In the absence of real estate investment trusts (Reits) or real estate mutual funds (REMF), real estate private equity (PE) funds are vehicles that give you exposure to the sector without the risk of one property going bad. These are primarily meant for high networth individuals (HNIs). You should have at least Rs 10 lakh to enter this product.
What are REAL ESTATE PEs?
These funds invest in real estate projects by tying up with the developer, wherein the developer sells a portion of the project to the fund. Some funds tie up with companies also. Most such funds operating in India have a lock-in period of three to seven years, after which, the fund exits the holding by selling it in the secondary market. If the investment is in a commercial property, the fund may rent it out within the lock-in period and exit later.
According to VCCEdge, the financial research platform of VCCircle, the Indian market has 44 domestic real estate PE funds in total having a collective size of $11,226.8 million (R49,813 crore).
It is difficult to put a clear number on the returns since real estate PE funds are non-transparent. There is no data to fall back on and returns are not guaranteed. In the recent past, some domestic funds have given annualised returns of 20-25%, according to JLL India. Kotak Realty Fund and Indiareit Fund have exited some of the projects, data from JLL India show. Exit would mean the fund made gains; these gains get transferred to the investor. At present, Indiareit has four funds in the country and Kotak has three.
In the absence of clear regulation, there is no fixed fee that all funds charge. Usually, there is a one-time entry fee of 2% of the investment amount. There is an annual maintenance fee of 2%. In certain large-ticket deals of at least R1 crore, the fund house may waive off the set-up fee or reduce the annual charges.
There is a performance fee that you have to pay by sharing your profit with the manager. This is usually pre-determined and linked to the fund’s hurdle rate, which is usually 10-12%. Only if your money gives a return higher than the hurdle rate, the manager would share the profit.
Though domestic real estate PE funds in India are registered with the Securities and Exchange Board of India, there is no clear regulation on disclosures. Moreover, until the fund sells its holdings, there is no gain to be passed on.