PGIM India rolls out a global real estate fund of funds: Should you invest?

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© Venkatasubramanian K PGIM India rolls out a global real estate fund of funds: Should you invest?

PGIM India Mutual Fund (PGIM MF) has rolled out a Global Select Real Estate Securities Fund of Fund (PGIMRFoF). The FoF will invest in the units of PGIM Global Select Real Estate Securities Fund (PGIMRS), which in turn deploys sums in real estate investment trusts (REITs) in different parts of the world.

What is the scheme about?

PGIMRFoF is a fund of fund that will feed into PGIMRS, which is managed by PGIM India MF’s sister concern – PGIM Real Estate. The underlying fund has invested in various REITs across different parts of the world, but largely in developed markets.

The PGIMRFoF will hold 95-100 percent investments in PGIMRS to mimic the returns of the underlying fund.

What works

There are three REITs already listed on the domestic stock exchanges: Embassy Office Park REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust. However, these REITs are India-focused and largely invest in office real estate for a steady rental income.

A mutual fund REIT gives investors exposure to a diversified portfolio of REITs. Through PGIMRFoF, investors will get exposure to REITs that hold real estate investments in personal storage business, senior living, data centres, apart from sectors such as residential, industrial, hospitality, healthcare, retail and office spaces.

The fund’s REIT exposure is also geographically diversified across 12 countries. These include the United States (59.2 percent), Japan (12.4 percent), United Kingdom (6.1 percent), Australia (4.6 percent), Hong Kong (3.8 percent), Belgium (3.1 percent), Canada (2.9 percent) and others.

“Investing in real estate requires assessing the value of property on the ground, as unlike equity, the information is not so easily available. This is where our private market expertise comes in,” says Rick Romano, managing director of PGIM Real Estate, which is the fourth-largest real estate asset manager in the world (with assets of $194 billion worldwide) and the second-largest in the US.

Since inception, PGIMRS has given compounded annual returns of 7 percent in dollar terms.

Romano points out that after benefitting from the pent up demand for leisure travel coming back, Hotel REITs could now benefit from work travel as conferences and other work-related activities pick up.

He adds that the post-COVID, pent up demand for elderly care facilities is also coming back.

“The historical returns of the fund look reasonable for a real estate-backed investment. However, real estate markets in different geographies will have their own variables,” says Anubhav Srivastava, partner and fund manager at Infinity Alternatives.

Says Kirtan Shah, co-founder and chief executive officer at SRE Wealth, “Through REITs, investors get diversification to an asset class, which has a low correlation with equities.”

If rupee depreciates against the dollar, it will add to the scheme’s returns.

What doesn’t

As the fund has a large exposure to US real estate, it could get impacted if the US economy goes through a challenging period.

Ajit Menon, CEO of PGIM India MF, points out that the higher exposure to US and other developed markets have arisen in the fund as well in the benchmark, as the REIT markets are much more evolved in those geographies.

“The fund has not invested in China, where there are a lot more challenges in accessing information,” Menon says.

PGIMRS is benchmarked against FTSE EPRA Nareit Developed Index, which is a global real estate index.

Financial planners say that investors should look at REIT FoFs as investments as those between debt and equity.

“It can fetch slightly higher returns than debt instruments, but at the same time it can be slightly more volatile than debt as REITs are listed and actively traded on the global stock exchanges,” says Shah.

The FoF will be taxed as a debt fund for taxation. So, short-term capital gains booked before three years will be added to investors’ income and taxed at their slab rates. After three years of holding, long-term capital gains tax will be levied at 20 percent with the indexation benefit (adjusting for inflation).

Moneycontrol’s take

REITs are good alternatives to your investment portfolio beyond equity and debt. A portfolio of REITs that has sector as well as geographical diversification is healthy. While PGIM’s global real estate expertise and the underlying fund’s track-record do lend comfort, the fund will be more suitable for savvy investors with deeper understanding of the real estate market. The NFO is open till November 29, 2021.

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