PE Funds the preferred investment option for HNI

Domestic private equity funds in the real estate space are emerging as a preferred investment option for high net-worth individuals and family offices in the country. Over the last few years, money from institutional investors that was part of such funds has dried up. Banks have been directed by the central bank to reduce their exposure to real estate. “In such a scenario, HNIs are investing with fund houses as these offer better yield to the investors,” says Sandeep Kotak , executive vice president and business head for commercial real estate at Kotak Mahindra Bank . As a portfolio, capital market offers an 8% return while HNIs can get a return of 18-22% from domestic funds investing in real estate. In the last one-year a number of players including Ask Investment Advisors, Kotak Realty Fund, Milestone Capital Advisors and Aditya Birla Real Estate Fund have raised domestic private equity funds from HNIs. ICICI Venture and Indiareit have announced that they will raise money from HNIs.
For HNI’s investing in a fund is an opportunity to diversify both location and developer risk and participate in real estate across the country. “This has emerged as an alternative investment class,” says Sutapa Banerjee , chief executive officer, private wealth at Ambit Capital . For an HNI, investing in a fund means he is investing in a basket of properties, he does not have to do a due diligence on the physical property and is free of all hassles of registration and stamp duty, she adds. The only due diligence that is required is which fund to invest in-one that invests for capital appreciation, for rental yield, where one gets a steady return or one that invests in part completed projects where the payback period is shorter. “Investing in real estate in India still requires thorough due diligence which an institutional fund manager can do better,” says Sanjeev Dasgupta , president, real estate at ICICI Venture, which is raising a Rs 1,000 crore domestic fund. Apart from the due diligence, a fund manager would also offer tax efficient deal structuring.
“A fund does not invest in a property for the price increase. It will access the development margins at today’s price,” says Sunil Rohokale , executive director, Ask Investment Advisors, which has raised two domestic realty funds (Rs 520 crore and Rs 480 crore) in the last few months from HNIs. HNIs of course need to be careful about which fund they are getting into and their past track record. Not many of the funds in the country have shown returns yet. “We offer this product to clients who understand that there is relatively higher risk in real estate and it is a long term play,” says Sonalee Panda , head, wealth management, liability and marketing at ING Vysya Bank . A typical investment in a real estate fund would be for 5-7 years. Dasgupta of ICICI Venture though points out that the kind of investments that funds are making these days, they can start repaying the HNIs after the first year. A number of funds today are investing in projects that are 50-60% complete. Here, investments should get an exit in 2-3 years.