Real estate funds - A Concrete Promise

Real estate funds score high on many factors, akin to mutual funds. There is a strong case for investment vis-a-vis direct investment in property or realty stocks. With interest rates at elevated levels, banks going slow on realty lending and a dried up IPO market, there is an opportunity to lend to reputed builders for potential IRRs of 15-17%. Read on…

December 21, 2011 3:07 IST | India Infoline News Service

The charm of investing in property is hard to resist. Yet, not all aspirants manage to tap this market of high stakes and equally high possibilities. Lack of funds is the prime reason that leaves most strangled at the periphery. Lack of knowledge is another.

For those looking for a good real estate investment option tagged with high returns, Real Estate funds offers a great avenue. Simply put, a realty fund is a trust which is formed pooling in money from individuals and then invests the corpus into a mix of property mortgages and ownership for sale or lease. The returns are then passed on to investors.

Real estate funds score high on many factors, akin to a mutual fund. Portfolios are typically diversified across multiple real estate segments and regions and offer a judicious blend of structured debt and equity instruments. Investors own individual units and receive regular updates in the form of fund holding statements and valuation reports. The small ticket size is the most alluring feature for any investor here. The investment is usually backed by collateral.

Like mutual funds, Real estate funds are managed by qualified investment professionals who are well-versed with the market intricacies. Their expertise can immensely help common investors chart out a stable revenue stream over the fund’s tenure.

Think of it as a regular fixed income product, which gives you the joy of money coming in every year. Moreover, during inflationary times, rental income proves to be quite resilient. This obviously makes real estate funds less vulnerable to market fluctuations. Taxation will of course be as per your income-tax slab.

From the perspective of a common investor, realty fund mitigates the risk of individual property investment:

  • Investing is less capital-intensive compared to direct investments
  • The exposure is market wide, not subject to the credibility or constraints of a single developer
  • The investor is relieved of the micro market fluctuations and the hassles of groundwork, procedures, legalities, delays and defaults.

But while it’s undoubtedly a great opportunity, one needs to exercise caution before taking the leap. You need to do elaborate homework before placing your faith in any realty fund scheme:

  • Credibility and experience of the management team - their compensation structure, promoter’s stake in the fund
  • Strength of Value chain - do they partner with reputed builders with proven track record.
  • Lock-in tenure - you may not be allowed to pull out prematurely.
  • Nature of investments - choose schemes that invest based on the prospects of the specific project, not the perceived value of the company running it.
  • Quarterly / annual statements - a careful scrutiny is worth the time and effort.

All in all, real estate fund is a compelling option if you are a long term investor with a high risk appetite. Long term and high risk are not naturally compatible but in the case of realty funds, this chemistry can prove highly fruitful.

In the current scenario, with interest rates at elevated levels, banks going slow on realty lending and the IPO market has dried up. This presents an opportunity to lend to reputed builders at high rates of interest, for potential IRRs of 15-17% in the bargain.

It goes without saying that the realty fund management’s competence in identifying promising projects is extremely vital, so is a detailed study of prevalent market conditions. While each investor needs to take an individual call keeping in mind risk appetite and reward aspiration, I feel there is a strong case for investing in real estate funds vis-a-vis direct investment in property or realty stocks. Don’t forget to introspect before you invest. Happy investing!

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