The domestic asset management companies (AMCs) can now invest directly in real estate. The Securities & Exchange Board of India (SEBI) today unveiled the much-awaited guidelines for real estate mutual funds (REMFs), which mandated that at least 35 per cent of the corpus of a scheme be invested directly in real estate assets.

The remaining funds can be allocated for mortgage-backed securities and instruments of companies in the sector. A statement issued by the capital market regulator said that investment in real estate assets and real estate-related securities have to be less than 75 per cent of the net assets of the scheme.

These schemes will enable retail investors to access the real estate market, which witnessed a boom in the past few years but has seen fund flow drying up in recent months.

Small investors are left out of real estate play since the investments required to buy property are huge. Now the retail investor can invest in the real estate sector through these mutual funds.

SBI Mutual Fund’s Chief Investment Officer Sanjay Sinha estimated that the schemes could see fund houses mop up between Rs 30,000 crore and Rs 50,000 crore over the next three to five years. But experts said that schemes may be slow starters due to the current market conditions.

SEBI has to  issue a comprehensive circular, clarifying issues like appointment of a custodian to keep titles of properties held by the funds.

In addition, it is likely to mandate that at least a 35 per cent investment corpus of an REMF scheme has to be invested in ready-to-use properties.

All schemes will be close-ended with units listed on stock exchanges, SEBI said while amending the provisions of Mutual Funds Regulations, 1996.

The net asset values (NAVs) of the funds must be made public every day and each asset has to be valued by two credit rating agencies every 90 days from investments and the lower of two values will be taken for computing the NAV.

In addition, there may be issues related to taxation as a section of the industry wanted clarity on whether REMFs will be classified as equity or debt schemes.

Sources said that Sebi’s circular next week is expected to leave it to fund houses to decide their treatment.

At present, MF schemes that invest at least 65 per cent in domestic equity markets are known as equity-oriented schemes and are exempt from long-term capital gains tax, while the rest are treated as debt schemes and attract a long-term capital gain tax.

Fund houses pay tax on the dividend income on debt schemes, while short-term capital gains are added to an individual’s income and taxed. Long-term capital gains are taxed at 10-20 per cent depending on the application of indexation.

Summary

    * Real estate mutual fund schemes can only be close-ended, listed on recognised stock exchanges
    * At least 35% investment in ready-to-use projects mandated
    * Investment in real estate assets, securities (including mortgage backed securities) capped at 75% of the net assets of a scheme
    * Caps to be imposed on investment in a single city, project, securities issued by sponsor or associate companies
    * Fund houses need valutation by two valuers every 90 days from date of investment
    * Mutual funds cannot transfer real estate assets between schemes
    * Have to declare daily NAVs

There is great potential for the real estate sector in India. Even in the current down trend in the economy the real estate prices have not dipped as much. The need for housing and commercial real estate is growing at a fast pace. This will be a great opportunity for Indian small investors to diversify their portfolio.