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.
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