Mumbai: At least four real estate funds are raising money about Rs 2,000 crore to invest in rental yield assets because of the lower risk and regular income associated with such property compared with new developments.
Interest in rental yield assets has also increased as there is now a substantial stock of property with high specifications that was established in the past three-four years,
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“It’s the first time so many rental yield-focused funds are there in the market,” said Amit Goenka, national director, capital transactions, Knight Frank India Pvt Ltd.
This indicates a shift in the model of investment from development, such as residential projects, to developed—commercial space that’s been completed and rented out, he said.
In mature Asia-Pacific markets, 70% of transactions are for acquiring existing yield properties.
JM Financial Property Fund, the real estate fund of JM Financial Ltd, managed by Infinite India Investment Management, is aiming to raise a Rs 400-500 crore rental yield fund known as JM Financial Real Estate Income Fund from domestic investors. The fund has already registered with the regulator, Securities and Exchange Board of India, or Sebi.
“We plan to raise the fund from high networth individuals (HNIs) and domestic institutions over the next couple of quarters,” said R.K. Narayan, director, Infinite India.
Anand Rathi Financial Services Ltd (ARFS) is raising a Rs 250 crore rental yield fund along with real estate consultancy firm Knight Frank. After deploying up to 75% of this money, they plan to raise a $200 million offshore fund.
Indiareit Fund Advisors Pvt. Ltd, the real estate fund promoted by Piramal group chairman Ajay Piramal, plans to raise around Rs 1,350 crore in a debt fund and a rental yield fund this year.
LIC Housing Finance Asset Management Co., a unit of LIC Housing Finance Ltd, is planning to raise a Rs 500-750 crore real estate fund which will invest in rental yield and other assets within real estate. “We are tying up with different domestic institutional investors and financial institutions,” said a top LIC Housing Finance official, who didn’t want to be named. “We have registered with Sebi and are likely to launch it by June this year.”
Returns from development projects have generally been lower than expected because of market conditions, following the slump of 2008-09. Delays, occasioned partly by that slowdown, have also eroded the internal rate of returns.
Rental yield investments have done better. Earlier this month, Kotak Realty Fund sold its stake in Peepul Tree Properties Pvt. Ltd, an information technology park, to Tata Realty and Infrastructure Ltd, for Rs 385 crore, making a fourfold return. Kotak had invested Rs 95 crore in 2006.
Private equity firms are drawn to stabilized assets as they don’t carry development risks, which are becoming increasingly difficult to underwrite, given the political flux, said Anuj Puri, chairman and country head, Jones Lang LaSalle India, referring to issues such as land acquisition.
The demand for office space in India over the next five years (2010-14) is estimated at an approximate 240 million sq. ft. The National Capital Region (Delhi and its suburbs), Mumbai and Bangalore will account for 46% of this demand, according to the 2010 Cushman and Wakefield India Real Estate Investment Report.
“For developers, this is a good alternative source for funding and (to) monetize their assets because real estate mutual funds (REMF) haven’t taken off yet and real estate investment trusts (REIT) have been a non-starter in India or for Indian developers,” said Narayan of Infinite India. REMFs invest in property, either directly or indirectly.
Graphic by Sandeep Bhatnagar/Mint