Traditionally Indian individuals have been buying properties – both residential as well as commercial, for capital appreciation and regular income through rentals. However, over time the manner in which investors look at this sector has changed and many new investment options in real estate have been made available. Over last ten years, it has been found that many high networth individuals got into the investment cum trading activity in property. The modus operandi was to buy flat when the builder offers some flats in pre-launch stage at a steep discount. The builder used to get some money upfront and in exchange was willing to offer some freedom to these buyers along with the steep discount. The buyers could choose to register the property in their name and hold on to it till the project is completed or just sell it off when it was under construction and book quick gains. But both these options came with pains such as negotiating with builders, identifying potential buyers, legal hassles and tax-inefficiencies. To make life easier the private equity funds entered the real estate scenario and emerged as game changer. Investing through a pooled vehicle not only allowed the investors to participate in much larger project deals but also relieved them of the aforesaid stress that came with direct investing. Second largest employer in Indian economy – the real estate sector, this year received over 8% of FDI money. This indicates the attractiveness and potential of this sector from investment point of view. Post opening of this sector to FDI, more real estate funds have been set up to invest in this sector. These funds raise money from investors, NRIs, Institutions including domestic and international investors and invest in both debt and equity. The investor investing through funds enjoys the benefit of asset diversification , geographical diversification and developer diversification by investing through the funds, allowing for spreading risk across projects and in turn maximizes returns on exit. For example, one may end up spending one crore rupees on a flat in Mumbai, whereas with a one crore investment in a real estate focused private equity fund he will be owning a bouquet of five or six investments spread across geographical markets. In the former he is exposed to the risk of a particular property doing good whereas the later offers some comfort by distributing the risk. These funds usually invests large amount in the project therefore has the power of collective negotiations; it enters at lower points and exits with much higher returns. The fund lends by the way of structured debt and securing its exits route, by taking into account capital preservation, high returns and moderate risk. Funds supported by their experienced technical and legal teams take care of due diligence followed by active & effective management team which makes the fund house more involved in each and every transaction thereby improving performance of the fund. Residential markets are expected to be flattish in next 2-3 years. An individual investor buying a residential property might not see much price appreciation as witnessed earlier. Returns on investing directly totally depends on rise in property prices at that point of time, wherein investing through a fund house will be profitable for investors, as the fund house directly invests into the balance sheet of a project and are not directly linked to the increase in the property prices. Overhead costs are quite lower if the investor is investing through fund as compared to direct investing, thus incurring expenses towards registration, stamp duty, legal expense, travel expense, other miscellaneous costs etc For example: Mr. Shah invests directly in real estate and buys a flat from the builder. He incurs costs such as – registration fees, stamp duty, society fees, legal / due diligence fees, travel cost, physically present in the entire deal. After 4 years, he revisits the property, plans to sell the flat. During that time, the market has remained flat; the valuation is almost the same and finally sells at his purchase price. His only earning possibly from the flat was the rental for 4 years that too was set off against the cost which he incurred during the purchase and sale of flat. Given rising cost of inflation, Mr. Shah would not have earned a much as expected in last 4 years by investing in a flat directly. Alternately, Mr. Prabhu invests in a real estate fund. He enjoys regular income from interest payments and continues till the entire life cycle of the fund, when the life of the fund comes to an end, the fund provides an exit after adjusting for capital appreciations if any. Studying both scenarios, Mr. Prabhu has not only preserved his capital but also earned a healthy return followed by lower overhead cost and minimum risk as compared to Mr. Shah who has not made such returns during the same period. A fund participates in the profit sharing with developer rather than banking completely on the future price increase. Therefore in scenarios of no price increase, indirect investing shall be able to deliver superior returns than direct investing.
[Source:- Money Control]