Pinnacle

REAL ESTATE MUTUAL FUND SCHEMES
For the benefit of our readers, we have reproduced key extracts from SEBI Mutual Funds Regulations Amendment Act, April 2008 in connection with REMFs

Definitions
49A. For the purposes of this Chapter, unless the context otherwise requires-

1. "real estate asset" means an identifiable immovable property-
   1. which is located within India in such city as may be specified by the Board from time to time or in a special economic zone within the meaning of clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);
   2. on which construction is complete and which is usable;
   3. which is evidenced by valid title documents;
   4. which is legally transferable;
   5. which is free from all encumbrances;
   6. which is not subject matter of any litigation;
      but does not include-
   1. a project under construction; or
   2. vacant land; or
   3. deserted property; or
   4. land specified for agricultural use; or
   5. a property which is reserved or attached by any Government or other authority or pursuant to orders of a court of law or the acquisition of which is otherwise prohibited under any law for the time being in force;
2. "real estate valuer" means a qualified valuer of real estate assets who has been accredited by a credit rating agency registered with the Board.

Applicability

49B.

1. The provisions of this Chapter shall apply to real estate mutual fund schemes.
2. Unless the context otherwise requires, all other provisions of these regulations and the guidelines and circulars issues there under shall apply to real estate mutual fund schemes, and trustees and asset management companies in relation to such schemes, except where specific provisions are made in relation thereto under this Chapter.

Additional eligibility criteria

49C .

1. A Certificate of registration may be granted under regulation 9 to an applicant proposing to launch only real estate mutual fund schemes if he;-
   1. has been carrying on business in real estate for a period of not less than five years;
   2. fulfills eligibility criteria provided in regulation 7, except that specified in item (i) of the Explanation to clause (a) thereof:
2. A real estate mutual fund scheme of a mutual fund registered under subregulation (1) shall not invest in the securities mentioned in sub-clauses (ii) to (iii) of clause (a) or in clause (b) of sub-regulation (2) of regulation 49E unless it has key personnel having adequate professional experience in finance and financial services related field.
3. An existing mutual fund may launch a real estate mutual fund scheme if it has an adequate number of key personnel and directors having adequate experience in real estate.

Other conditions for real estate mutual fund schemes

49D.

1. Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange:Provided that the redemption of a real estate mutual fund scheme may be done in a staggered manner.
2. The units issued by a real estate mutual fund scheme shall not confer any right on the unit holders to use the real estate assets held by the scheme and any provision to the contrary in the trust deed or in the terms of issue shall be void.
3. The title deeds pertaining to real estate assets held by a real estate mutual fund scheme shall be kept in safe custody with the custodian of the mutual fund.
4. A real estate mutual fund scheme shall not undertake lending or housing finance activities.
5. All financial transactions of a real estate mutual fund scheme shall be routed through banking channels and they shall not be cash or unaccounted transactions.

Permissible investments

49E.

1. Every real state mutual fund scheme shall invest at least thirty five per cent of the net assets of the scheme directly in real estate assets.
2. Subject to sub-regulation (1), every real estate mutual fund scheme shall invest-
   1. at least seventy five per cent. of the net assets of the scheme in-
      1. real estate assets;
      2. mortgage backed securities (but not directly in mortgages);
      3. equity shares or debentures of companies engaged in dealing in real estate assets or in undertaking real estate development projects, whether listed on a recognized stock exchange in India or not;
   2. the balance in other securities;
3. Unless otherwise disclosed in the offer document, no mutual fund shall under all its real estate mutual fund schemes, invest more than thirty per cent of its net assets in a single city.
4. No mutual fund shall, under all its real estate mutual fund schemes, invest more than fifteen per cent. of its net assets in the real estate assets of any single real estate project. Explanation: For the purposes of this regulation, "single real estate project" means a project by a builder in a single location within a city.
5. No mutual fund shall, under all its real estate mutual fund schemes, invest more than twenty five per cent of the total issued capital of any unlisted company.
6. No mutual fund shall invest more than fifteen per cent of the net assets of any of its real estate mutual fund schemes in the equity shares or debentures of any unlisted company.
7. No real estate mutual fund scheme shall invest in -
   1. any unlisted security of the sponsor or its associate or group company ;
   2. any listed security issued by way of preferential allotment by the sponsor or its associate or group company;
   3. any listed security of the sponsor or its associate or group company, in excess of twenty five per cent of the net assets of the scheme.
8. No mutual fund shall transfer real estate assets amongst its schemes.
9. No mutual fund shall invest in any real estate asset which was owned by the sponsor or the asset management company or any of its associates during the period of last five years or in which the sponsor or the asset management company or any of its associates hold tenancy or lease rights.

__________________
Ram

jambaavan

Hi,

This article is really a good read and very informative.....

Keep up the good work........

jayant.madkaikar

Stock market crashes almost always precede a real estate bust, and there is no reason why it should be different this time.

Several analysts are waxing glory about the Indian real estate market, creating a belief that it can never collapse. However, history has proven that there is a direct correlation between the stock markets and real estate markets, with a time lag of usually 6 months to 1 year.

If the Nifty and Sensex do not make new highs by June 2008, India’s real estate market will start accelerating downward. By this yardstick, we have another 3 months before the property dream becomes really sour.

However, this doesn’t mean that all will be hunky-dory for those who have invested in property. Until then, prices will not rise; at best they will stagnate or remain in a state of limbo – both sellers and buyers won’t budge.

Whenever the stock markets have passed through boom times, demand for – and consequently prices – of property have gone high. Likewise, in depressed stock markets, property prices tend to soften.

The reason for this relation between the two markets is that, in rising markets, investors find real estate as the ideal place to park the huge gains made in the stock markets, leading to escalation in prices; conversely, in a falling market disposal of property is the quickest way to cover losses, leading to a fall in property prices.

History is replete with examples to confirm this nexus. The most glaring is Japan. It has never recovered since its real estate boom and subsequent bust of 1985–90. India incidentally is exhibiting the same pattern as the Japanese cycle.

• Japan’s real estate market crashed in 1990 following the stock market crash. It is almost 18 years since, but the real estate market is still stagnant in Japan.
• In 1991, post the Harshad Mehta-led market crash in India, the real estate markets also crashed and prices remained stagnant for next 6-7 years. They bottomed out in 2002.
• In 2001, the tech-led Nasdaq crash caused the real estate market to fall around 20-30 percent.
• The 2007-08 downturn in US real estate markets is staring at us right in the face.

The reasons for the crashes may be different, but the pattern is almost always the same. People who have lost heavily in stock markets are keen to dispose off their investments in the real estate market. Distress selling always depresses prices. Small builders facing financial shortage have to sell some of their property to meet financial requirements.

Many other individual investors, who have purchased multiple properties with their own funds or loans for speculative purposes now have to sell some of their property before prices go down further.

The question many ask is why did the fall of May 2006 not trigger a real estate crash, in fact real estate reached even higher heights since then. The answer is again in the stock markets. After May 2006, the stock market recovered within 6-8 weeks and even touched a new high, thus buoying real estate prices with it.

However, when the massive sudden fall in the Indian stock markets was seen, there were reports from Mumbai, Delhi, Bangalore, Ahmedabad and Coimbatore that clearly indicated that property prices (specifically residential property) dropped 10 to 15 percent off their highs. Fresh buying had come to a screeching halt in all major cities.

The current scenario in 2008 paints a picture of almost every retail investor waiting for the market to rally up to new highs and this is a huge gamble to take. If the stock markets do not make new highs, and in all probability they will not, it will be no surprise for real estate prices to drop by up to 30 -40 percent in the near future.

However, it is not just the stock market that is responsible for downturn in the property market. Other factors that escalate a crash are:

• Rising interest rates on housing loans; these have increased from 8 to 10.5 percent in last two years, thus increasing the number of EMIs.
• RBI tightening liquidity. RBI has tightened lending norms by raising risk weightage for real estate loans to 150 percent. A lot of speculation in real estate was because of excess liquidity in the market.
• Rise in petrol prices and other commodities puts pressure on monthly budgets of the middle class, forcing it to postpone the purchase of homes.
• Lack of government regulation in the market.

The above are reasons why we are primed for a real hard knock in real estate. If you do a check of the above factors, you will see that the current situation complies with each and every point. Yet, almost every person is in denial that an imminent correction awaits the Indian real estate market.
A stock market crash is just a trigger. Usually, property prices reach unsustainable levels on account of huge speculative demand, and the real estate market collapses under its own weight.