20 November 2020

REAL ESTATE MUTUAL FUND. Renaissance in Owning Realty

The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 percent over the next decade.

The Indian real estate market is expected to touch US$ 180 billion by 2020. The housing sector alone contributes 5-6 percent to the country’s Gross Domestic Product (GDP).

In the period FY2008-2020, the market size of this sector is expected to increase at a Compound Annual Growth Rate (CAGR) of 11.2 percent. Retail, hospitality and commercial real estate are also growing significantly, providing the much-needed infrastructure for India’s growing needs. Unfortunately, because of some special features of real estate assets like lack of liquidity, lack of efficiency, lack of relevant performance measurement as well as high capitalization, private investors are limited in real estate direct investment.

One important legislature to capitalise liquidity trading and boosting growth in commercial real estate sector through its most recent shot in the arm was the introduction of the Real Estate Investment Trust (“REIT”). This higher minimum ticket price of REITs investment is mainly as REITs is a new concept in Indian markets and entails higher risk. Hence, regulatory authority which is Securities and Exchange Board of India (“SEBI”) ensured that only those investors who have surplus cash and higher risk tolerance should invest in REITs. Earlier in 2019, Embassy Group (One of the largest Real Estate Player) had issued a REIT IPO with a minimum ticket size of INR 2 lakh.

The minimum ticket price of another Player Mindspace REIT is INR 50,000 which is lesser than Embassy REIT IPO. Brookfield last week filed draft document with the Securities and Exchange Board of India to launch its REIT issue and monetise commercial real estate. It plans to list the REIT by end of this year. Investment by fund houses in REITs jumped from a mere Rs 7 crore in January 2019 to Rs 71 crore in January this year and further increased to Rs 402 crore in June 2020. Fund managers infused Rs 735 crore in real estate investment trusts (REITs) in January-June 2020 compared to Rs 249 crore in the first six months of last year.

Now we can now expect enhanced investor interest and participation with the Securities and Exchange Board of India (“SEBI”) through another new concept of bringing Mutual Funds to Real Estate vide the amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (“Regulations”) to allow mutual funds to launch real estate mutual funds (“REMF”). Mutual funds, which are investment vehicles made up of a pool of funds collected from a large number of investors and invest in stocks, bonds, money market instruments and similar assets, were allowed to invest in REITs and InvITs (Infrastructure Investments) in February 2017. On one hand, REMF are the funds investing in the securities of real estate companies owning properties. Whereas, on the other hand, REIT is referred to the organisation or association acquiring real estate properties.


Real Estate Funds are sector funds that invest in securities of companies from the real estate sector. In other words, these funds provide the capital to the real estate company to develop a property. If the sector grows, then the fund makes good returns. A real estate fund might invest in real estate companies or REITs (Real Estate Investment Trusts) based on the investment objective of the fund among other factors. Investors do have to keep in mind that this is not a short term proposition.

Investors who are willing to invest in Real Estate sector but do not have enough corpus to buy a physical Real Estate Properties can invest in Real Estate Funds and the suggested investment horizon is at least 5 years which implies that investors with long-term financial goals should invest in REMF. REMF, where the criteria is regulated by SEBI wherein, mutual funds can be set up or issued to public based on the returns that real estate sector can bring in from the Real Immovable Commercial Assets and the Securities backed investments which are REITs etc.


Fractional ownership is a process in which many unrelated people can share in, and decrease the risk of purchase of a high-value physical asset, usually a portion of resort real estate. Earlier, this market was primarily small-scale, where people built groups of families or associates to obtain a collective real estate investment. Now, a simple middle-class income group Indian can purchase a piece of Indian Real Estate without physically owning an immovable property. Fractional ownership is now an established market.

There are organizations, functioning as investment platforms, promoting the general public to invest in real estate as joint investors. If the amount of investors is fewer than seven, the arrangement called coownership. Every investor becomes a shareholder possessing a stake corresponding to the value invested. REMF paves an alternate way for this type of investment through a Sponsor.

Certain key features of the Regulations are discussed below --


• In order to set up a new mutual fund, which will launch only REMF schemes, the sponsor should be carrying on the business in real estate for a period at least five years and fulfill all other eligibility criteria applicable for sponsoring a mutual fund.

• Existing mutual funds can launch REMFs if they have adequate number of experienced key personnel/directors.

• Interestingly, if the REMF has no key personnel with experience in finance and financial services, then 100% of the net assets will be required to be invested in real estate assets.


• REMFs are required to invest at least 35% of its net assets in real estate assets and can invest the balance in mortgage backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities, provided that, if taken together, investments by the REMF in real estate assets, real estate related securities (including mortgage backed securities) should not be less than 75% of the net assets of the REMF. The balance 25% can be invested by the REMF in any other securities.• Every REMF scheme shall be close-ended and its units shall be listed on a recognised stock exchange and Net asset value (NAV) of the scheme shall be declared daily.

• REMFs are not permitted to transfer real estate assets amongst its schemes.

• REMFs are prohibited from engaging in the business of lending or housing finance activities.

• REMF are not permitted to invest more than (i) 30% of all its net assets in more than one city, unless disclosed in the offer document; (ii) 15% of its net assets in a single real estate project; (iii) 25% of the issued capital of an unlisted company under all schemes together; and (iv) 15% of net assets of any of its schemes in equity / debentures of an unlisted company.

• REMFs are prohibited from investing in (i) unlisted securities of the sponsor, its associate or its group company; or (ii) assets owned / previously owned by sponsor or the asset management company or their associates during the past 5 years. REMFs, may, however, invest in listed securities of such companies provided that such investment does not exceed 25% of its net assets.


• Each real estate asset of an REMF should be valued by two valuers accredited by a credit rating agency registered with the SEBI and appointed by the asset management company. Regulation 49A of the Regulations defines a ‘real estate asset’ as an identifiable immovable property (i) which is located within India in a specified area (to be specified by the SEBI); (ii) on which construction is complete and which is usable; (iii) which is evidenced by valid title documents; (iv) which is legally transferable; (v) which is free from all encumbrances; and (vi) which is not subject matter of any litigation. The Regulations specifically exclude projects under construction, vacant land, deserted property, land specified for agricultural use etc. However a more market sense is required in valuation, wherein a preferred Grade A commercial/residential asset’s valuation in accordance with Tier1 and Tier 2 cities layering can hold more fruit to an investment proposition.

• The valuation must take place every 90 days from date of purchase of the real estate asset, and the lower of the two values should be taken for the computation of net asset value (“NAV”). Further, there is a cooling off period whereby no valuer can continue with valuation of a particular real estate for more than two years and that no such valuer can value that same asset for a period of three years thereafter.The NAV is required to be disclosed on a daily basis.


• All income arising from the REMF registered under Section 10 (23D) of the Income Tax Act, 1961 will be tax exempt at the hands of the REMF.

• Under the provisions of Section 10 (35) of the Income Tax Act, 1961 the returns received by the unit holders from the REMF will be tax exempt.

• REMF will be liable to pay additional income tax on distributions of returns at the rate of 12.5% for individuals and 20% for others if it is not regarded as an equity oriented fund.

• Unit holder will be exempt from long term capital gains tax if the units are purchased on the floor of a stock exchange and the securities transaction tax thereon has been paid.

• Taxation: Whilst the tax treatment of REITs is still unclear, tax treatment of REMFs, in line with mutual funds, is relatively certain. It, however, remains to be seen whether REMFs will be regarded as equity oriented funds or not. This is because a mutual fund qualifies as an “equity oriented” mutual fund, only if more than 65% of its total net assets are invested in equity shares of domestic companies, and the Regulations require that only up to 65% of the net assets of an REMF be invested in securities.

One disadvantage associated with this investment is that the investors do not have the rights to decide how the fund should be run or in which company their funds should be invested in. Investors who own stocks in a company have a say in issues of this sort, but the same does not hold for real estate fund investors because the Sponsors like to name a few: Aditya Birla Sun Life Global Real Estate Fund – REtail (G), Kotak Asset Allocator Fund, Sundaram Hybrid Sr, HSBC Managed Solution Growth (G), HDFC Property Fund, Aditya Birla Real Estate Fund ensure they bring their expertise to the table in identifying properties with value and bring to the table for investors. Like shares, it is the responsibility of the Investors to look through the asset list of such sponsors.


While the stress is on a litigation free assets for consideration of REITS and REMF, such assets may be a distant dream for a class of commercial assets in India. The timing of litigation is also important when you consider the valuation of a given asset. Probability of a litigation arising should also be considered. Not all assets can be monetarily valued and hence a legal professional’s due diligence is a must for a well rounded valuation. 


REITS and REMF are alternate forms of Real Estate Investments and the cheer they bring to the table is better liquidity and bringing more participation from general public and investors. Investors are liberated from choosing a stand-alone immovable property investment and look at Pan-India investment in real estate and managing it virtually through a regulated stock market. REMF balances out the high-risk investments in the portfolio. Although the real estate prices may fluctuate at times, this does not affect real estate funds to a large extent. During inflation, the prices of property and rent increase which can lead to a rise in the value of the real estate as well, which in turn can increase the value of real estate mutual fund units.

Not all risks are sufficiently captured by the Regulations and it is pertinent to note that the real estate sector in India is also burdened with a high incidence of stamp duties – achieving uniformity and reduction in stamp duties is an almost impossible task as stamp duty on conveyance of immovable property is a matter for states to legislate, and not the Centre.

We also need to see if this would allow a backdoor entry to foreign investors through FIIs that may be able to invest in fully-built-up Indian real estate without any scale or quantum restrictions. REMF can strike where REITs cannot and that is the choice of Asset Class, While Commercial assets pave way for REITs, unsold or rented residential stock can be brought into the fold here albeit with various valuation thresholds.

Copyright © The Impact Lawyers. All rights reserved. This information or any part of it may not be copied or disseminated in any way or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of The Impact Lawyers. The opinions expressed in this article are those of the authors and do not necessarily reflect the positions or policies of The Impact Lawyers.

Would you like to read more?

The Impact Lawyers offers a FREE newsletter that keeps you up to date on news and analysis about the international latest legal news.
Please complete the form below and click on subscribe to receive The Impact Lawyers Newsletter subscription


The Impact Lawyers Newsletter

  • Practical templates and guides for lawyers and law firms
  • Podcasts, videos and webinars explaining how to be sucessful
  • Tips made by lawyers and other practitioners