Over the past 12-18 months, HNI investors have been
slowly returning to real estate as an investment option, according to private
wealth managers. However, given how they burnt their fingers back in 2008, this
time around, the investors are more interested in lending to developers rather
than buying equity.
More structured debt now
Abhijit Bhave, CEO, Karvy Private Wealth, said he’s
observing a selective return of rich individual and institutional investors to
this asset class. “But now, the investment is increasingly coming in through
rental yield funds. Earlier, around 2007 for instance, investors bought pure
equity in real estate projects or created a special purpose vehicle for these
investments. Now, it’s more structured debt with an equity kicker involved,” he
added.
“To put it in layman’s language,” Bhave explained, “a
private equity fund may lend money to a builder at say 18-20 per cent interest.
That’s the debt component.
“Then, if the plan was to sell, say 100 apartments
at ₹20,000
a sq. ft. and he ends up selling them at ₹30,000 a sq. ft., the fund earns a part of this profit
as well — that’s the equity kicker.”
A recent report by global real estate consultancy
Cushman & Wakefield found that inflows in the sector increased 40 per cent
in the first quarter of 2016 at ₹3,840 crore, with both the total number of deals and
average deal sizes rising year-on-year.
Karvy’s India Wealth Report 2015 said total assets
under real estate funds were estimated to be ₹10,976 crore in FY15. Of this, individual contribution
was expected to be ₹3,622
crore, about 8 per cent on a rich individual investor’s investible surplus.
In the new arrangement, Bhave added, even when real
estate is doing badly, the lender makes money, since “a rental yield fund is
more an indirect financial investment in real estate.
“Though the asset class is primarily real estate, it’s
debt exposure. The true blue real estate funds of the past are not back yet.”
Ashish Bhalla, Senior Vice-President and Business
Head, Arthveda Fund Management, which focuses on affordable housing for middle-
and low-income groups, said real estate is increasingly becoming an HNI game,
with the minimum investment at ₹1 crore.
“We’ve been able to deliver 30 per cent CAGR in the
last three years. We see the market picking up further as the first REITs are
introduced.” Real Estate Investment Trusts are structured as capital market
instruments, where an investor can buy a unit in a listed real estate project
the same way he buys a share on a stock exchange.
Finding tenants, a big issue
“The biggest risk with a rental yield fund is that the
asset might not find tenants,” Bhave concluded.
“But real estate investors say the market bottom is
behind us, and in three to four years, we will see an upturn in the market
again. With a rental yield fund, investors get a return of anywhere between 8
and 12 per cent, but that depends on location and your luck.”
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