Real Estate Fund – A smart investment option

Real Estate Fund
- A smart investment option
By Ramesh Jogani,
CEO, Indiareit consultancy Services Private Limited, (A Piramal Enterprise)

To have your cake and eat it too! Real Estate makes it possible for you. Real Estate offers an alternate asset class, which gives you, returns comparable to equity with a substantially marked down risk of an instrument backed by collateral/ asset based security.
With the India story on firm grounds promising a robust 8% growth on a decadal basis, real estate is northbound in terms of growth. Backbone for all economic activity, it rides on growth across sectors without being dependent overtly on any one sector for its growth.
Increasing urbanization which is likely to encompass two out of every five Indians, a marked shift in lifestyle from necessity to comfort and luxury as the primary drivers of spending, growth in the services sector contributing to affluent middle class in India, conducive fiscal regime ensuring economical home loans with commensurate tax breaks for the end users, in turn allowing an individual to own a house even at the age of 27 today is sure to provide the required impetus to this sector. By virtue of the inherent need for ownership in an increasingly affluent society real estate will see an exponential growth in this decade.
Increased impetus on infrastructure development across the country, innovative growth models like Special Economic Zones, impetus on logistics infrastructure to boost local industry with private sector and FDI participations will only add to the glitter of the real estate sector
With real estate funds willing to partner with high net worth individuals to create capital than the more traditional institutional funding route, this segment opens attractive investment avenues for a suave investor.
Real Estate investments that are traditionally driven by individual initiatives are now being packaged as a standard financial product by realty funds. No more botherations to fix bathrooms in leased out flats; no more fears of encroachment on lands, all you will possess now is a “statement of accounts” with no maintenance to maximize value.
By virtue of providing an organized and sustained source of funds with relevant sectoral expertise to a hitherto unorganized market in India, funds will captain the growth of real estate industry in its lifecycle to maturity, from the present stage of infancy.
Any individual who would have dabbled with real estate would vouch for the inconvenience of title search of land. He would have certainly come across unscrupulous developers who seldom deliver even after being paid. Such situations get addressed with a real estate fund at the helm, as they join hands with developers of repute with a clear track record ascertained by stringent due diligence.
Funds go a step ahead in making developers out of investors. As a fund, the investments in any project are at infancy & early stage of the project since the fund invests and collaborates with developers/land owners from inception to completion. This ensures that the average returns in real estate development are at par with the returns that a developer would earn, which can be attractive on an annuliased basis.
Funds come with an inherent understanding of the business which helps them to identify sectoral gaps in the broader real estate development of any city. This results in more focussed deployment avenues which on one hand maximise returns for investors and on the other hand help in the holistic development of cities.
The downside in these transactions is also minimised on account of entry at land stage which iteself has inherent value equivalent to the investment without discouting future earning potential. Further, a typical investment by a fund offers the potential for staggered investments at land acquisition stage of the project and leveraging at the cosntruciton phase. The net impact of staggered payments and leveraging is a substantially lower equity infusion in projects and hence a resultant higher retrun on equity for the funds and hence for its investors. And all this, without any speculations on future prices.
Further, given the spread of investments made possible with the higher investment corpus created from a pool of investors, the fund capitalizes on both the early mover advantage across various geographies and segments as well as reaps the benefits of economies of scale in the implementation/ construction stage of its various investments/ projects. The added benefits of hand holding real estate companies to reach as size suitable for listing provides a huge windfall in the stock markets to enhance the earnings from the business itself is a virtue that comes with investments through real estate funds.
Real Estate is a versatile investment instrument where one can expect capital appreciation in the medium to long term coupled with the potential to earn sustained dividend yields on a sustainable basis.
In essence, real estate venture capital funds help reduce the risk profile of real estate investments by offering diversified investment portfolio managed by experienced fund managers thereby providing dual benefits of a defensive investment alternative compared to direct real estate investments and a hedge mechanism to equity market exposures by offering an alternative asset class with a similar return profile
Critical however, is the choice of the right fund to invest in. Track record of the promoter group is of paramount importance since corporate governance and transparency play a major role in ascertiaing investor confidence. The profile of the team spearheading the fund is also a crucial factor since they bring the understanding and experience to ensure identification of right investment opprtunities and monitoring of the investments to maximise returns for the investors. Transparency in the fund strcuture is also an important yardstick of the commitment of the fund to the investor. A simple, transparent and result oriented structure which believes in rewarding the investors before the trigger of profit share is an ideal measure of the intent of the fund looking at a long term partership with its investors.
About the INDIAREIT FUND
The INDIAREIT Fund is a boutique real estate venture capital fund, promoted by Piramal Enterprise. The fund is registered under the SEBI (venture Capital Funds) Regulations and has INDAIREIT Fund Advisors Pvt. Ltd., as its investment advisors. INDIAREIT will invest at enterprise levels of primarily real estate development companies.
About PIRAMAL Enterprise
Piramal Enterprises is a diversified INR 3000 Crore Group with global footprints. The group companies like Nicholas Piramal India Ltd. & Gujarat Glass Ltd., are market leaders in their respective segments.
Posted on 23rd August 2006