ET is reporting that the model adopted by Indian REMFs is different from those practicsed globally. REITs(Real Estate Investment Trusts) globally invest 100% of their funds directly into real estate. However, in India they are allowed to invest in realty stocks and have atleast 35% of direct real estate investment.
Globally REITs adopt a dividend yield model which is an indication of returns expectation. In Stocks and Shares it is the dividend declared that indicates the yield, while in properties it is teh rental income earned out of leasing.
The yield of REITs is usually 1.5%-2.0% higher than their respective government securities. For example, in Japan average dividend yield is 4.1% p.a as compared to a 10-year government bond yield of 1.85% p.a. In the Indian context, residential properties yield 9-10% while commercial properties yield 10-12%.
At first their could be diversified(Residential, Malls, Commercial, etc) real estate funds in the offering. The main concern is the risk of lesser available investment avenues which could lead to poor diversification. There should be sufficient availability of projects across developers to allow MFs to diversify investments. From the model adopted, it does look that Indian realty funds will come a little high on their risk-return quotient.
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