Understanding Real Estate Alternative Funds

Real estate, conventionally, means a high outlay of funds. However, in recent times with the growing need for innovative investment avenues, real estate funds have been introduced. Real estate alternative funds are complex and niche products mainly aimed at HNIs and foreign nationals with a large appetite for risk and higher funds for investment. Here we look at the nuances of real estate alternative funds.

What are alternative funds?

Alternative investments are those which are not a part of conventional investment avenues. They are beyond run-on-the-mill equity and debt-related investments such as mutual funds, post office deposits, fixed deposits, bonds, and equity shares.

Alternative funds offer a new dimension and a unique diversification to the investment portfolio. They have the potential to increase returns substantially. However, the risk is also relatively high. These investment avenues aim at HNIs and foreign nationals with a higher risk appetite. Most of the investments falling under this avenue have a lock-in ranging between 3-10 years, indicating limited liquidity and hinting that these avenues have a long-term perspective. Historically, many alternative funds have performed better over the long haul than most conventional avenues.

What are Real Estate alternative funds?

Real estate, alongside private equity and private debt, is the least risky among all the alternative funds. They are not traded often and have a reasonably long lockin, which makes them less volatile. There are a variety of options even within the real estate’s alternative funds such as residential single room rentals, multi-family properties, studio apartments, and commercial properties for rentals etc., They have in the past displayed stable earnings within a diversified portfolio, and they also offer downside protection. The real estate market cycle is reasonably long, typically 8-10 years.

Here are the benefits that you derive by investing in real estate alternative funds:

1. Stable income:
   Real estate, in many forms, offers stable and steady recurring cash flow in the form of rental income. In the case of funds, they would come in the form of regular dividends or as per the structure of the alternative fund. If the fund’s quality is high, then it could potentially emulate a bond, only with better returns. The yield would be higher than that of G-secs and quite transparent.
   
   
2. Capital appreciation:
   Whilst comparing realty as an investment with any conventional investment, people often miss to include the capital appreciation underlying the asset. Typically, due to the quantum of funds underlying the real estate alternative fund, even a minuscule % of capital appreciation would translate to a substantial increase in funds. Typically, there is also a specific increase ranging between 8% – 10% in rental yields year-on-year, thus translating to incremental yield on your real estate alternative funds over the long haul.
   
   
3. Hedge against inflation:
   Real estate tends to have a positive correlation with inflation. The value of the real estate increases at a faster pace as compared to inflation. Real estate tends to be unwavering when other asset classes start to falter. Thus, making this avenue a good hedge against inflation. They act as a haven during a turbulent macroeconomic environment. Studies indicate that by holding an exposure of 10% – 20% of your portfolio in real estate, you can create an optimised portfolio.

Real estate alternative funds vs real estate mutual funds

Real estate AIFs in India are governed by SEBI, just as in the case of real estate mutual funds. From an investment perspective, both may look similar. However, real estate mutual funds are more generic. They are aimed at a larger investor audience than real estate AIF, a complex investment product aimed at HNIs and foreign nationals. The minimum quantum of investment is higher in the case of AIF than in mutual funds.

Like all other AIFs, real estate alternative funds typically come with a lock-in period ranging between 5-10 years or longer, depending on the underlying projects. Real estate mutual funds offer better liquidity.

AIFs generally have a higher risk, and the risk mitigation strategy is quite extensive. Mutual funds are relatively lower risk. The selection process for AIFs is far more intense than that of mutual funds.

Why should you invest in alternative real estate funds?

Real estate AIF is suitable for an individual with a slightly higher risk profile and who has comfortably established a portfolio to take care of your essential financial milestones. You should consider the investment only from a long-term perspective. It can offer a new dimension to your existing portfolio, a diversification that no conventional asset class can offer. However, as in general are complex investment vehicles which require superior knowledge to understand the nuances, mutual funds are simpler and open for investment, even for a novice investor.

In conclusion:

Having learnt about alternative real estate funds, you can now explore the options here and assess if they suit your risk appetite. Remember to research well, understand the product thoroughly and make an informed decision. Reach out to our experts at TATA Capital, who can help you invest in alternative avenues which complement your existing portfolio.