Real estate private equity funds: Means to make money in realty

Rubi AryaMilestone Capital AdvisorsInvestments in real estate assets have not been very popular over the last couple of years on account of increased pricing, reduced growth outlook, extended project timelines and lackluster demand from home buyers. This slowdown has been witnessed across segments though it has been more pronounced in the upper and premium segment of residential projects. Although, the outlook is quite positive in relation to the economic growth of the country, the general belief is that revival in demand for investment in real estate assets is still sometime away. To add to this, homebuyers have been missing in action due to issues such as stalled projects, unaffordable prices, uncertainty in project execution and low credibility of developers. In such a scenario, the question repeatedly asked is “How can one make money in real estate?” Investment in real estate is one of the most popular investment options (often primary) for majority of Indian households, usually done by purchasing residential apartments or residential plots. Like gold, real estate has been regarded as a 'safe investment' by most Indians. There is a need to evaluate whether this continues to remain a wise investment choice.Evaluating the performance of investments in real estate is tricky. Data available for judging the returns on real investments is sketchy and the returns vary significantly between locations and even between two properties in the same vicinity. This is further compounded with one of the inherent problems in real estate investments – “Diversification”. For most investors, it is not affordable to diversify in various projects or geographies as most people can afford to own only one property. Also, the necessity of regularly monitoring your investments restricts ability to invest outside of your home city. So does this mean that one should stay away from real estate? After all, real estate has continuously proven to be a very good protection against inflation as both rental incomes and the capital values have provided healthy appreciation over the long term. The answer to that question lies in evaluating alternate formats of real estate investments. Today, investors have an option to invest in real estate through more secured options such as Structured Debt Investments. Over the past few years, mezzanine routes of investment in real estate have increased which is primarily a structured deal via subscription to Non Convertible Debentures (NCDs)/Optionally Convertible Debentures (OCDs) by the SPV developing a project. Some of the key unique characteristics of mezzanine or structured investments include it being a secured form of investment with mortgage over land and cash flows, regular payouts to investor through coupons and defined exit timelines, ability to invest against identified inventory instead of the entire project. The last few years has witnessed real investments being routed these structured and secured sources of capital where returns provided are highly attractive in the 20%+ range. Real estate private equity funds have been at the forefront of providing opportunities to invest in real estate through such structured debt investments.In addition to the advantage of such an investment being secured, investment through real estate private equity funds has the following benefits:• At the time of investment: As funds invest in multiple projects and geographies, it solves the need for diversification from an individual investor perspective. Also, funds have better negotiating power enabling better deal terms.• During the lifecycle of the project: Funds have robust project management systems which regularly monitors the investment and takes corrective action at an early stage hence creating value for the investor• At the time of exit: Investment through secured debt instruments provides variety of avenues for funds to exit the investment including obtaining refinance from other sources and thus providing timely exit to the investorOverall, real estate private equity funds through structured transactions have provided an attractive means to invest in real estate where one can participate in the upside while maintaining a downside protection to the investment. Going forward over the medium term, we expect to see an uptrend in the real estate sector on account of uptick in sales and lowering of inventory levels, developers offering attractive schemes, aligning products to the requirements of buyers, lowering of interest rates by the RBI and an overall improvement in macroeconomic factors. This coupled with much awaited Real Estate (Regulation and Development) Bill is expected to bring transparency and international investments in the sector thereby increasing consumer confidence. As the sector rebounds over the next 12 – 18 months, we expect that real estate private equity funds to be the flavor for the investors to take exposure in real estate.