SEBI unveils norms for real estate mutual funds

SEBI has issued final guidelines on real estate mutual funds (REMFs). The schemes can be launched by existing mutual fund houses or firms that have been operating in the real estate space for at least five years. In addition to the dedicated infrastructure funds and real estate investment trusts, REMFs would be the third product for mutual funds in the real estate category. While the draft guidelines had been put on all the three, the closed-ended REMFs are the first ones to see the final guidelines coming in.

Besides directly investing in real estate, SEBI has also permitted investments in mortgage-backed securities, securities of companies engaged in dealing in real estate assets or in undertaking real estate development projects and other securities. However, it has mandated that at least 35% of net assets of the scheme should be invested directly in real estate assets. Taken together, investments in real estate assets, real estate-related securities, including mortgage-backed securities, shall not be less than 75% of net assets of the scheme. Caps will be imposed on investments in a single city (not more than 30%), single project (15%), equity or debentures issued by unlisted real estate companies (15% across all schemes and 25% of issued capital in a single scheme). The assets held by one scheme cannot be transferred to another.

However, REMFs cannot invest in vacant land, deserted land or land earmarked for agricultural use. The guidelines also suggest that the assets of real estate schemes be valued every quarter by two valuers. With this move, retail investors can invest in real estate as an asset class, which has a low correlation with equity and bonds, and enjoy the benefits of asset class diversification.