Widening investor base

Published : Aug 25, 2006 00:00 IST

A HOUSE is usually built or purchased to last a lifetime. However, the idea of building a house to reside in it has been replaced by the motive of "investing" in property to serve a speculative urge. The sharp fall in nominal interest rates for housing loans since the late 1990s acted as a catalyst for this changing perception. The tax breaks on housing loans are an additional incentive. It has resulted in a large segment of the upper middle-class acquiring houses. Speculative excesses are bound to happen in a market which is widely perceived to be opaque. Moreover, the system, open to rampant abuse because of the large-scale deployment of black money, enables excessive speculation. It is not surprising that land prices have escalated sharply in such a situation.

Aiding the euphoria is the common perception that there are no risks in the real estate business. This is not true. How much the value of a property will appreciate depends on several factors. For one, the rate of appreciation of properties, which are already overvalued, will be slower when compared to properties in areas that have not yet been hit by the boom.

Moreover, the extent of appreciation depends on what else is going to come up in the vicinity of the property. New malls and shopping complexes, IT parks and other facilities will cause property values to shoot up.

A leading builder in Chennai said that a large property built by him recently near the IT corridor resulted in a general appreciation in the land prices in the area. The point is that there is no such thing as a general rate of appreciation; the specific factors result in actual appreciation. Herein lies the catch for the "small investor" in real estate. In fact, it is very similar to the share market where the large players have established complete control over the market. The opaque nature of the market makes things even more difficult for the "small investor" in real estate.

The Securities and Exchange Board of India (SEBI) recently laid down guidelines for real estate mutual funds (REMF). The logic appears to be to provide depth to the property market and widen the investor base, possibly enabling the small investor to participate in the highly speculative market.

The Board has prescribed the following investment options: Direct investment in real estate properties within India; mortgage-backed securities; shares /bonds/debentures of listed/unlisted companies, which operate in market for properties; and other securities. The safeguards to investors are similar to those available in other mutual funds. The REMFs will have to declare their net asset value (NAV) on a daily basis and list the funds on the stock exchanges.

A Special Correspondent
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