Realty funds offering innovative investment avenues
Pradeep was ecstatic. He had just received a larger than expected year-end bonus. After a vacation to Shimla with family, he was now wondering how to invest the remaining amount productively for the future.
He considered buying a flat in Mumbai, using the bonus as down payment and taking a loan for the remaining amount. Though he would get a tax benefit on interest repayment, prevailing high rates worried him. He was not sure about finding the right property with a good rate. He was told that yields on commercial property were better than those on residential, but the ticket size was higher.
The likes of Pradeep can take heart as there are now useful vehicles in the form of Real Estate VC funds and Real Estate PMS. They address precisely the problems mentioned above. For a fee (typically 2% annually), they take money from investors and invest in a set of realty projects. They take a share of profits from investments (subject to customer getting a minimum return).
Such funds have been recently floated by trusted institutions like HDFC and Piramals. Typically, the minimum investible amount in such a trust or PMS is Rs 25 lakh or Rs 50 lakh, depending on the scheme. But only 15-20% of this needs to be committed upfront Rs 10 lakh. The balance is called by them over the next 2-3 years.
The pattern of payment gels well with the annual bonus. The lock-in period varies from four to seven years. They invest in a mix of equity and debt instruments in residential and commercial properties, typically spread across cities to diversify risk.
Such investment vehicles enjoy significant advantages compared with investing directly. Most such trusts manage over Rs 1,000 crore of funds. Thus, their research and transactions costs are far lower than what an individual property buyer can get. They conduct a thorough research on the developer’s background and experience in construction projects before they decide to partner with him.
In contrast, individual investors are often stuck with bad developers who do not complete construction in time or hand them badly-constructed properties. Since they accumulate a significant corpus, they negotiate and partner with developers at the construction stage itself, often taking the board seats on the developer’s Board. This gives them much better control over the construction project than a retail investor could hope to have.
They spread the corpus across several projects across cities, types and developers. Thus, there is significant diversification of risk. For a retail investor, his cost of purchase already has the developer profit built in. But the VC fund or PMS takes equity stake in the developer and shares that profit.
With minimum commitment being reduced to Rs 25 lakh on some of these funds, they are now attractive investment avenues not only for HNIs, but for the middle class as well.
By latching on to such innovations early, the middle class and HNI alike can ride the real estate boom in a relatively safe and convenient way.
An average retail investor would find it difficult to manage liquidity. Finding a buyer often takes time and significant expense. These issues are taken care of by these investment vehicles.
The annual costs of 2% for fund management may be considered fair and comparable with such structures the world over. Most of such VC funds or PMS today are giving indicative yields of 20% per year. Of course, if the boom in the real estate sector continues, the returns could be even higher.
The only negative here is that the tax benefit on home loans is not available for these instruments. In any case, at current interest rates, loans may not look attractive.
Overall, with reduction of minimum commitment to Rs 25 lakh on some of these funds in recent months, (which means upfront payment of as low as Rs 5 lakh in some cases) they have become attractive investment avenues not only for High Net-Worth Individuals (HNI), but for the middle class as well. By latching on to such innovations early, the middle class and HNI alike can ride the real estate boom in a relatively safe and convenient way.
The author is the director of PARK Financial Advisors.