Get diversified country and theme exposure with real estate global funds

Experts say returns from these funds could be slightly lower, but also less volatile, compared to international equity funds

Three funds that invest in global real estate investment trusts (REITs) are available in India now: Kotak International REIT Fund of Fund (FoF), Mahindra Manulife Asia Pacific REITs FoF, and PGIM India Global Select Real Estate Securities FoF. These funds invest the money they gather from Indian investors in a global parent fund, which invests in a variety of REITs, and sometimes also in real estate stocks.  

Low-cost, diversified exposure

Indian retail investors will get the benefit of international diversification through these funds (and hence be protected if there is a downturn in the Indian economy). While the funds from Kotak and Mahindra Manulife are focused more on the Asia-Pacific region, the one from PGIM India is focused more on developed markets, like the US, Japan, Europe, etc.  

Most Indian investors have exposure to real estate through the residential segment. These funds can give them access to a variety of sub-themes within realty. Says Ajit Menon, chief executive officer (CEO), PGIM India Mutual Fund: “Our fund offers exposure to various sub-themes like grade A commercial, self-storage, logistics, last-mile retail, senior living, cold storage, etc. that are either not available in India or are not available at scale as investible securities, compared to global markets.”

Being able to invest in a variety of themes can help these funds manage risks better. “When the pandemic happened, our Singapore-based fund manager moved out of REITs specialising in hospitality, malls, etc and entered those that specialise in medical real estate, data centre, warehousing, etc where activity was expected to be higher,” says Ashutosh Bishnoi, managing director and CEO, Mahindra Manulife Mutual Fund.

Having exposure to global real estate can also help in an environment where inflation is hardening. “The underlying returns come from rental yields and most rental contracts are inflation hedged,” adds Bishnoi.

Investors will also get the benefit of currency depreciation in these funds. The Indian rupee tends to depreciate at the rate of 3-4 per cent annually against hard foreign currencies such as the US dollar.

These funds have also lowered the entry barrier for investors. Investors can get access to a diversified portfolio of REITs with just Rs 5,000. Creating a diversified realty portfolio by investing directly would require a humongous sum.  

Expect some volatility

Real estate assets can be volatile because the returns come from utilisation of capacity, which can fluctuate. ““As economies open up, some types of real estate may gain while others may not. Office REITs may benefit from the reopening but those focused on logistics and warehousing may be impacted negatively as people order less online and resume consumption outdoors,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.    

Investing in a globalised fund can also have a flip side. “Returns may get affected due to problems in those parts of the world where these funds are invested,” says Arnav Pandya, founder, Moneyeduschool.

Being diversified across countries and asset classes will, however, help in both cases.

A sharp rise in the US 10-year bond yield could also affect these funds. This is because buying real estate, which is what REITs do, becomes costlier while rents readjust upward with a lag.  

Global real estate fund or Indian REIT?

Building a diversified portfolio should be the priority for Indian retail investors. Global real estate funds will allow them to do this better. Most Indian REITs, which are anyway very few in number (three listed ones), are focused on two themes primarily—office properties and retail malls.  

Another question is whether to invest in a fund that focuses on the developed world or one that invests in the Asia-Pacific region. “Real estate in developing markets is likely to offer better returns than in the more mature, developed-world countries,” says Pandya.

According to Dhawan, this decision should depend on the investor’s existing international exposure. “If you already have a lot of exposure to developed markets, go for an Asia-Pacific focused fund, and vice-a-versa,” he says.

Build exposure gradually

Since these are growth assets, investors should enter with a 7-10-year horizon. Build up exposure gradually and avoid lump sum investments. These funds may constitute 10 per cent of your portfolio initially.

Finally, remember that you are taking exposure to real estate. “If you compare the return of these funds with those offered by other international funds, which are equity-oriented, you will be dissatisfied. Expect more moderate returns here,” says Pandya. 

 

Taxation of Indian REITs vs global real estate mutual funds

Classification of long- and short-term capital gain

• In case of REITs, units will be classified as long-term capital assets if held for more than 36 months

• Global real estate mutual funds will be treated at par with debt funds; gains will qualify as long-term if units were held for more than 36 months 

 Taxation of capital gains for REITs

• Capital gains on REIT units listed on the stock exchanges on which Securities Transaction Tax can be levied

• Long term: (Sec 112A): Up to Rs 1 lakh is exempt in hands of unitholders. More than Rs 1 lakh taxed @10% + Surcharge, if applicable and 4% Higher Education Cess (HEC).

• Short term: (Sec 111A): Taxed at 15% + surcharge, if applicable and 4% HEC.

Taxation of capital gains on global real estate mutual funds

• Long term: (Sec 112A): Taxed @ 20% (with indexation) + surcharge, if applicable and 4% HEC

• Short term: (Sec 111A): Taxed at slab rate of investor