BANGALORE: Though market regulator SEBI, has allowed Alternative Investment Funds (AIF) to set up shop in the country under a newly formulated route, which allows pooling of funds for investments in areas like real estate , private equity and hedge funds, the realty sector is still looking curiously at SEBI due to lack of clarity, post a few rejected applications, its ticket size and the overall funding environment in the sector. Is it the developers’ failure to decode the funding enigma with AIFs or it is just not sustainable for the sector? With bank lending getting tighter and PE funds deserting the cash strapped realty sector, it was seen as the last hope for the developers to set up Alternative Investment Funds (AIFs), a class of pooled-in investment vehicles for the real estate sector, with private equity and hedge funds, also appearing to be heading to a logjam in the year ahead.
Facts speak for themselves. In 2013, over 70 AIF vehicles were created in India. According to AIF guidelines, real estate funds fall under category 2 and 3. Currently, category 2 and 3 funds are managing a commitment of over Rs 5,000 crores. The fund raising environment is active but only select fund managers with a strong track record, have been able to get sizeable commitments. New AIFs or family-owned funds/trusts, wanting to raise third party capital, have found it difficult to raise substantial money. As the fund raising market improves and some of these newer players demonstrate the capability of generating returns, it is safe to assume that most of the registered funds will be able to raise capital.
Analysts believe the slow movement of AIFs can be attributed to two reasons. First is the minimum investment limit which has been set by the regulator at Rs 1 crore which means that it is meant only for a certain category of investors. Second, is the general appetite for investors in the real estate market that has been low, given the current economic slowdown. Even the HNIs and other retail investors have not been taking investment decisions, and are following the market trends.
A section of analysts are wondering whether AIFs will succeed at all in India, especially when REITs comes into play. However, Venkatesh Gopalkrishnan, EVP and CIO, Shapoorji Pallonji, maintains that the difference between the AIF and REIT funds is that the REIT trust will primarily buy into yield bearing real estate assets and hold them for a while before selling them off. Given the investment limits, both AIFs and REITs, could target a different category of investors. With the minimum investment limit at Rs 1 crore, the AIFs target the HNIs and institutional investors, while on the other hand, the REIT offers a credible option to the retail investor. Also, while AIFs can invest across multiple sectors, REITs will be focused on investment in the real estate sector.
“Given these differentiators, we can definitely see both, AIFs and REITs, co-existing in India. The current policies for AIFs are quite clear. SEBI has specified three categories of funds, depending on their investment goals. Furthermore, the minimum investment limit and maximum fund raising ticket sizes have also been clarified. Having said that, there is definitely potential for making changes to the policies, to further expand these funds or enhance their flexibility. The launch of AIFs has added one more vehicle to bring more real estate assets into development. Real estate developers require funds on an ongoing basis to develop and bring their land parcels into the market. While there are already other modes of raising money, AIFs definitely add to these modes and help ease the liquidity concerns to a reasonable extent,” points out Gopalkrishnan.
Suresh Castellino, national director, Investment Services of Colliers International, says AIFs are a safer bet for the investors. REITs will be managed by trusts following real estate specific guidelines. Thus, it will ensure that investor interests in the assets/ investments, are well-guarded. REITs will offer an exit opportunity to AIFs invested in real estate through listings. This will help AIFs to churn money faster and re-invest the same back into the market. Thus, by REITs offering exit routes and capital churning mechanisms, investors will be keen to invest in real estate through AIFs.
“The current policy and regulatory framework with respect to fund raising and investing, is clear and well- drafted. However, the real estate industry will wish for a policy, which is more real estate industry specific and thus, will understand the issues related to real estate investments and its portfolio companies. AIFs, as an investment vehicle, will offer necessary growth capital to the real estate sector. Since the Indian banking law does not allow lending to real estate developers for land purchase (basic raw material for development), AIFs will offer necessary capital for the development of key sectors like housing, commercial and retail. They will also be able to channelise money (under SEBI guidelines) for development of the sector,” explains Castellino.
Nikhil Hawelia, managing director, Hawelia Group, laments for the reluctance of investors to opt for such a safe investment instrument. According to him, at a time when the real estate industry is going through a severe liquidity crunch, alternative investment funds work as a medium of financial assistance to developers, so that there is no hindrance in the ongoing construction work while pursuing affiliated activities. He says delays often defeat the very purpose for which the schemes are mooted.
“With focus on investor protection, SEBI brought in the REIT to develop an investment vehicle for the rapidly growing real estate sector. REIT in India, is certainly a positive step in the present scenario of an economic slowdown; developers can now monetise their assets by rotating them into a regulated network. This move will increase the depth of India’s real estate market, in terms of both, exit and financing options, for developers and avenues for investors as well. However, while REIT is yet to be implemented, the fate of AIFs seems to be hung in the absence of clarity or security or both,” says Hawelia.
So, everyone agrees that there is no clash or confusion between the REIT and the AIF. However, it is not about the funding mechanism but its implementation that can bring a tangible change in the cash-starved sector. Unfortunately, that does not seem to be happening and the deafening silence on the AIFs, of late, has been a matter of serious concern for the sector. How long will the sector have to wait for these investment instruments to be trusted by the potential investors, is the question everyone is asking.