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

Real Returns in Investing

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 Leave your comment with mai...

Franklin India Smaller Companies Fund - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
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