Launched in December 2007, ING Global Real Estate fund is an open-ended fund of funds that proposes to invest in global properties in 21 countries. This fund is benchmarked against the Citigroup World Property Index.
It mopped up around Rs 218 crore (Rs 2.18 billion) in the new fund offering (NFO). Its net asset value (NAV), as on February 28, stands at 10.06. Globally the ING group is the world's largest real estate investment manager with assets under management (AUM) being close to US$145 billion.
Real estate, as an asset class, has already provided phenomenal returns in the last few years, but now the going looks tough. The logic of investing in global real estate is to have an investment avenue that is insulated from the Indian equities or bonds market.
Being a fund of funds, ING Global Real Estate does not invest directly in properties. This investment model allows it to put money in real estate investment trusts (REITs) and real estate operating companies (ROCEs).
These are entities which build, own and operate real estate properties such as apartments, shopping centres, hotels, malls, health care facilities and others.
The primary incomes of REITs come from rentals and deposits from the owned properties. To qualify as a REIT, a company has to compulsorily distribute 90 per cent of the income as dividends and they enjoy tax benefits against that.
REOCs, on the other hand, earn their incomes from rentals and deposits, as well as from sale of properties. The option to distribute dividends is voluntary.
Another question which dogs an investor while investing in a fund of this type, is the risk of exposure to currency fluctuations. The fund counters this by claiming that it invests in different securities in local currencies.
Therefore, when the US dollar weakens, some other currency like the Japanese yen or the Australian dollar may appreciate against it. This evens out the fluctuations to a great extent.
The outlook on property in the US and Continental Europe is grim for the next couple of years. However, property markets in the Asia Pacific region, Hong Kong, China, Australia and Singapore are supposed to fare better.
If the international real estate market slumps further it might be an opportune time to get into this fund. Rental incomes will also provide stable cash flows for the fund to earn a reasonable return.
If a retail investor wants to get into the international property bandwagon and wants liquidity too this fund is a good option. However, look at it as a pure diversification play, with returns expected to beat fixed income and lower volatility than equities.
As far as tax component goes, this fund of funds is treated like a debt fund and taxed accordingly. As per current tax laws, long-term capital gains will have the benefit of indexation and taxed at 20 per cent plus surcharge. The short-term capital gains will be added to the total income of the investor and taxed according to the income bracket.
The writer is head, mutual funds, Derivium Capital and Securities.