Real Estate Funds an alternate to real estate investments?
The Great Indian real estate market is going through another metamorphosis change. While the real estate industry on the whole contributes to nearly 19.30% in the GDP, as an industry it still has to get a lot of impetus and structuring on all fronts, right from legal reforms, consumer protection and an over all rationalization on FSI laws. With RERA now announced and especially in the next few months it will be a norm in Mumbai, we have a lot to look forward as radical changes in the real estate sector and hopefully the Real Estate Funds can be seen upon as an alternate to real estate investments?
We have been reeling under problems since we have all reached puberty in the Indian Sub-Continent, and we have to compromise on some thing or the other. The issue is that we are a democracy, which endures, and when the time comes to voice up, some priority takes over the other and we are called a resilience generation and the word for us in compromise.
Coming back to the real estate sector in Mumbai, our approach has been pretty similar, the moment the property market looks good we have some issues or the other. Political and economic stability is a must for real estate growth in city which is an ever developing city, what ever Infra development we have seen over the past 5 years was over due by 40 years.
We are paralyzed as a city with land laws, both at the State, Central levels and BMC Level and various other bodies like Aviation, Coastal Regulation Zone, etc which take their time to give away permissions for the smallest of bridge. Just a few days back, the Mangroves were allowed to cut after a legal battle since 2006, for a bridge between Lokhandwala Complex and Yari Road in Andheri West, which would cut down travel time from 35 minutes to approx 5 minutes to go either ways and cut traffic on the busy intersections as well.
With Red tape increasing the issue of corruption comes as a “Gift in Red Tape to the beneficiaries”. And the beauty of this is that, we have been writing about this, reading about this and hearing about this but nothing seems to happen beyond that. A few days back, the Developers lobby complained to the BMC that the corruption has hit the roof.
The Indian Real Estate sector needs to go through a complete change to get the best out still for all parties, be it the Government, Developer or the Consumer. Today, the entry load in real estate is more than 11.50% of the property acquisition value, this accounts for 4.50% Service Tax, 1% Vat, 5% Stamp Duty and a fixed fee of Rs.30,000/- if the property value increases above Rs.30 Lacs. This is absolutely challenging for the home buyer as his cost of acquisition is now 10.50% more.
But the Good news is with structured realty funds coming in the market, the good part for an individual Real Estate Investor is that he gets a ready made pudding. Most of the Real estate funds in the world follow a very simple Investment evaluation process. This typically means to cover the following things prior to the investment decision:
- Deal Structuring, Analysis and review of the proposed investment with a 3-5 year planned growth, location analysis, future infrastructure development impact, present day condition, comparable prices etc.
- Land acquisition process, land regulation laws, zoning, FSI Rules and local council laws, government policies.
- Monitoring the development both from construction viewpoint and the market dynamics (Sales).
- Assessment and Due Diligence of the transaction with Financial Feasibility, Developer/Promoter Credibility, Past Development Track Record and most importantly the Legal aspect.
- For an individual Investor, it may be very difficult to decipher the above, and what he relies on half of this as a market information to enable his decision. The ideal bet is to take a ride on the back of these Investments, as they will have to prove worthy in time to come.
Any investor who has a long-term approach in the market should review these projects funded by the Real Estate and Equity funds. The results to a good extent are assured here, of course conditions apply*. The funds will only make money if the property capital values in the project increases and no large Institutional Investors would place funds with these funds if the results are negative. And the Funds would rarely get influenced by an under performing asset or a location. Real Estate Funds can be seen upon as an alternate to real estate investments for investors who dont want to put a large sum of investment in the real estate and at the same time depending on the fund entry and exit loads, the fund is far more liquid than the real estate asset.
A few Top Projects in Mumbai with structured investments Real Estate Funds and can be seen upon as an alternate to real estate investments are funded by Piramal Fund Management Pvt. Ltd. (which was formerly known as Indiareit) who were the pioneers in the real estate fund space in India, with a platform built on proven fund management expertise and a realised track record in fund raising and exits. HDFC Real Estate Fund again a very strong back bone with real estate know how, ICICI Venture an experienced hand in the Mumbai Property Market, ASK Property Investment Advisors and Kotak Realty Fund, Tata Realty and Infrastructure.