LAUNCHING OF REITs IN INDIA

Student Research Project ( Posted on 26/9/2006)

INTRODUCTION OF REAL ESTATE FUNDS

Real Estate Funds are one of the hottest things in the developed world as an investment tool. They have become a rage in the developed world mainly because it does not have any correlation with the movements in the equity markets and thus providing diversification benefits to the investors along with stable returns.

This rage has yet not reached Indian Shores as of now mainly due to government regulations but now it won’t be long before they are introduced in India and grow exponentially. This growth story will be aided by the factors prevailing in the Indian market scenario which is given below.

INDIA – AN EXCITING MARKET OF TOMORROW

With the second largest population in the world, India’s market possesses inevitable characteristics that will relate strongly to the creation of enormous real estate pressure and growth in this dynamic sector. Contributing factors are:

• Global proliferation and liberalization

• A modernizing economy

• Worlds largest middle class

• Huge Demand – a 40-80 Million housing shortage (Economic Intelligence Unit)

• Cities that register a decadal growth of 40%

• Population increasing by 180 Million every 10 years (Indian Census Bureau)

• A literacy rate of 70% and growing by 10% per decade

• Real estate values that double every 8-10 years

• Lower Interest Rates

• Decrease in the average age of a person buying a house

• The credit for housing has grown from Rs 12000 crores in 1998-99 to Rs 62000 crores in 2002-03

• 3% of the incremental deposits in the banks to be deployed in the housing sector

• Tax deduction exemption of 1.5 lakhs on the interest payable on housing loans

This correlates to great pressure being created by an increasingly sophisticated population in this marketplace. Under this circumstances it pressures the government and lawmakers to introduce an environment, with rules and regulations allowing financial structures that can aide in the development of the sector to meet the enormous existing and projected demand. Failing to do so will be detrimental to a strong economic foundation and detracting from India’s economic plan in the Global Market Place.

PRESENT REAL ESTATE STRUCTURE – THE PRESENT REALITY

The Indian economy was a closed market prior to 1991 with recognized real estate in its infancy in India. Antiquated real estate laws have impeded the development in this sector until recently.

The Indian real estate market has traditionally considered illiquid opaque and conservative unlike the modern western states where organized real estate is seen as an avenue for investment and forms a valuable cornerstone of the economy. In fact until recently the construction sector did not even have the industry status which it badly needed to get funds from the banks and financial institutions easily and there was a lot of black money from the Mafia dons which flowed into the sector.

But few years back this changed and the construction business was given an industry status and some sort of finance flowed into it but not to that extent. To that end the Indian real estate marketplace has been locked outside the financial market and not leveraged for investment purposes. Despite this India is poised for dizzying and rapid urbanization, which will lead to major developments in Real Estate. However the continued demand of quality real estate is yet to be achieved due to the shortage of space (Clear Titled Lands) and funds. secondly developments of new towns and cities, which are on the anvil, and which India requires drastically, are in the need of huge amount of investment and technical expertise. This cannot be achieved under the present practices or by the present domestic developers, who still work in a much disorganized manner.

The Indian Government is realizing that the Real Estate sector is a key component of the infrastructure of ant economy and factors inhibiting growth will have a subsequent negative impact on the economy. The real estate sector in India has an untapped potential to become a catalyst for economic growth. This has been demonstrated by the performance of the industry in other economies but this will only happen if the industry can be corporatised. There is no reason why the Indian Real Estate Industry cannot reach the same level of maturity as what is in the USA and other developed European economies. This will help Real Estate become an engine of growth for the India Economy as a whole.

The Indian government has recently allowed the much awaited foreign direct investment (FDI) in the real estate sector, which is expected to open doors for much needed investments in the reality sector. However, this requires a clear understanding of the structure of the industry, its relationship with the rest of the economy and a focused effort on the reform process. More so ever this FDI is actually allowed in selected areas only. These investments would be in integrated township which would include housing, commercial premises, hotels and resorts, while the urban infrastructure would compromise roads bridges, mass rapid transit, systems and manufacture of building materials. The minimum acreage that can be developed is 100 acres designed keeping into consideration the local bylaws and regulations. The minimum capitalization would be US $ 10 million for a wholly owned subsidiary and US $ 5 million for a joint venture with an Indian partner. FDI is however not being allowed in the retail sector.

TYPES OF REAL ESTATE FUNDS

Real estate funds can be of four types based on the investment tools, which they use. These strategies and the kind of performances achieved by some funds following these strategies are given below:

1. PURE EQUITY FUND: This fund invests in shares of companies, which have substantial interest (atleast 50%) in Real estate sectors, e.g. Construction, REITs, infrastructure development, etc. this is like any other pure equity sectoral fund, which has a potential of high returns, accompanied by high risk brought by a single sector concentration. Examples of such funds are ABN AMRO Real Estate Fund and AIM Real Estate Fund. These funds invest in securities of companies, which are in the business of real estate. The performance of the fund is as given below: (Annualized Returns)

1 Year 2 Years 5 Years

ABN AMRO Real Estate Fund 49.88% 21.30% 17.19%

AIM Real Estate Fund 52.74% 24.44% 20.02%

Lipper Real Estate Fund Index 51.39% 21.01% 17.32%

2. MORTGAGED BACKED SECURITIES FUNDS: This kind of funds invests in mortgaged backed securities of companies by investing directly in these companies or by buying mortgage backed securities is very new in India and not much used here as of now. An example of a mortgaged backed securities fund is one group mortgage backed securities fund. The performance of this fund is given below along with the comparative values of Lehman Brothers Mortgage-backed Securities Index.

1 Year 3 Years 5 Years 10 Years

1 Group Mortgaged Backed Fund 4.74% 7.41% 7.34% 8.33%

LB Mortgage-Backed Sec Index 4.08% 6.37% 6.75% 7.35%

3. HYBRID FUND: This kind of fund invests in shares and mortgaged backed debt instruments issued by companies involved in the real estate sectors or generate a substantial part of their business from the real estate sector. This again is nothing but a hybrid sectoral fund and has higher sector specific risk attached to it. an example of such a fund is Gaa Blueprint Property Fund. It is a UK based fund, which invests in real estate equity, debt instruments issued by real estate firms, property trusts funds and commercial property funds. the funds has given a return of 4.06% since its inception in July 2003.

4. REAL ESTATE INVESTMENT TRUST (REIT): This kind of fund will invest in different kinds of Real Estate properties like Retail Stores, Industrial Properties, Commercial Properties and Residential Properties, etc. and earn their income from rents, lease payments and possible appreciation of the value of these properties. Examples of such funds are Norwich Property Fund and Guardian Property Fund. The performance of these two funds along with FTSE all shares index as a benchmark is given below:

Baring the last one i.e. Real Estate Investment Trust, the first three kind of funds cab be launched in India as per the current SEBI regulations, the only problem they might face in India is that there aren’t many company listed in India which have substantial part of their business in Real Estate. For the next part of the project we won’t be looking at the first three options but will consider the fourth option i.e. Real Estate Investment Trust. As of now the India laws do not allow us to form a Real Estate Investment Trust, but the finance ministry, SEBI and RBI have taken steps and are trying to evolve a route to introduce a Real Estate Investment Trust.

REMF FRAMEWORK

• INVESTOR is the one who has an affinity towards realty investments. Investor profile can range from Insurance Companies, Corporate Bodies to Retail Investors. The Investors are the source of funds in the whole framework.

• REAL ESTATE MUTUAL FUND or the REMF acts as a conduit or a link between an investor and real estate and helps manage the funds of the investors and invest them in the real estate sector.

• INVESTMENTS: REMF can invest in a developed property, and as the value appreciates over a period of time, it can offload its investment to make capital gains. It also has an option of developing the property on its own and then selling it at an appropriate time to ensure adequate returns. Furthermore, it can realize regular stream of returns through leasing, financing to developers and mortgage backed financing. The Investment Avenues are the users of funds in the whole framework.

• The FUNCTIONS, which REMF performs, includes entering into Real Estate Transactions on behalf of its investors, performing valuations of the properties either internally or through external agencies. The REMF is also responsible in maintaining liquidity in case of any redemption pressures or to fulfil any financial obligations or to undertake trades. The REMF is also responsible for maintaining the properties, which it has bought or are under its control.

• The REGULATORY BODIES involved in the working of REMF include the Finance Ministry, the SEBI, the RBI and any other body as per the rules formed by the concerned authority.

REAL ESTATE INVESTMENT TRUSTS (REITs)

A Real Estate Investment Trust (REIT) is a company that invests its assets in real estate holdings. You get a share of the earnings, depreciation, etc. from the portfolio of real estate holdings that the REIT owns. Thus, you get many of the same benefits of being a landlord without too many of the hassles. You also have a much more liquid investment than you do when directly investing in real estate. The downsides are that you have no control over when company will sell its holdings or how it will manage them, like you would have if you owned an apartment building on your own.

A REIT is a company that buys, develops, manages and sells real estate assets. REITs allow participants to invest in a professionally managed portfolio of real estate properties. REIT qualify as pass through entities, companies who are able distribute the majority of income flows to investors without taxation at the corporate level (providing that certain conditions are met). As pass through entities, whose main function is to pass profits on to investors, a REITs business activities are generally restricted to generation of property rental income. Another major advantage of REIT investment is its liquidity (ease of liquidation of assets into cash), as compared to traditional private real estate ownership which are not very easy to liquidate. One reason for the liquid nature of REIT investments is the its shares are primarily traded on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell properties in private markets.

Essentially, REITs are the same as stocks, only the business they are engaged in is different than what is commonly referred to as “stocks” by most folks. Common stocks are ownership shares generally in manufacturing or service businesses. REITs shares on the other hand are the same, just engaged in the holding of an asset for rental, rather than producing a manufactured product. In both cases, though the shareholder is paid what is left over after business expenses, interest/principal, and preferred shareholders dividends are paid. Common stockholders are always last in line, and their earnings are highly variable because of this. Also, because their returns are so unpredictable, common shareholders demand a higher expected rate of return than lenders (bondholders). This is why equity financing is the highest cost form of financing for any corporation, whether the corporation is a REIT or mfg. firm.

An interesting thing about REITs is that they are probably the best inflation hedge around. Far better than gold stocks, which give almost no return over long periods of time. Most of them yield 7-10% dividend yield. However, they almost always lack the potential for tremendous price appreciation (and depreciation) that you get with most common stocks. There are exceptions, of course, but they are few and far between.

If you invest in them, pick several REITs instead of one. They are subject to ineptitude on the part of management just like any company’s stock, so diversification is important. However, they are rather conservative investment, with long term returns lower than common stocks of other industries. This is because rental revenues do not usually vary as much as revenues at a mfg. or service firm.

TYPES OF REITs

REITs fall into three broad categories:

EQUITY REITs

Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties rents.

MORTGAGE REITs

Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or invest in (purchase) existing mortgages or mortgage backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

HYBRID REITs

Hybrid REITs combine the investment strategies of Equity REITs and Mortgage REITs by investing in both properties and mortgages.

Individual REITs are able to distinguish themselves by specialization. REITs may focus their investments geographically (by region, or metropolitan area), or in property types (such as retail properties, industrial facilities, office buildings, apartments or healthcare facilities). Certain REITs choose a broader focus, investing in a variety of types of property and mortgage assets across a wider spectrum of locations.

WHAT KIND OF ASSET IS A REIT STOCK?

REITs are dividend paying stocks that focus on real estate. If you seek income, you would consider them along with high yield bond funds and dividend paying stocks. Consider the last 20 years of returns for the NAREIT equity REIT Index (an index of about 150 traded REITs), shown below. The red bars represent annual returns solely from dividends; they have averaged about 8% and never once fallen below 4.8%. the blue bars add price changes for each year – they present total return, price change plus income return. You can see that stable dividends combine with price volatility to create a total return which is often promising, but volatile nonetheless.

WELCOMING REIT PRUDUCTS INTO THE INDIAN MARKET PLACE ?

A RADICAL SHIFT!

Real Estate Investment Trust (REIT) is a corporate structure that buys, develops, manages and sells real estate assets and allows various participants small and large to invest in a professionally managed portfolio of real estate properties, which is publicly traded. This concept is still in its infancy in India as it is in much of Asia. But like most other novel financial instruments, there should be no problems for this new concept to be accepted.

What will the level of demand for the REIT be? Today there are variety of financial instruments on offer for the investor to put his money into. However the returns are very low. Mutual funds, company deposits, shares, post office savings instruments, to name a few offer yields varying from 6% to 9%. By Indian standards this very low. The Indian investor is looking for something better than this. At this time the Indian investor has been badly shaken with the options in terms of safety. As such as the Indian investor wants a safe option.

The Indian investor views Real Estate as a safe harbour; if the established brand names are attached to the products as such there should not be any problems with the perception safety. As such the Indian Public will welcome the REIT as it will provide a shield between public investor and builder, as the institutional sector is preferred over the private sector for obvious reasons of safety and liquidity.

Further, investments in institutional government instruments give the huge Indian marketplace personal tax incentives. The Indian businessman already recognises the benefits of the REIT product and awaits it eagerly. REITs qualify as pass through entities, or companies who are able to distribute the majority of income cash flows to investors without taxation at the corporate level. As pass through entities their prospectus for appreciation for unit holders of the REITs benefits for the Indian Investor include:

• STABLE DIVIDEND GROWTH: pass major chunk of the profits on to investors, as the REITs business activity is generally restricted to generation of property rental income.

• DIVERSIFICATION of the Real Estate Portfolio.

• PROFESSIONAL MANAGEMENT

• TRANSPARENCY IN WORKING & REPORTING with REITs providing annual reports, prospectus and other financial information directly related to the investors with monitoring on a regular basis by authorities.

With Benefits to the property owners including:

• Alternative financing

• Enhanced return on Investment

• Higher Asset valuation

• Diversification

• Technology transfer

All these are desirable points from the developer, investor, government and the end user and bring corporatization to the industry.

REITs in India will probably be called REMF (Real Estate Mutual Funds). Presently the government is working towards changing the legislation to accommodate and allow REITs in India. Among the benefits of the Indian REITs will be the large scale channeling of small savings of a very large population with the appropriate tax benefits into the real estate sector that faces a huge housing shortage. Thus providing investors with another investment alternative, otherwise unavailable in this market place.

So like securitisation, REITs in the Indian market will provide the process by which illiquid assets are transferred into more liquid form and distributed to a broad range of investors through the capital market. The introduction of REITs in India will provide a further boost to the developing real estate industry. this will result in increased production of residential, commercial and industrial building stock as well as raising cheaper funds for this sector. The REIT would certainly provide an impetus to the real estate sector in India as it has elsewhere in the world, and the benefits of which can be enormous.

Introducing REITs to the Indian market place requires a favourable legal, regulatory, accounting and tax system and environment. Presently, the introduction and facilitation of the REIT concept is still in the planning stages with the securities exchange bureau of India (SEBI), Reserve Bank of India (RBI) and the Finance Ministry evolving a blue print for customizing REITs for the Indian marketplace and formulating the changes in regulations required to enable this structure. With that in mind the association of mutual funds of India (AMFI) formed a Sub-Committee. The mandate of this committee called the ‘Satwalekar Committee’ was to formulate a working plan for real estate investment schemes based on their findings and to propose recommendations for change to the government.

SATWALEKAR COMMITTEE

The Satwalekar Committee conducted a detailed study and has prepared an exhaustive report on the above subject and formulated a working plan for launching Real Estate Investment Schemes (REIS) based on the Committee recommendations.

THE STRUCTURE

The Sub-committee deliberated on the appropriate structure to be recommended for the introduction of the real estate funds in the country. the deliberations focused on two different models:

1. Real Estate Investment Trust of USA, which have been in operation since 1962 and

2. The Mutual Fund Structure prevalent in UK.

The favoured model for India being that prevalent in the UK the pooled managed vehicle (PMV) a Mutual Fund Structure. In the United Kingdom, real estate investments are done through pooled managed vehicles. While these are different from open ended Investment companies (OICs), they can be in the form of trusts. The regulator for these however, have a variable capital and are similar to open ended funds. PMVs may get tax qualify for benefits. However, there are no tax benefits for the regular PMVs. This would be comparable

to have no tax benefits for typical OICs. The PMV has ability to delay redemption if there is excessive pressure to exit the fund.

BENEFITTING FROM THE LESSONS OF OTHERS

In this context, the sub-committee has been in the fortunate position to implement a solid investment program by evaluating international experience regarding Real Estate Funds in other countries and has a looked to the following points in its evaluation:

1. Liquidity and low volatility

2. Professional management

3. Conservative leverage

4. Diversification of investment risk

5. Independent monitoring

6. Technology transfer

In the United States real estate investment is through real estate investment trusts (REITs). The REITs are formed as companies that have an issued share capital. Further, they have the flexibility to raise funds through preference shares and debt. In this structure they are always close ended and listed on the exchanges.

In order to qualify as an American REIT the following rules have to be followed:

• Be an entity that is taxable as a corporation.

• Be managed by a board of directors or trustees.

• Have shares that are fully transferable.

• Have a minimum of hundred shareholders.

• Have no more than 50% held by five or fewer individuals during the last half of each taxable year.

• Invest atleast 75% of the total assets in the real assets.

• Invest atleast 75% of gross income from real property, or interest on mortgages on real property.

• Have no more than 20% of its assets consist of stocks in taxable REIT subsidiaries.

• Pay dividends of atleast 90% of its taxable income form of shareholder dividends.

REITs were started without tax benefits and did not do well until the US tax laws were amended in 1986. The new laws provided them with tax benefits under the condition that they conform to certain requirements that have been laid down. REITs are very popular now in United States. as per the data available, there are approximately 300 REITs operating in the country with assets in excess of US$300 billion. The company structure followed in the USA (REITs), which allows the flexibility to raise funds by leveraging the balance sheet, was deemed inappropriate by the sub-committee for pooling of small savings in the area of Real Estate Investment. The PMVs in UK are in the form of trusts and similar to the open ended Mutual Funds/Collective Investment Schemes. Which are regulated by SEBI. The sub-committee has therefore recommended the trust structure as appropriate for Real Estate Investments.

It should be noted that REITs in the US became popular structure for investing in Real estate only after the US Congress granted them tax benefits. After comparison of the features and suitability of the collective investment scheme structure versus the mutual fund structure for real estate investments, the securities and exchange board of India determined that the (Collective Investment Scheme (CIS) Regulations, of 1999 (CIS Regulations) would have to be modified to include real estate as an investment objective and to enable and launch Indianized REITs of REMFs.

RECOMMENDED CHANGES IN THE CIS REGULATIONS

Some of the problems with the CIS regulations in India are as follows:

1. The CIS regulations do not have a concept of a sponsor. Thus any company having a net worth of Rs 5 crores and the appropriate main objectives in its articles of association can set up a collective investment scheme. This needs to be rectified and only companies with a sound financial background should be allowed to set up collective investment schemes based REIT. Due the lack of a sponsor for the business, the CIS Regulations do not seem to be emphasize the concept of arms length relationships between group companies. this concept is very important for investor safeguard and should specify the upper limit for the exposure that the REIT can take on group companies projects and projects of its majority shareholders.

2. The CIS regulations appear to be made keeping a specific project in mind. The regulations prescribe a maximum subscription level and recommend proportionate allotment of units. The sub-committee notes that real estate funds are not project specific and therefore do not have predetermined size of subscription. The sub-committee strongly believes that keeping a maximum limit on subscription would disadvantage small investors desirous of taking exposure to the real estate sector.

3. Being fundamentally based on a specific project rationale, CIS regulations do not have any investment restrictions. The sub-committee notes the extensive investment restrictions recommended by the ‘Deepak Satwalekar Committee’ to avoid over exposure to certain projects, groups or geographic locations. The sub-committee believes that investment restrictions are vital for ensuring safety of the investor’s monies. The sub-committee also noted that the existing MF regulations contain investment restrictions similar to the ones recommended by the Satwalekar Committee.

4. Another issue with the CIS regulations is the concept of an appraising agency. This is again appropriate for a specific project that would need to be appraised, as a measure of abundant caution. The sub-committee believes that the appraisal concept is misplaced in a situation where multiple properties are being invested in. Also, the appraising concept reduces the flexibility of the managers of the scheme and may impair the possibility of better returns.

5. Another important aspect of CIS is that the CIS Regulations do not necessitate the calculation of NAV. Thus, there is no underlying value of the investments or the units that can be calculated on an on going basis. Thus, Real Estate investments done under the CIS Regulations would not provide a fair and transparent underlying NAV, against which the market price could be benchmarked. The Subcommittee noted that in the case of pooled managed vehicles in the UK, valuation of properties is done on a quarterly basis and NAV is reported on a daily basis. Thus, even the international experience suggests NAV calculation as a central concept of Real Estate Investment.

6. Finally, the subcommittee recognizes that tax benefits available to mutual funds are a vital determinant of the success of the domestic mutual fund industry. the subcommittee recalls the experience of the USA where REITs gained popularity after receiving tax benefits.

The need of appropriately structured Real Estate investments can be hardly overemphasized. The subcommittee noted that the Deepak Satwalekar Committee went into great detail on the benefits of Real Estate Funds, including channeling small savings into the housing sector, which currently faces a huge shortage, as well as providing investors with another investment alternative, hitherto unavailable.

The sub-committee has suggested the mutual fund structure for introducing Real Estate investments in India and provided detailed rationale and advantages of the Mutual Fund structure. Post the issuing of comprehensive guidelines by SEBI, the mutual fund structure is now well understood and trusted. Selling of real estate investments through the mutual fund route would therefore be easier and energies can be directed towards selling the product rather than the structure. There are many different structures, which can be used to form a real estate fund, one such structure, which can be very successful, is the Interval Mutual Fund structure. An example of an Interval structure is given below:

• Be close ended for a minimum period of 3 years.

• Open at the end of every quarter for sale of fresh units based on the quarterly NAV calculation and remain open for a minimum period of 15 days. This will enable the fund to grow by soliciting fresh inflows from investors, while giving potential investors a chance to participate in the scheme after its Initial Offer.

• Offer redemption / repurchase to the investors at the end of 3 years in a staggered manner. For example, at the end of 3 years, 20% of the investment can be redeemed at NAV; at the end of 5^th year, balance 30% can be redeemed to the investor at NAV.

• Be an interval fund, and offers redemption at the end of 3 years, the scheme may be listed on any stock exchange to provide the liquidity to the investors.

• Calculate the NAV on quarterly basis as per the valuation of the underlying investments.

• Operate within the regulations of Mutual Funds as amended from time to time and comply with all the requirements of the SEBI (Mutual Fund) Regulations.

• Tax benefits…. Being part of a Mutual Fund, Real Estate Investment Schemes would be eligible for all tax benefits applicable to Mutual Funds in general. This would enhance the attractiveness of these schemes to investors.

• The scheme will not be allowed to borrow funds from the market and thus use leverage so as to enhance the risk – return paradigm.

No matter what the structure of the real estate scheme is but it is expected that the investment avenues will be restricted to the list given below:

• Equity Shares / Bonds / Debentures of the listed companies which deal in properties along with property development. however, at present, in India there are very few such companies, which are listed.

• Mortgage-backed securities i.e. the securitisation of housing loans. At present, these are not yet available. However, one expects that this avenue will be open once the bill seeking amendment is passed in the next budget session.

• Direct estate project finance, construction finance, purchase / option to purchase of buildings under construction with a view to sell it again; investment in the debt securities issued by development and construction companies (placed privately).

• Investments in money markets and call markets so as to maintain the required liquidity.

LAUNCHING REITs IN INDIA

Before launching a REMF, all Real Estate Investment Schemes would need the approval of SEBI and will also have to file the Offer Document as per the existing SEBI (Mutual Fund) Regulations. An asset Management company could launch these Schemes if it has the appropriate investment management skills and if not then it can use the services of an advisor.

There are certain risks associated with investing in Real Estate as an asset class. Some of these risks are given below:

• Liquidity Risk

• Risk because of high maintenance burden. Risk due to high government controls

• Risk due to real estate cycles

• Risk due to legal hurdles and complexity

• Risk due to high transaction cost and thus forming barriers to entry and exit.

• Risk due to lack of information

Some of these risks are natural and inevitable but a lot of these risks can be controlled to some extent. A Real estate mutual fund should work in such a way that the over all risk is optimized and matched to the investors needs.

RISK MANAGEMENT

• Amendment in SEBI – As recommended by the Satwalekar Committee, a amendment in SEBI regulations is suggested enabling the SEBI to regulate the establishment and functioning of the real estate mutual funds schemes with all the existing regulations applicable to such mutual funds pertaining to net worth of AMC; existing free structure; initial launch expenses restricted at 6%; maximum limit of expenses; etc. as already provided in the Mutual Fund regulations.

• Investment Restriction – That present Regulations have restriction on investment where any investment in one corporate should be restricted upto 10% of the corpus and similarly, any investment in the properties owned and managed by sponsor should be restricted upto 25% of the corpus.

• Restriction based on project, Promoter Group and Geographical area – The Satwalekar Committee has recommended Investment Restrictions based on a project, a promoter group and a geographical area. With these restrictions appropriate ti mitigate the concentration risk of the investment portfolio of the real estate investment scheme. Details of the investment restrictions proposed in the report of the Satwalekar Committee can be found on page 24 of that report

• Valuation – At present, we have “Registered Valuers” as proved by Government of India / Income tax Departments / Insurance Regulatory Development Authority. Thus it becomes imperative for SEBI to use them and approve these registered valuers for the purpose of valuing properties held by Real Estate Investment Schemes.

LEGAL ASPECTS THAT NEED CHANGE

Along with the regulatory issues, there are some legal issues that are caused by our antiquated laws and which will hamper the smooth and profitable functioning of the Real Estate Mutual Funds. thus these laws need to be reformed since they also increase the risk level of a Real Estate Investment. Some of these laws and proposed changes are given below:

• Stamp Duty – This is a state subject and unless the Central Government decides to make it uniform, it will be difficult and time consuming to expect any changes in the stamp duty framework. It is recommended that either there should be no stamp duty for a SEBI registered REMF or even if a minor stamp duty is imposed it should take the form of value added stamp duty structure and thus double stamp duty will be avoided in case of frequent transfer of the properties.

• Property Taxes – this is a State/City subject. It recommended that the relevant authorities provide exemption from annual property taxes to real estate investment schemes. This would help real estate investment schemes to provide better returns to investors.

• Records – A significant issue in dealing with properties is the custody if title and paper form of transaction. It would be very helpful to the REMF if all the property records are computerized and the properties be transacted in a dematerialized format, exactly how the securities are traded right now.

• Rent Control Act – The provisions of the Rent Control Act have been amended in some of the states. since, several states continue with the ancient Rent Control provisions and it is believed that the Rent Control Act is one of the main reasons why people are not very enthusiastic in building a house and giving it on rent.

• Urban Land Ceilings and Regulations Act – This act lays a ceiling (generally around 500 to 2000 square meter) on the land which a person can hold in an urban area, the excess land is either to be handed over to a competent authority or is to be developed by the owner for a specified purposes only. Here a person stands for an individual, corporation, firm, family, association or body of individuals etc. Thus if the REIT has to come to any meaningful existence this law has to be scrapped.

CONCLUSION

It can be concluded that there is a tremendous potential for a Real Estate Hedge Fund to be introduced in India. The proposed fund will mainly follow the structure already being followed in UK, which is that of a Mutual Fund with some changes. Though the demand for such a fund is huge there are a lot of concerns, which are still to be answered in terms of the antiquated laws, which govern the real estate business, the existing laws of SEBI and regulatory mechanisms to be used. If these concerns are taken care off by the government then the proposed real estate funds are poised to have exponential growth in India and thereby lead to greater economic growth and overall progress of the country.

BIBLIOGRAPHY

• realestatejournal.com

• investopedia.com

• invest-faq.com/articles/real-es-reit.html

• Myirisfoline.com

• Finance.indiamart.com

• “REITs are spreading worldwide: Should India follow?”; Real Estate Review, Quarterly CREDAI Journal, October 2005

• “Bringing REITs to India: The benefits and Challenges:, Real Estate Review, Quarterly CREDAI Journal, October 2005