single real estate project, To invest not more than 25% of the total issue capital of any unlisted company Mandatory listing of REMFs on the stock exchanges Despite the above rules and regulations, the mutual fund industry has been unable to launch REMFs due to lack of ‘clarity’, want of transparency and uncertainty prevailing in the real estate sector.
Moreover, there being no regulatory framework for the real estate sector for its efficient functioning, have also refrained mutual fund houses from launching such funds. “Investor” is bad word in RERA, it do not recognise neither retail nor institutional investors. And those who floated the Funds have been enjoying the confusion state of regulatory lapses. It all broke the investors’ confidence and from an assets class which was created, today the Funds hold just 29% of what it all aggregated during good times. It is starting an end to Real Estate Mutual Funds in the country.