The row over land acquisition in Greater Noida, which affected at least 30,000 home buyers, left investors in a quandary. How can one invest in property and earn a good return without getting caught in a situation where one risks losing the entire money? Real estate private equity (PE) funds may be the answer.
Realty PE funds generate returns from the real estate market without the risk of locking funds in one property. They tie up with developers which need funds and buy stakes in their projects.
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"Realty PE funds are typically development-based and buy stakes in projects. Rental-based funds buy a property with a committed tenant and earn the rent. One key difference is that the rental-based funds do not take any development risk," says Richa Karpe, director (investment), Altamount Capital Management, which helps many families manage their wealth.
There were 89 active realty PE funds in India between 2008 and 2011, according to Venture Intelligence, a research service focused on PE and mergers and acquisitions. Tata Realty and Infrastructure, Indiareit Fund Advisors, HDFC Real Estate Fund, ICICI Venture, ASK Property Investment Advisors and Kotak Realty Fund are some of the funds through which you can invest in domestic and overseas properties.
Investing directly allows you to own a property, but it also requires more effort. You have to first identify a location and a property with growth potential and do the due diligence. You then have to go through the paper work and get the property registered. Then you have to find a tenant if you want to earn a regular income. If your goal is capital appreciation, you have to find a buyer once the price crosses your target.
In a PE fund, you just have to put in the money. The rest is taken care of by the fund. It also allows you to participate in the realty market with an investment of as low as Rs 5 lakh. It spreads the risk by investing in projects across locations.
"Realty PEs help investors benefit from the expertise of the fund manager," says V. Hari Krishna, director, Kotak Realty Fund.
Unlike direct buying, where an investment can appreciate significantly within a year, your realty PE portfolio will appreciate only after 2-3 years. Realty PE funds typically have a tenure of 5-8 years. Some PE players fund only last-stage liquidity gaps. The tenure of such funds is shorter than that of the development-based funds. Rental-based funds also have a shorter tenure.
"The investment period is usually three years during which the investment commitment can't be changed. Thereafter, an exit is possible," says Krishna. PE funds do not take all your money at one go but ask you to release the amount in tranches as they find new investment opportunities. At the end of the tenure, the funds sell their investments in the secondary market and return the money to the investors.
Realty PE funds generate returns from the real estate market without the risk of locking funds in one property.
As an investment in a PE fund is a private contract between the fund and the investor, the funds do not disclose their valuations and returns generated by their investments. Maintaining secrecy about investments is crucial because the funds will lose their edge if this critical information is known to the general public and their competitors.
The returns from realty PE funds depend on the performance of the broader real estate market. "Given the relatively higher risk and lower liquidity, investors are justified in expecting an annualised return of at least 20% over the life of the fund," says Karpe.
The funds charge a management fee, usually 2% of the investment. Investors might also have to pay a one-time set-up fee. These funds have a hurdle rate, the minimum return beyond which they take a share of the profits. They usually take 20% of returns in excess of the 10% hurdle rate. "After adjusting for fees and taxes, investors can expect an 11-15% return on an annualised basis," adds Krishna.
Kotak Realty Fund, which started in May 2005, says it has generated returns in excess of 30% on its exits so far. ICICI Venture also has a realty PE fund, which raised $550 million (around Rs 2,500 crore) in 2005-06. It refused to disclose its current valuation or returns.
Realty PEs are not very liquid, but an investor can sell his portfolio to another buyer. "An investor looking to sell may not always manage to find a buyer. Even if he does, the offer can be at a huge discount to the market value," says Karpe.
When investing, it is important to pick the right fund. You must check the fund's reputation along with its parentage. Try to learn about the fund management team. You can also look at the performance of the past funds. Before investing in a PE fund, you should be fully aware of the fund mandate and objective.MISSING LINK
Real estate investment trusts (Reits) and real estate mutual funds are two other ways of investing in property. Reits are stock exchange-listed investment vehicles, which invest in properties for rental income, provide loans for properties or buy existing mortgages for interest income.
"India still does not approve the REIT structure, which demands that most of the appreciation be returned to the investors on a regular basis, though rental-based funds come fairly close to it," says Karpe.
Realty mutual funds own properties and generate revenue by renting or selling their holdings. These are also not available in India.