Mumbai: The country’s four registered credit rating agencies could see a windfall from the regulatory guidelines set for real estate mutual funds, or REMFs.
The equity markets regulator Securities and Exchange Board of India, or Sebi, which recently allowed asset management companies to float funds that invest in real estate, requires each asset that an REMF invests in to be valued by two registered credit rating agencies.
The guidelines also specify that one agency should not value a particular asset for more than two years, and thereafter cannot value that asset for three years.
The value of each asset has to be examined every 90 days from when it is purchased, and the lower value will be considered to compute net asset value, or NAV, which is to be disclosed daily. The potential market could not be established immediately, but the four credit rating agencies—Crisil Ltd, Icra Ltd, Credit Analysis and Research Ltd, or Care, and Fitch Ratings India Ltd—are already gearing up for a huge surge in business from valuing REMFs.
Naresh Thakkar, managing director of Icra, said his firm is looking at this opportunity but none of the potential REMF scheme managers has approached it yet. Icra has a real estate developer rating division, which does ratings for real estate companies and projects. This experience would come handy in rating assets purchased by REMF schemes, said Thakkar.
The four credit rating agencies “would have a head start,” said Jai Mavani, head of the real estate division at consulting firm KPMG in India. Others including accounting firms with the expertise to rate such assets could also come into play, he said.
Mutual fund industry executives said the earliest REMF scheme could hit the market is in the next two to three months. However, a lack of clarity in aspects such as paying stamp duty and tax could dent returns.
Transaction costs of a realty asset range from 5-15% because of stamp duties and registration costs, said a KPMG report on the guidelines on REMFs.
“In view of this, partial or complete exemption from stamp duty on purchase or sale of real estate by REMFsmay be considered to reduce acquisition costs and enhance returns to investors,” the report said.
REMFs could be classified as an alternative asset class—“a third class of assets”—apart from equity and debt assets, said Tridip Pathak, chief investment officer of Lotus India Asset Management Co. Pvt. Ltd, a domestic mutual fund.
According to the Sebi guidelines, at least 35% of an REMF’s NAV should be invested in real-estate assets. The balance can be invested in mortgage-backed securities, publicly traded equity of realtors and other securities.
The schemes cannot invest more than 15% of aggregate NAV in a single project or a single unlisted company, and not more than 30% of the NAV of a scheme can be based in a single city.