IIFL AMC Ltd is raising a 750 crore debt fund, which will be India’s first Category III AIF (alternative investment fund) real estate fund, a top company official said.

Category III AIFs are allowed to borrow from any lending institution for the purpose of generating higher returns with cheaper capital, apart from tapping investors for money.

IIFL Real Estate Fund (Domestic) III) will lend 80-100 crore each to selected builders in key property markets developing homes costing 35 lakh to 1 crore. The fund, a close-ended one with a five-year tenure, will look at secured debt with varying structures of repayment.

Real estate AIFs have been raised under Category II AIF of Securities and Exchange Board of India regulations till now. This category does not allow a fund to approach lenders other than to meet day-to-day operational requirements.

Category III AIFs are described as those “including hedge funds which trade with a view to make short term returns; which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. These funds can be open ended or close ended."

“This fund will allow the leverage option, which will increase investor returns," said Balaji Raghavan, chief investment officer, real estate, IIFL AMC Ltd. “50% of investor money will be drawn down, along with 50% leverage from another institutional lender in the first 18-24 months, and investors will benefit from the spread on the borrowing. After that, once the next draw-down happens, the investors’ loans will be repaid," he said.

The fund will follow the group strategy of investing in secured debt in mid-income housing. The investments will be structured to match project cash flows, while ensuring debt servicing is focused in the top five cities.

IIFL raised its last fund of 1,012 crore in 2015, the second in the series. The debt fund has been fully deployed.

IIFL is currently in talks with lenders to employ the leverage option. It may settle on an external lender, or a group firm.

Once the fund achieves its first close, it will take the leverage, Balaji said. The fund will lend to both early and late stage projects. However, in an early-stage investment, the fund will mitigate risk through cash flows from developer’s other projects as security or collateral.

Several real estate debt funds are currently raising money from investors. Indiabulls Alternative Investments Ltd plans to raise as much as 1,000 crore from non-resident Indian (NRI) investors along with persons of Indian origin (PIOs) and other foreign investors.

IDFC Alternatives Ltd is also raising a domestic fund of 750 crore, out of which it has already raised 550 crore.

“Category III AIFs allow more flexibility and may function almost like a hedge fund. The fund manager and investors benefit from the differential cost of capital, where the cost of lending is much higher than the cost of borrowing," said Abhishek Goenka, partner, direct tax and real estate expert, PricewaterhouseCoopers India.