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Realty funds emerging as favorite options for investors

Jigar Desai & Jwalit Vyas, The Economic Times

January 03, 2011

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Realty funds are emerging as one of the favourite options for investors, who want to cash in on the boom in the sector but are unable to pump in a lot of capital. Says B Srinivasan, a certified financial planner: “One way of investing in real estate asset class is by directly purchasing a property. However, investing in realty often requires huge capital, which might not be available with everyone.”

The way out, investing in funds, which in turn put money in real estate. Asset management companies run by organisations, including Aditya Birla Money, ASK Wealth Advisors, HDFC and Kotak, float and manage realty funds. Each of these funds have a respective structure of payments and returns.

For instance, Aditya Birla Real Estate has collaborated with a reputed builder in Bangalore. The flats, which are built, would be rented out on paying-guest basis. Aditya Birla would retain 25 percent of the total income received from such rentals. This will be utilised to pay commissions, maintenance costs and taxes.

The remaining 75% would be divided among retail investors on the basis of the square feet (sq ft) area they own. Such schemes would allow the retail investor to get a regular stream of income without getting into the complex issue of buying the property. Hiral Sheth, vice-president with ASK Wealth Advisors, says that real estate investments have a potential to post high returns. It is possible to expect a return of 25-30% compounded annual growth rate (CAGR).

But given the risky nature of this asset class, investors are advised to limit their exposure to not more than 20% of their portfolio. These funds have a lock-in period of close to four years with payments in tranches and there is no choice for cash withdrawal.

A major concern with investing in real estate fund is that these investments have a long-gestation period and are highly illiquid. Given this, investors keen on taking an exposure to real estate fund need to anticipate their future cash requirements before taking the plunge.

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