Realty centric funds remain unaffected of market dynamics

Among the emerging markets in India is the real estate market that has been a vital contributor to the economic growth rate of 8.50 per cent in year 2010-11. The reason is the propensity of Indians to invest in real estate that comes from the traditional consideration of property as an instrument to earn regular income and a safe investment that offers high growth rate and capital appreciation.

Sector wise Investments

Investing in real estate does diversify risk and provides high rate of return but as rewarding as it may sound, real estate remains a risky asset class. Buying property is a long term investment and has low liquidity, suitable for investors with high and moderate risk appetites. It not only involves consideration of the time period for the realization of investor’s financial goals but the rate of return too is dependent on the prevailing market conditions at the time of selling.

An alternative to direct investment in real estate property is the professionally managed real estate private equity (REPE) funds that invest in projects of developers and share profits. The pooled funds are able to acquire more properties than an individual investor can and so are able to provide a diversi?ed portfolio of properties. Though, property returns are mostly stable, they are easily influenced by the ups and downs of the domestic economy, changes in interest rates & the credit markets as well as the global economic trends. However, real estate funds do not get impacted by fluctuations in realty market prices and allow investors an exposure to realty without investing large capital in a project. Investing in a fund also means, no hassles of registration and stamp duty or due diligence on the physical property.

Though, buying a property does offer tax benefits, additional costs such as stamp duty and VAT adds to the purchase cost and the profits are governed by the selling price. Whereas, funds spot opportunities and take advantage of developer’s liquidity crunch to acquire prime projects at discounted rates. Thus, selling price at any point of time would generate profits irrespective of prevailing market prices due to low buying cost. Furthermore, as a fund is managed by professionals with deep market knowledge, the investment carries minimal risk. As per industry experts, some of the reasons for the growing popularity of realty PE are:

  • They provide returns from the real estate market without the risk of locking funds in one property.
  • The funds tie up with developers, buy stakes in their projects and are typically development based.
  • Investor releases investment amount in tranches, as the fund finds new investment opportunities.
  • Potential benefit of annual returns is often in excess of 20%.

In addition, different realty funds concentrate on different regions, cities and ventures. Thus, investors can select a specific fund based on their specific financial goals. Also, investors after studying funds past performance and feasibility of achieving its targets have an option to create a customized high performance, diversified investment portfolio sans the realty market associated risks. However, these funds are typically meant for High Net worth Individuals (HNI’s) and institutional investors, as the entry level is generally high.

A major benefit associated with REPE funds is the safety of investment due to fund participation in number of properties across locations instead of a single project, diversifying both location and developer risk. Another advantage is the fund’s strategic partnership with project developers that ensures timely exit. In fact, residential sector has been the most lucrative investment asset class for funds as it is not governed by global factors. Also, as the liquidation of residential projects happens through sale of individual units to end users, it does not depend on institutional buyers for exit. Thus, these projects offer investors low risk and quick exit investment option.

ArthVeda Fund Management Pvt Ltd (AVFM) products are also real estate centric funds that focus on identifying “pockets of inefficiencies” with significantly reduced risk and high margin of safety. This is achieved through knowing the ground realities of project locations, by market research, close interactions with the developers, lawyers as also the end users. Using the r data, the fund shortlists cities where the supply was not met or/and the market price was lower than the economic value, thereby significantly opening up the possibility of appreciation in prices when adequate supply comes into the market.

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