ICICI Pru launches real estate fund

In a first-of-its kind real estate mutual fund in India, ICICI Prudential Mutual Fund has launched its real estate securities fund.

The fund will invest 51% of the portfolio in high yielding debt securities issued by companies associated with the real estate sector. The scheme will not be directly owning or holding real estate properties. It will invest up to 49% in equity of companies engaged in industries that benefit from the real estate sector or have substantial investments in property.

Debt securities issued by real estate companies have relatively lower liquidity. To manage this risk, the fund has been designed as a three-year, closed-ended fund, which will invest in real estate and oriented sectors like cement, construction, metals, hotels, retail, banks and finance companies.

The new fund offer is open for subscription till 14 December, 2007.

Speaking at the launch, Nimesh Shah, managing director, ICICI Prudential AMC, said: "The Indian real estate sector is growing rapidly, and is expected to register a growth rate of over 30% per annum in the next five years.It is the second largest employer - next only to agriculture and has significant linkages with several other sectors and industries of the economy."

According to National Housing Bank, India is going to have a shortage of over 20 million housing units and an incremental demands of 8-10 million per annum.In the retail space, India will need an investment of $25 billion to meet the growing demand for malls and multiplexes by 2010.

There are credit risks associated with the fund as the credit rating of real estate companies is generally lower compared with similar-sized companies in other sectors with similar growth rates.This happens because rating assigned to an issue is based on its ability to make timely payments rather than ultimate payments. Since the time cycle of completing a development project involves a lot of time, the long chain of actions implies a potential delay in completing the project and consequent possibility of delayed payment.