Alternative Investment

a new way of asset allocation

In recent years, the real estate landscape in the country has evolved from being disorganized and unregulated to better regulated and digitally backed. The introduction of progressive regulations like RERA, GST and most recently REITs the sector has managed to garner the confidence of not just Indian but global investors as well. . The government intervention along with global economic factors have played a vital role in strengthening the market as well as creating a roadmap for a new investment avenue that is transparent, profitable and most importantly monitored by a regulatory body.

Ever since the introduction of AIFs in 2012, the government has been taking major steps to develop a strong investment framework to promote vehicles that have the potential to scale up and attract global investments. The pandemic-induced lockdown played a critical role, changing purchase behaviour, and leading to rising demand for owning a home and leading to several buyers to upgrading to bigger homes. The pandemic also worked favourably for investors in the equity markets and saw a record growth of investors and investments.

This increased the allocation to investment opportunities, such as REITs, cryptocurrencies, derivatives, gold, Alternative Investment Funds (AIFs), and more, helping consumers think beyond conventional scenarios. From a real estate investing point of view the cash flow stability, post-pandemic resilience of certain segments, and low correlation with the stock market make real estate an asset class to consider. As a matter of fact, there has been a gradual increase in investment amongst Indian residents as well as non-resident Indians (NRIs) thanks to changing real estate market dynamics in recent years, this also includes financial product options in this space include REITs, fractional ownership, and real estate AIFs.

The rise of AIFs

AIFs become increasingly popular as an alternate asset category due to the rise in the amount of investable wealth and increasing demand for focused financial instruments. These vehicles allow you to participate in strategies that retail vehicles like Mutual Funds or Bonds don’t provide. AIFs have access to different strategies like real estate, Pre-IPO, Angel Investing, and other unlisted investments. Moreover, they use unconventional patterns of investing, such as long-short strategies and product structuring, to diversify toward products that offer higher returns compared to traditional instruments. . Not only that, but AIFs also increased the threshold of investment and have brought in a better-informed category of investors with the ability to take higher risks and ride the 3-5 year investment cycle.

The journey of AIFs over the last 10 years has seen it experience dramatic growth, with its commitments growing by 42% in FY 2022 to an all-time high of INR 6.40 lakh crore in March 2022. Category II funds, which include real estate funds, private equity funds, and funds for distressed assets, accounted for the majority of the commitments at INR 5.20 lakh crore at the end of March 2022. (SEBI Data) In today’s real estate environment, AIFs offer a multitude of benefits to investors. Even though real estate makes up a small percentage of AIFs, they provide investors with a broad spectrum of advantages in the current real estate market. It not only helps in diversifying but also investing in some of the fastest growing markets, covering a variety of asset classes – co-working, commercial, residential, and tech parks.

Why real estate AIFs?

While real estate has always been a large proportion of the overall investments of investors, physical real estate has high transaction costs and very high concentration risk. One not only has to pay stamp duty, GST, and brokerage but also for maintenance, upkeep and property tax. It is also illiquid not allowing you to create small amounts of liquidity. However, when you invest in a structured financial asset like AIFs, you don’t have to deal with these hassles. Apart from that, the transaction cost is lower, and you can trade in much smaller sizes. Additionally, AIFs are investment vehicles for like minded High Net-worth Investors (HNIs) and institutions looking at long-term investing. What makes them a viable proposition for family offices and HNIs is the ability to broaden the risk-reward mix across asset classes. There is, indeed, a clear appetite among investors for portfolio diversification and higher yields beyond traditional stock and fixed-income classes. And this optimism has fuelled investment in the AIF sector, especially in real estate, turning it into an alternative asset class.

While real estate VCs have existed since 2005 and AIFs since 2013, most of these funds largely looked at debt investments in real estate. However, it is important for real estate AIFs to also participate in the equity upside of real estate projects. Therefore, we are seeing the advent of equity and development funds in Real Estate, which are now allowing investors to participate in actual real estate project returns. These allow you to give a more diversified risk adjusted return as opposed to purchasing a single asset.

AIFs have paved the way to invest in sectors like real estate and if structured correctly will drive a lot of liquidity in the market. Keeping in mind the constant regulation and admirable government interest via SEBI in promoting this investment tool, it has opened up the possibility of a new investment asset class for a larger audience. In the long run, this will be a growing vehicle for investors who are looking at participating in real estate as an asset class but without the associated hassles of purchasing real estate.



Views expressed above are the author’s own.


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