Skip to main content

Investors need to understand the nature of real estate funds and the suitability

 

WANT to be a part of the real estate growth story? But don't have enough dough to buy a property or just don't want to take risks associated with investing directly in realty? Relax. You can still invest through real estate funds.


   A real estate fund, in fact, is a professionally-managed portfolio of diversified real estate holdings and is basically meant for high net worth investors. But, thankfully, not-so-rich investors can also get a slice of the real estate pie by investing in real estate funds, which give them an opportunity to participate in specific asset classes such as residential, commercial, hospitality etc in a more concentrated manner. When you invest in such funds, you essentially make investments in the schemes of concerned firms, which in turn invest the money in upcoming or ongoing real estate projects. The returns from building and selling or leasing the projects are the gains that investors receive from the investment.


   It is a known fact that unlike earlier, there are various modes of investing in real estate these days, one such mode being investing directly in a property. One is often tempted to invest directly as this usually gives very good returns. For instance, one could always look at buying apartment units from reputed developers in upcoming areas wherein one can expect 15-18 percent indicative returns, with rentals and capital appreciation over a long-term investment horizon. On the flip side, however, such investments need big money and also have their own risks.


   "One can invest directly in real estate, say, in flats, bungalows, office buildings or a piece of land. Most of these investments are concentrated in a particular location and/or with a developer. Most of the time one buys these assets in a place one's family stays or works. These assets, however, can only give returns in a rising property market or through leveraging," says Sunil Rohokale, executive director of ASK Investment Holdings.


   Direct investing in real estate also involves upfront costs in the form of stamp duty, registration, service tax, transfer charges, brokerage and taxes. It also entails concentration risk of location and developers along with project execution, as controls are virtually missing. But in a situation like rising interest rate, more supply and less demand, poor execution and very low visibility of property prices to go up in a hurry, the question remains—how does one make risk-adjusted return at the cost of illiquidity?


   Another mode is through investing in listed real estate companies. However, since this investment is in a company, the investor has less information and control over the utilisation of funds. Besides, real estate companies' valuation is a tricky subject and there is no established/proven method in the Indian market. The current prices of most real estate companies are at a steep discount (50-60 percent) to their initial offerings, indicating the unrealistic valuations assigned to these companies. Though one has liquidity in this option, but the downward risk is the highest due to volatility of the stock market. This is, in fact, the most risky investment option in real estate investment.


   One can also invest in a piece of land. However, though investment in land yields the maximum returns, it is prone to a high level of risk right from identification of the right growth corridors to title risk and possession risk. Hence, unless in the business of real estate or plotted developments of reputed developers, such investments should be avoided,.


   Real estate funds, on the other hand, offer the option of investing in close-ended funds with a tenure of five to seven years, and target returns in the range of 20-25 percent. These funds are managed by experienced professionals, have a defined investment policy, risk and asset management systems and entry-exit policy to ensure superior risk adjusted returns. As these funds are closed ended, they suffer from liquidity. Therefore, in markets where property prices see resistance to move northward, real estate funds seem to be the best option. Also, investors access developer's margin over price increase and have control on operations, mitigating delay in execution and spreading the investment across growth corridors, reducing concentration risk of locations and a developer.


   Real estate investment growth is dependent on multiple macro economic factors and the risks associated are micro in nature, such as title risk and execution risk, among others. Given this, it is always appropriate for an investor to depend on experts. Real estate funds are theoretically the best investment mode, given that these funds are run by experts who ensure risk mitigation
while ensuring returns.


   Also, the real estate fund business at this juncture has enough data on track records of most funds and fund managers, and hence one is in a position to pick and choose, unlike five years ago. Real estate funds are more safe as they are registered with SEBI as Portfolio Management Services (PMS) or Domestic Venture Capital Fund (DVCF). These funds are closed-ended funds with five to seven year tenure, with an option to extend the tenure by one or two years. The investments are drawn in two to three years, depending on the identification of investment opportunities. Most funds charge a management fee of two percent and entry load of two percent. Besides, there is normally a profit sharing beyond a certain threshold of return to the investor known as 'carry', which can go up to 20 percent.


   During the subscription, 20 percent of the committed amount is normally required while the rest has to be paid over two to three years. Most of the real estate funds offer a hurdle rate of 10-11 percent with targeted returns of 20-25 percent. Fund managers are also eligible for performance fees. There are some funds which also focus on fixed income yielding assets like office/IT or retail properties and offer returns of 10-12 percent per annum.


   There are various domestic funds wherein one can invest in the new or follow-on offerings. The funds available in the domestic space are either backed by financial institutions such as HDFC, ICICI or financial services organisations such as Kotak, AV Birla Financial Services or are standalone funds such as ASK Real Estate Special Opportunities Fund and India REIT, among others. Each fund has a unique objective and returns can go up to 20-25 percent, depending on the investment quality.


   The risks and returns, however, are very specific to the investment. Also, the investor has the opportunity to participate in project upsides that may be made by unlisted development companies as well. The investor also gets specific project-related information, resulting in better tracking of the investment.


   Investing in real estate funds requires lesser amount also. For instance, if an investor wants to buy a property directly, he might end up looking at investment sizes running into several lakhs and even crores of rupees, depending on project location. On the other hand, one can start one's journey with real estate funds with a sum as little as 10-15 lakh only, although there are many funds in the market today which require 25 lakh to 1 crore as the minimum investment amount. This effectively means that an investor can get exposure to the sector for smaller amounts, rather than having to provide for large asset costs.


   All this, however, doesn't mean that real estate funds are entirely safe. To be on the safer side, therefore, one needs to necessarily look at the track record and reputation of the entity backing the fund, experience and track record of the fund manager, investment objective, asset class and the structure in order to optimise tax savings and maximise returns.


   Also, while the hassle-free nature of investing in these funds may seem attractive, investors need to understand the nature of these funds and the suitability of such investments in their portfolio. Real estate funds, for instance, can't be a substitute for buying one's dream home!

 

Popular posts from this blog

Rs 14,000 Crore worth of tax free bonds coming soon from NHAI , PFC

  NHAI, PFC file prospectuses, coupon rate not yet decided MORE debt investment options have opened up for investors with AAA rated tax-free bonds worth over Rs 14,000 crore lined up. The National Highway Authority of India ( NHAI ) and Power Finance Corporation ( PFC ) are offering Rs 10,000 crore and Rs 4,033.13 crore worth of tax-free bonds, respectively, as per prospectuses filed with the Securities and Exchange Board of India (Sebi). Of a Rs 5,000 crore issue by PFC, Rs 966.87 crore has already been raised through private placement on September 28 and November 1. Tax-free bonds give investors tax-free return on any amount invested. In another kind of bonds, the long-term infrastructure bonds, investments up to Rs 20,000 are tax exempt, that is this cap amount can be deducted from the taxable income. Accordingly, the NHAI prospectus has clarified that only the amount of interest from -and not the actual investment on -its new bonds will be tax-free. "NHAI's publ...

Change in Fund Manager for some of HSBC Mutual Fund Schemes

Buy Gold Mutual Funds Invest Mutual Funds Online Download Mutual Fund Application Forms Call 0 94 8300 8300 (India) However, this facility is only available to Unit holders who have been assigned a folio number by the AMC.   HSBC Mutual Fund has announced that the below mentioned schemes shall be managed by the new fund managers as stated in the table. The effective date will be July 02, 2012.   Amaresh Mishra 's will be Vice President and Assistant Fund Manager. Having done a Post graduate diploma in Business Management and Bachelor of Chemical Engineering, he has over seven years of experience in Equities and Sales.   Mr. Piyush Harlalka's designation shall be Vice President- Fixed Income. Qualified as a C.A., C.S. and holding M.B.A.( Finance degree), he has over six years of experience in Fund management and ...

How EEE and EET Tax affect Retirement Investments

  An important factor while choosing a financial product is its taxation , and for retirement savings, this is even more important as the sums involved are usually life-long savings. Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS). EPF The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act , which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond th...

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family. Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss. The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance. The policy is tailor made to individual requirements and needs. The sum insur...

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now