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| Lack of clarity may hit realty funds’ take-off |
By
properties mls |
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MUMBAI: A week after SEBI announced guidelines for real estate mutual funds, officials at fund houses and real estate developers are awaiting clarity on certain issues before they go ahead with scheme launches. Industry experts point out that taxation, periodic calculation of net asset value (NAV), and absence of any benchmark indices are some of the contentious issues turning out to be stumbling blocks in the design of such products.
Pranay Vakil, chairman, KnightFrank India, says that a quarterly valuation exercise would not be very easy to implement. “Let us assume that an REMF consists of 10 real estate assets and each asset has been acquired at different periods of a year. So, how one can calculate a composite NAV of fund, taking into consideration all these properties purchased?” asks Mr Vakil.
Guidelines are also silent on the NAV on rented property, he points out. There is also a lot of confusion over whether these entities will be taxed as a debt fund or an equity-oriented fund. “As per the current regulations, given that REMF Schemes will invest directly in real estate projects, they are likely to be treated as debt funds for taxation,” says Milind Barve, MD of HDFC Mutual Fund, who was also in the Sebi-appointed committee that framed rules for these funds.
Dividends from equity funds are not taxed nor are long-term capital gains, unlike debt funds (these are taxed). “However, as a part of giving an initial impetus to the real estate MFs, fund houses will request the authorities that REMFs be treated like equity diversified schemes,” he says.
This confusion on taxation is also leading some experts to remind policy makers about the possibility of double taxation for the investor. If the entity investing in the real estate projects (say an SPV) is taxed while it distributes profits to the fund, and so is the latter when it gives away profits to the investor, the investor will be effectively taxed twice, experts point out.
Meanwhile, there is a debate on whether real estate developers will actually find entry into the segment attractive. Sebi has put onerous restrictions on the kind of properties that a REMF can invest in, like banning all “related party transactions”. Effectively, one cannot raise money from investors to deploy in one’s own assets.
A Balasubramanian, chief investment officer at Birla MF, says it is fair to assume that fund houses will be the first to launch such schemes, followed by developers as the time passes by. The only argument against Mr Balasubramanian’s comments is that most fund houses (other than a handful) may not have the required expertise (investment managers specialised to invest in real estate) to spot opportunities.
“There is need to calibrate the foreign money flowing into the REMFs, as this can lead to spikes in asset prices,” says Jai Mavani, head of real estate at KPMG, a consulting firm. He says that the capitalisation rates (popularly called cap rates) in India are higher than abroad, and this could lead to an obvious “arbitrage opportunity” for foreign investors. Higher cap rates mean that for the same amount of rent, its value here is lesser.
Some of the other issues facing players planning REMFs are the lack of any proper real estate indices in India (working as benchmarks), enabling comparison between schemes, and the infancy of the mortgage-backed securitisation market in India. More convenient options to exit from real estate projects will also have to be provided since Sebi has not allowed transfer of assets between two schemes, limiting liquidity.
No wonder that most developers are not willing to make any commitment on whether they will eventually launch REMFs. When quizzed on this, Rajeev Singh, MD of DLF, said, “We do not have any immediate plan to float an REMF. We are observing the situation and as and when time comes we will consider it.”
Acquire information on Real Estate at www.propertiesmls.com
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