Real estate funds, floated as private equity vehicles, offer an alternative to buying property. But what factors must you consider before deciding whether you should buy a property or invest in a fund? And how conducive is the current real estate market for private equity investment? These are some of the questions that Amit Bhagat, MD and CEO, ASK Property Investment Managers, takes in an interview with Business Line. ASK Property Investment Managers recently closed its second real estate fund, raising a corpus of Rs 1,000 crore to be deployed in mid-income housing in the top five cities.

Excerpts from the interview:

There are tax benefits to buying a property but not with investing in real estate funds. What comparison should investors make while deciding between these?

In case you are buying a house for self use there is no need for a comparison (buying property is better). You will also enjoy tax benefits. You have to compare a private equity investment to a second or third home purchase.

Buying a second or third house will typically be a leveraged investment but there is no leverage available for your investment in a private equity fund. So these products are meant for people who have already bought one or two houses and are not interested in leveraging but in investing.

Secondly, when you buy a house you are buying an end-product and also pay stamp duty and VAT which totals to about 10 per cent. So your cost is going to be say Rs 5,500 a sq ft. If you want your money to double in say three years, your property price has to grow to Rs 11,000 sq ft in that period.

Whereas, when we, as a private equity fund, go and buy, we purchase land at Rs 1,500 a sq ft. This together with the construction cost of say Rs 2,000 a sq ft is funded by the customer.

So of the selling price of Rs 5,000, Rs 1,500 which is the profit for a developer, is what we deliver to you, because of our bargaining capacity and because you are partners in a project with us.

We are not relying on the market prices to go up.

So if you look at the comparison in markets such as the present one, where prices are stable and not rallying much, a safer strategy is to go with the fund if you have acquired your first house for self use. Also, if you have given your money to the developer, you cannot manage the risk of delay, whereas we monitor the same as private equity investors.

As a strategy have you increased the minimum ticket size for investment?

We have Rs 1 crore as the minimum ticket size for our funds, although we are allowed to accept Rs 25 lakh. We were anticipating the guidelines on alternative investment funds where Rs 1 crore is the norm. So we thought it would be more prudent for us to focus on this segment.

How long will you take to deploy the Rs 1,000-crore collected from this fund?

We have already committed 20 per cent and another 20 per cent is in the pipeline for deployment. We will take another 24 months to deploy the rest.

The return of 25 per cent or so that you target seems rather high in the current scenario…

Today a developer borrows from banks at 14 per cent and from NBFCs at 18-21 per cent. The principal risk in both these cases remains with the developer as this is not an equity investment where he can pass on risks. Banks charge the above rates although they do not lend money for buying land and NBFCs charge much higher because they can lend funds for buying land. To take on much more – that is the entire risk that comes with the project - we need this kind of equity returns.

We hear that private equity funds have problems exiting projects. Will this affect investors in such funds?

Investors may not lose money. But because the investment strategy of a fund may not cover the risks associated with private equity investments, there are chances that your return is delayed. And once return is delayed, you lose out on the time value of money. So your returns can be inferior. But there are some encouraging signs from investors. An investor who was willing to experiment with this product with any player has now taken a conscious decision to invest only in funds with a track record of good execution and record of giving money back to investors.

Your Real Estate Opportunities fund seeks exposure in markets such as Mumbai and the National Capital Region where pricing pressure and weak demand is visible now. What is going to be your strategy in these markets?

The problem lies in Delhi and in South and Central Mumbai. In any case they are not part of our investment strategy. The opportunities lie in Noida and Gurgaon. In Noida and Gurgaon, if you look at our price points of Rs 4,000-6,000 a sq ft, enough opportunities are available. Similarly, if you are in Mumbai, it is a financial capital and not a knowledge hub. The price points here are Rs 8,000-12,000 a sq ft. Now, the expertise of a private equity investor lies in identifying the right price points in the micro market.

Equally important is the partnership with the developer. Is the developer the best in the market and does he enjoy a premium? Does he have good execution capabilities, track record and a 40 per cent repeat/reference customer base? At the end of the day, the developer’s ability to sell will determine whether a private equity investor’s returns will be superior to others or not.

ASK appears to generally prefer top tier or the next level of cities? Is it because you find smaller cities too risky to venture?

That is purely because the job creation story in the country continues to be 90 per cent focussed on top seven cities. The smaller cities such as Nagpur, Mysore or Jaipur, for example, are more investor-driven than user-driven and the supply is more than the demand. In smaller cities, in a downturn, you may face a problem of absorption as investor interest will take a backseat.

So in the current volatile environment it is best to stick to the job creation story and have an entry price which is critical for absorption.

Today there is countercyclical opportunity in large cities. How many developers are buying land today in these cities given their high leverage? So if there is new opportunity of land coming up in these micro markets there are not too many buyers. This countercyclical opportunity helps us identify the right projects.

> vidya@thehindu.co.in

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