P.M. Srivastava, a 50-year-old businessman from New Delhi, has now replaced Reserve Bank of India (RBI) bonds in his portfolio with a real estate investment fund.
“My investments in RBI Relief Bonds were yielding very low returns, so I have taken out money from the bonds,” he says. “Since I have already invested in stock markets and mutual funds, I found real estate fund an affordable way to diversify my portfolio in real estate. Also, it’s easier to track a fund’s performance as compared with managing property on my own.”
Srivastava recently subscribed to Milestone Capital’s Rs250-crore real estate fund, which allows investors with surplus of Rs25 lakh to invest.
Investors such as Srivastava have become the target audience for real estate funds that have started lowering the entry barriers to raise more funds from large number of investors. In some cases, minimum investment limits are being lowered from Rs1 crore to as low as Rs10 lakh.
Milestone, which raised a first tranche of Rs100 crore for its Milestone Domestic Scheme in June, had kept a minimum investment at Rs1 crore. It recently raised Rs150 crore for the same scheme by lowering the minimum amount to Rs25 lakh. Now, it plans to raise Rs1,000 crore for a separate fund, which will have a minimum investment limit of Rs10 lakh.
Similarly, Indiareit Fund Advisors Pvt. Ltd, a fund which has recently raised Rs500 crore from domestic investors, has also lowered the ticket size from Rs1 crore to Rs25 lakh. Many other funds are also dropping the minimum entry amount from Rs 1crore to Rs50 lakh.
These real estate funds are being aggressively marketed through the wealth management arms of banks, which, in turn, recommend the same to their high net-worth clients. Potential investors don’t have to pay Rs10 lakh or Rs25 lakh upfront but get a schedule, which prescribes the frequency at which the payments have to be made.
After paying 10-20% of the total amount upfront, an investor has to pay the rest of the amount over a two-year period. Any delay or non-payment of the instalments can result in penalty or the contributory amount being transferred from the defaulting investor to others.
Almost one-and-a-half to two years ago, when all these real estate funds were first launched, the typical target audience for such funds was the ultra-high-net-worth individual or institutional investors. At that time, the funds kept a high entry barrier—a minimum ticket size of Rs1 crore or up to Rs5 crore.
“This set of investors has already deployed their surpluses in these funds. So, to broaden the base of investors, real estate funds are lowering the entry barriers,” says Mridul Upreti, head, capital markets, Jones Lang LaSalle Meghraj, a property consultant.
From a fund’s perspective, it means that the promoters need to give more bandwidth to a larger number of investors, he adds.
“The idea is to get wider participation from investors,” says Ved Prakash Arya, managing director of Milestone.
“We realized that there was a huge market potential,” echoes Ramesh Jogani, managing director and chief executive officer at Indiareit Fund Advisors.
Meanwhile, these funds have also established a track record making it easier to raise money from more individuals, says Sandeep Das, head of wealth management at Standard Chartered Bank. His bank has been associated with distribution of various real estate funds, including Milestone.
And other banks, such as ICICI Bank Ltd, which usually cater to the mass affluent investors, have also been aggressive in distributing these funds.
“For a person whose only exposure to the real estate asset class is through the house he owns, a ticket size of Rs1 crore was simply beyond his reach. But, with the lowering of the limit, he has got another way to get exposure to this asset class,” points out Kanwar Vivek, head of retail liabilities and wealth management at ICICI Bank.
However, not all funds are keen on broadening their investment base for the sake of getting more investors. Kotak Realty Fund plans to continue with its higher limit of Rs5 crore. Up to July, the fund has raised Rs1,600 crore.
“We believe that a product like this must be sold to investors who have the capability to bear the consequential risk” says S. Srinivasan, chief executive officer of Kotak Realty Fund.