Personal Finance

Homing in on the PE route

Rubi Arya | Updated on January 24, 2018 Published on February 08, 2015

Marc Dietrich/

The super-rich can diversify their risks by investing in multiple residential properties

With the economic situation for real estate and infrastructure development in India being relatively volatile, developers may find it tough to launch and deliver quality projects within stipulated time frames. Some are faced with liquidity crunch while others are barely managing to stay afloat.

The Government is assisting the industry by introducing schemes such as REITs and InVITS and has also eased FDI norms in real estate.

There is immense potential for both commercial and residential real estate in India for the next five-eight years due to a few factors. Initiatives such as ‘Make in India’ and the recent positive developments at the World Economic Forum in Davos will bring in huge investments into India.

This will create more jobs and increase the demand for commercial and residential spaces. Industry estimates reveal that India is going to see a massive spurt in international IT presence over the next two years. In fact, MNCs and investors are discussing the potential for purchasing rather than leasing real estate assets.

With traditional bank financing for real estate being hard to come by, the most likely vehicle to sustain and develop this space are private equity (PE) funds. A PE fund works in a similar fashion to a mutual fund, wherein a fund house raises money from a pool of investors and the fund manager uses his expertise to invest the money across different assets. The main difference between the two is the minimum investment size.

Avoiding hassles

A PE investment is a minimum of ₹1 crore, and comes in various structures, such as debt (timely interest payouts to investors), equity (purchase of physical apartments, appreciation benefit is passed on the investor) and hybrid (mixture of debt and equity) structures. The PE form of investment is primarily suited for high net worth individuals (HNIs) and usually has a fixed lock-in period. Investors can either invest directly in real estate or via a PE fund route.

Traditionally, physical real estate such as apartments, office spaces and land require substantial amount of time and capital. Moreover, various prerequisites such as due diligence, legal and government fees and duties, make this process cumbersome.

The PE route gives the investor an opportunity to park money across multiple residential properties and earn a healthy return within a relatively short period of time. This enables the investors to avoid the hassles of direct dealings with brokers and incurring legal costs.

Moreover, it allows an investor to diversify his risk by investing across different geographies, something which would otherwise be extremely cumbersome given the different state laws, incremental costs, lack of adequate information and processes involved.

According to the current AIF guidelines for PE funds, for an investment as low as ₹1 crore, an investor can participate in a real estate PE fund which typically invests in five-six assets across the country. Each of the investments is independent of each other and is structured under different terms and conditions.

Good potential

A recent study by research agency CRISIL states that there are certain micro markets within the cities of Mumbai, NCR, Pune, Chennai and Bengaluru that are poised to grow significantly owing to factors such as introduction of metro rail services, road and infrastructure development and availability of land parcels for commercial development. These factors will push up the demand for mid-segment residential housing in and around these localities. Buyers need to carefully study the location to assess the demand-supply situation and proximity to public transport. Most importantly, the project needs to be affordable to the common man which will motivate him to purchase his own house rather than stay on rent. An investment today in a residential property in these select micro markets will garner healthy returns within the next four-five years, with potential for further upswing in prices.

It is expected that PE fund houses will introduce a gamut of products. Investors must exercise caution while parking their money and only choose a fund that has demonstrated a favourable track record in structuring similar transactions.

The writer is Vice-Chairperson and Director, Milestone Capital Advisors

Published on February 08, 2015
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