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All eyes on SEBI norms
October, 07th 2009

Private equity investors in real estate projects are eagerly awaiting SEBIs Real Estate Investment Trust (REIT) Regulations so that they get an exit option once their investments mature.

In the absence of REIT regulations, PE investors are unable to unlock the investments made in realty projects in the last four to five years. First the property market suffered price erosion last year and prices have been volatile.

An estimated $3 billion to $4 billion investments mostly at the project level, majority of which came through the FDI route, are awaiting exit options like REIT or real estate mutual funds (REMF).

Private-equity funds that purchased real estate stocks at the top of the market, are already restructuring their investments and thus would like to avail themselves of easier exit options through REMFs and REITs whenever they find a suitable opportunity, an analyst said.

REIT and REMF would be the formal way to exit, a person familiar with realty sector said.

REIT and REMFs investment generally are with a long-term view which will establish a vibrant real estate market and with retail investors participation exit options would not be limited to banks, institutions and HNIs, he said.

Though SEBI had issued draft REIT regulations almost two years ago in December 2007, it has not yet made up its mind on the final regulations.

Even in the case of real estate mutual fund (REMF) scheme, which was notified in May 2008, the regulator has held back permission to a couple of entities HDIL Constructions and Kumar Housing Corporation.

Valuation of realty by accredited valuers is yet to be sorted out, since SEBI has not issued a list of real estate valuers.

REITs have become a preferred vehicle for investment in properties around the world. Global market for REIT is estimated at over $450 billion with Asia alone accounting for a $70-billion market share.

Concerns on account of how land banks as well as constructed properties residential, commercial, etc. are valued, cannot be legitimate reasons to delay launch of REIT and REMF products, as benchmarks worldwide are available to Indian regulators, a realtor said.

There is currently 45 million square feet of real estate stock in major Indian cities which is lucrative enough for REMFs or REITs, Mr Pritam Chivukula, Principal-Real Estate, Brahma Capital Advisory Services Pvt Ltd, said.

But there are divergent views about REIT and REMFs in Indian market.

With conditions in the real estate market not conducive, REIT and REMF are a distant possibility right now, Mr Ramesh Jogani, CEO & Managing Director, Indiareit Fund Advisors Pvt. Ltd, said.

In fact, Indiabulls Real Estate has gone ahead and raised money by listing its REIT in Singapore through Indiabulls Properties Investment Trust in June Last year. DLF and Unitech too have plans to list REIT overseas but so far they have not taken off.

ING Mutual Fund has a REIT-based global real estate fund where Indian retail investors can invest, but it is just a feeder fund for the Luxembourg-based fund which operates like a REIT.

Meanwhile, financial institutions such as IL&FS and India REIT Fund Advisors Ltd have come up with portfolio management service based products which are similar to REIT. HDFC and Kotak Group too have PMS-based realty funds for HNI and institutional investors.

It is learnt that ICICI Venture is also planning a similar fund for big ticket investors.

But the fund size for the PMS based real estate funds are limited, ranging from Rs 500 to Rs 1,000 crore because of limited participation possible at the high entry level set for such investors, which is upward of Rs 20 lakh.

Even PMS based realty funds are looking at REIT/REMF as one possible exit option. The Fund (Milestone II) can look into exiting its investments to REMF/REITs. In addition fund can also offer exit of its investments to HNIs, Banks, Institutions, NRIs, Foreign Bodies, Milestone II offer documents says.

Since March 2009, the real estate space is buzzing with various fund raising moves by the corporates. First there was qualified institutional placements (QIP) by Unitech, DLF and some others listed firms.

Last week Emaar MGF, Sahara Prime City, Lodha Developers, Ambience Ltd and DB Realty filed applications with SEBI for initial public offering seeking to raise close to Rs 12,500 crore from the primary market.

Simultaneously with talk of economic recovery, several private equity investors are bringing fresh money to real estate projects. According to an estimate, around $7 billion have flown into real estate sector so far this year through QIP and PE investments.

Some of the realty developers have mobilised funds through the Mauritius route, companies sponsor India specific fund by getting investments from pension funds, endowment funds and other foreign investors. These funds go into special purpose vehicle of developers and real estate companies.

If the direct tax code were to come into effect from April 2011, the returns for QIPS, private equity funds or Mauritius based funds would be affected on account of uniform capital gains at 30 per cent without any concessions as currently available, an expert familiar with tax matters said.

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