In the absence of real estate investment trusts (Reits) or real estate mutual funds (REMF), what we have in this space is privately sold products, known as real estate private equity (PE) funds, that are not listed on any exchange.
But in the absence of a physical property, will you be comfortable investing in these? While the price of your property may increase the next year itself, investments in a private equity fund may not give any returns in the first two years. And that’s why these are not meant for everybody. These are meant for high networth individuals (HNIs) who want to enter the real estate market but are not willing to go through the regular buying-selling process.
We tell you what these funds are and given the absence of data and regulation in the sector, whether it makes sense to invest in them.
What are these
To start with, let’s differentiate these funds with Reits and REMFs. Reits, a popular form of investment in developed markets, are listed on stock exchanges and are governed by transparent norms. REMFs, on the other hand, own commercial properties and make gains by renting our or selling their holdings; they work like mutual funds and share profits with investors. Both are not available in India at present.
Real estate PE funds are different. These funds invest in real estate projects by tying up with the developer, wherein the developer sells a portion of the project to the fund. Some funds tie up with companies also.
Most funds operating in India have a lock-in period of three to seven years. At the end of this period, the fund exits the holding by selling it in the secondary market. If the investment is in a commercial property, the fund may rent it out within the lock-in period and exit later.
Most funds invest in residential projects and those commercial projects that are nearing completion. While residential projects move faster in the market, there is a rental yield attached to commercial projects. A few funds invest in projects that are still in the initial stages of construction, based on saleability and track record.
Options in the market: There are enough options available. According to data from VCCEdge, the financial research platform of VCCircle, the Indian market has 44 domestic real estate PE funds in total having a collective size of $11,226.8 million (Rs 49,813 crore). Since June 2010, these funds have invested around $717.95 million across the country.
Whom they are meant for
As mentioned earlier, these are primarily meant for HNIs. Though the ticket size has come down a bit, it’s still not for the retail investor. You should have at least Rs 25 lakh to enter this product.
“Buoyed by high returns for earlier exits in the past, fund houses have started offering smaller minimum capital limit for retail investors and not just HNIs,” says Ujwala Rao, head (West India capital markets), Jones Lang LaSalle India (JLL India), a property consultant firm. For example, the minimum investment in a new fund managed by Milestone Capital Advisors Pvt. Ltd is Rs 10 lakh. The fund house has invested in projects in Mumbai, Chennai and Noida, among others.
It is difficult to put a clear number on the returns since real estate PE funds are non-transparent. There is no data to fall back on and returns are not guaranteed.
At the time of investing, the manager will give you an estimated return figure, but that may not be exactly what you get at the end of the lock-in.
In the absence of clear regulation, there is no fixed fee that all funds charge. Usually, there is a one-time entry fee of 2% of the investment amount.
Then there is a performance fee that you have to pay by sharing your profit with the manager; this is usually a predetermined number. This is linked to the fund’s hurdle rate, which is mutually decided before investing. Only if your money gives a return higher than the hurdle rate, then the profit would be shared as decided.
Though domestic real estate PE funds in India are registered with the Securities and Exchange Board of India, there is no clear regulation on the disclosures. So the manager may promise you return but can’t make a commitment. Because of the absence of any definition on the operation of the real estate fund and its structure in India most do not commit or guarantee any fixed returns.
Then there aren’t any regular returns as such. Until the fund sells its holdings, there is no gain to be passed on.