Redefining Returns: AIFs Reshaping Real Estate Investment Expectations

Real Estate Alternative Investment Funds (AIFs) are playing a pivotal role in reshaping India’s economic landscape. Over the past decade, these funds have gained substantial traction, reflecting a transformative chapter in the country’s economic narrative. The real estate sector, encompassing office spaces, co-working environments, co-living spaces, warehousing, data centres, and residential properties, has emerged as a prime beneficiary of India’s rapid wealth accumulation.

Investors, particularly Ultra-High-Net-Worth Individuals (UHNIs), High-Net-Worth Individuals (HNIs), and affluent retail investors, are increasingly drawn to financial instruments that offer stable and elevated returns. Real estate AIFs have witnessed a surge in adoption, fueled by regulatory clarity and transparent norms, creating a conducive environment for robust growth in this alternative investment space.

According to SEBI data, the alternative investment fund (AIF) industry reached a pinnacle of Rs 8.50 lakh crore by June 2023, marking a 22% surge in assets under management (AUM) compared to the previous year.

Regulated by SEBI, real estate-focused AIFs serve as preferred investment vehicles, pooling capital from investors to primarily invest in Indian real estate assets. These privately pooled funds can adopt various structures, including trusts, companies, limited liability partnerships, or body corporates. Typically, UHNIs, HNIs, institutional investors, and accredited investors engage with these instruments, adhering to SEBI’s minimum investment limits.

Office space dominates the AIF landscape, driven by increasing demand from enterprises. Manufacturing and engineering players setting up units in India, coupled with the expansion of Global Capability Centres (GCCs), led to office space absorption of 58.2 million in 2023 across the top six cities, as reported by real estate consultancy Colliers India. With the IMF projecting growth for India, office space is expected to remain a significant portion of real estate AIFs in the coming years.

The rising demand for flexible office spaces, with co-working spaces contributing around 27% of total office space absorption, is expected to increase by 52% by 2025, according to Vestian. Co-living, witnessing a surge in popularity, and the industrial and warehousing segment, absorbing 49 million sq ft in 2023, are poised to contribute significantly to real estate AIFs’ overall asset base shortly.

The increasing adoption of real estate AIFs in India can be attributed to investors’ pursuit of stable and superior returns, making these investment avenues increasingly attractive for diversified asset exposure.

Diversification:

Investors are increasingly considering diversification beyond traditional assets. Real estate AIFs provide an excellent opportunity to gain exposure to various real estate assets, including Grade A office spaces, warehouses, data centres, co-living, and student living, offering a cushion against downturns with better return potential.

Better return potential:

NRIs and high-net-worth individuals, seeking higher returns, find real estate AIFs attractive. Historically, these funds have provided returns exceeding 20% per annum in the last decade. The real estate sector’s potential for generating rental income and capital appreciation provides better investment risk-return ratios. Moreover, the less volatility of AIFs, uncorrelated to stock markets, makes them a preferred choice for risk-averse investors.

Regulatory transparency with tailored opportunities:

The regulatory landscape for real estate AIFs is transparent, with SEBI developing detailed norms, ensuring the protection of investors’ interests. Tax structures and commission payouts are structured, providing clarity to investors. AIFs offer specialised investment opportunities to sophisticated investors, enabling exposure to customised offerings.

Varied risk-return ratios:

Real estate assets within AIFs come with varied risk-return ratios, allowing investors to carefully assess and pick exposure based on their investment philosophy.

Different types of exposure of investors will result in varied risk profiles. For instance, an investor having fractional ownership is betting on capital appreciation of the asset along with assured rental income. As fractional ownership is all about partial ownership in big-ticket commercial properties, which are jointly operated by a group of investors, the risk-return profile will depend on the demand for those office spaces.

As compared to fractional ownership, the risk level of structured debt instruments is fairly low. In structured debt, the investor gets an assured return as per the returns fixed on the agreement. For risk-averse investors, such types of exposure work the best. Similarly, in a co-living asset class, the return will depend on the occupancy ratio. If the occupancy rates are high, the real estate AIF generates higher returns and hence, investors get a better return on their investments.

Bright growth prospects:

The Indian economy’s anticipated rapid growth, aiming to become a $5 trillion economy, will reflect in real estate growth. With global companies setting up facilities in India, demand for office space, warehouses, data centres, co-living, and student housing is rising. The rise of REITs has brought a significant transformation to the AIF landscape, amplifying investor enthusiasm towards real estate AIFs in the upcoming years.

-The author is the founder & CEO of Assetmonk. Views expressed are personal.

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