New Delhi: Amid a sharp fall in India’s real estate stocks on the benchmark Sensex index since their January high, the stock market regulator two weeks ago set rules for trading in real estate mutual funds.
However, the market is not exactly celebrating.
Although the norms say that a minimum 35% of the assets of such funds will have to be in real estate shares, with the rest in mortgage-backed securities and securities of companies dealing in realty stocks, both market players and developers are chafing over valuation procedures.
Market regulator Securities and Exchange Board of India, or Sebi, has directed that each real estate property in a fund has to be valued every 90 days. Valuing realty assets held by real estate mutual funds, or REMFs, every three months will be hard to execute, is fraught with challenges and will add to fund costs, say real estate consultants and property developers.
Valuing such assets would be more of a matter of opinion by the valuer, says Ajit Krishnan, partner of real estate practice at global auditing firm Ernst and Young, or E&Y.
Sebi says the assets will be valued at cost price on the date of acquisition and at “fair price” every 90 days from the day of its purchase. It says an indication of the so-called fair price would be the current price in an active market for similar assets. If this information is not available, valuers will have to look at data from many sources.
It’s a tall order in a market dominated by grey market transactions that enable buyers to avoid stamp duties and capital gains taxes on the purchase and sale of property.
Tall order: A Unitech project in Gurgaon, outside New Delhi. Sebi says the assets will be valued at cost price on the date of acquisition and at “fair price” every 90 days from the day of its purchase. (Madhu Kapparath / Mint)
“In India, we do not (need) a central database on property prices, so the appraiser will not have a base to detect the value of a property,” says Krishnan. “The challenge will be to determine the price at which the property can be sold.” It is difficult to predict sale price as it would depend on future market conditions.
The only official housing price index in India is the National Housing Bank (NHB) Residex launched last year. The index, developed by NHB, the regulator and apex body for home loans, has been introduced as a pilot in Mumbai, Bhopal, New Delhi, Kolkata and Bangalore. “There was talk about the NHB coming out with a price index. If that happens, it will help valuers,” Krishnan says.
Sebi mandates that valuations have to be done by two valuers, and the lower value will be taken to calculate net asset value, or the value of a fund’s investments.
It will not be easy to calculate the value of properties, says Mridul Upreti, joint managing director for capital markets at Jones Lang LaSalle Meghraj, an international property consultancy firm. “It is easy to calculate the NAV (net asset value) for listed shares, as they are traded on the stock exchanges so you know the price of the shares,” he said. “But here, the underlying asset is property. Gathering comparable data of properties is difficult.” Property consultants and developers also feel that the 90-day period is too short and property values might not significantly change during that time.
Realty prices do not change as dynamically as that of stocks, says R. Nagaraju, general manager of corporate planning and strategy at real estate firm Unitech Ltd. “In terms of doing valuation, you can do it on a monthly, quarterly or half-yearly basis. No one is sure what is the right period to do valuation,” he says. Unitech might launch an REMF once the guidelines are clearer.
A real estate asset, says Sebi, includes immovable property including special economic zones. It would not include projects under construction, vacant land, deserted property and land specified for agricultural use.
Valuing an asset every 90 days will certainly add to fund costs, says Sanjay Dutt, joint managing director at property consultancy firm Cushman and Wakefield. “It will add to the cost because professional appraisers will have to be used to value properties, though the cost itself may not be very substantial,” he said.
A few developers, however, feel that Sebi might have been prudent asking properties to be valued every 90 days in India’s overheated and somewhat opaque realty market.
“I think Sebi is trying to play it safe,” says Vipin Aggarwal, executive director at real estate firm Omaxe Ltd. “There is a possibility of overvaluation of assets if it is not valued frequently. Funds could quote a higher NAV without a basis,” he said. “That is the kind of scenario that Sebi wants to avoid.”
Not all developers are complaining.
The 90-day limit will benefit investors, says Pradeep Jain, chairman of Parsvnath Developers Ltd. The “value of assets may not really change in 90 days,” he said. It will not be a fresh valuation of a property every quarter, Jain said. Rather, “it will be more like an upgrade to the valuation done previously.”
According to E&Y’s Krishnan, the appraiser will probably inspect the geographies where the property is located and not the sites themselves. “It will not be a physical valuation of the property site every time.”
In a market such as Singapore, property can be valued instantly as all the information is available online, but in India, because of lack of data, the process of valuing a property will be a challenge, says Jones Lang’s Upreti.
Properties will be typically valued by merchant banking, accounting and consulting firms, all of which would need accreditation by a credit rating agency, Sebi’s guidelines say.
“The short-run challenge is execution,” says Upreti. “The question is: Do we have enough valuers?” In the absence of manpower, getting valuations done every 90 days would be difficult, he says.
Expertise is yet another concern. “Accounting firms have been specializing in valuation. Whether they have real estate expertise is another question,” says Krishnan. “It will take time to build a base of professionals specialized in this area.”