With the Securities and Exchange Board of India’s (Sebi) new dictat on the minimum investment limit in private equity (PE) funds at Rs 1 crore, many smaller investors would have to look at alternatives. Many had begun using this route to invest in real estate.
Those in the sector feel Sebi’s guidelines are restrictive. Amit Goenka, national director, capital transactions, at Knight Frank India, says raising capital from local investors is going to be difficult. “At present, most domestic investors have individually invested close to Rs 50 lakh or less. Now, raising more will be challenging and it will affect the PE funds, too,” he said.
However, investors with less than Rs 1 crore investible surplus can look at other options in real estate. A high net worth individual (HNI) could consider investing in non-convertible debentures (NCDs) or real estate bonds/stocks. Or take the angel funding route.
“We do recommend PE and real estate structures but people should understand cash flows well. For that, you need a lot more sophisticated investors, with direct experience in lending, understanding the business and appetite for taking calculated risks,” said Prateek Pant, head, products and services, RBS Private Banking.
Real estate structures, such as NCDs and bonds, are high-yielding options, giving 22-23 per cent return, with a time horizon of three years. Private equities have given returns above 25 per cent, if held for more than five years. Real estate bonds and NCDs are secured instruments, backed by assets of lenders, which investors can claim if the company defaults. The security/collateral kept by issuers against the capital raised plays an important role for investors while lending. Usually, investors lend on the strength of the collateral kept by issuers. Security and value of the collateral are some of the things investors should be careful about before taking the plunge. A collateral can be a piece of land, commercial/ residential projects under construction or even office/apartment spaces.
“Money put in NCDs or bonds is safer than a PE fund or an equity-linked instrument, as it is a debt-based investment,” explains Goenka. Non-banking finance companies, such as Reliance Capital, Edelweiss and JM Financial allow people to invest in their funds, through their portfolio management schemes. One gets a share in the project in the ratio of the capital invested against the total corpus of the fund.
These give investors a pre-tax return of 18 per cent, inclusive of costs. The post-tax returns would be around 13 per cent. But, the problem with NCDs and bonds is that these are not rated. Their rating could be as low as a B- or a CCC+, which is as good as being a junk bond. But, compared to AAA-rated fixed-maturity plans (FMPs), these definitely give better returns. The costs involved while investing in bonds and NCDs include a one per cent originator fee and an upfront fee of 1.5 per cent.
If the issuer defaults on payment, one will have to look at the underlying securities. But one should remember that selling land takes two to five years, depending on the property.
The other way of investing in real estate is through angel funding, where money is collected from a few investors who hire a custodian and make investments in PE through him. The custodian is also called an aggregator. However, Pant feels investments made through such a pool are not meant for small investors. Such investors don’t have a long horizon and their risk appetite is smaller, too. Dabbling in real estate stocks in the present scenario is not preferable. “As a matter of fact, if you can cut losses as much as possible in real estate stocks, do so. Many of these scrips are trading below book value. There is no possibility of an upside in a year or year and a half,” cautions Goenka.
Real estate is definitely a very high-risk asset class and only those with that kind of appetite should consider investing in these instruments, says Hari Krishna, director, Kotak Realty Fund. “Consider the market conditions, the borrowing ability of the developers, regulations and so on before putting your money into real estate,” he adds.