By Sankey Prasad

Real estate funding across residential and commercial segments is growing and has remained consistent on account of the market demand in the last 12-month period. While the residential segment set new sales records of 68 percent Y-o-Y in 2022, commercial real estate grew on account of the growth in retail. These initiatives have attracted domestic and foreign investors to India, resulting in increased investments across segments. The increased levels of regularisation and professionalism have transformed the real estate sector into an investment option. In this light, Alternative Investment Funds (AIF) have effectively penetrated the Indian market. The evolution of the sector and a regulatory framework have fuelled the growth.

AIFs are privately-managed investment funds that invest in listed and unlisted asset classes. These asset classes include early-stage start-up funds, late-stage Pre-IPO funds, infrastructure funds, real estate funds, hedge funds, and more, as per the categorization of the Securities and Exchange Board of India (SEBI) in categories I, II, and III. Category II is the most significant category that constitutes almost 80 percent of the total AIFs. This category includes private equity funds, distressed funds, and real estate funds. Aimed at high-net-worth individuals (HNIs) and ultra-HNIs, AIFs offer investment options for diversification through alternative investments. This help maximizes their risk-adjusted returns by participating in private markets through private equity and debt.

The regulatory framework

Targeting the sector’s growth, SEBI announced AIF Regulations in 2012 to construct a policy framework, which could facilitate all kinds of private pools of capital or investment vehicles. Later in April 2022, SEBI further amended the Alternative Investment Funds (AIF) Regulations 2012 via a notification on 24th April 2022. The amendment is an essential regulation for India to establish itself as a centre for both domestic and international investments. It also involves private equity in the country’s financial system. Beneficial for the Indian real estate industry, it encourages sustainable growth.

Cutting-edge tech-based platforms now exist to provide AIF investment options, making the entire process more convenient and transparent. SEBI wants experienced investors to grasp the inherent risks of such investments and has established a minimum investment threshold of one crore to participate in an AIF.

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The business potential

AIFs in India are undeniably getting popular. As of 31st March 2022, the Indian alternative investment funds (AIF) industry has amassed commitments worth Rs 6.4 lakh crore, which is a significant increase of seven times over the past five years. It is likely to grow further in the coming years. For the AIF industry to continue to expand, the government needs to acknowledge the industry’s expectations of adopting robust global best practices, aiding on-shore fund management, and unleashing the domestic capital pool through further regulatory and sectoral support. Investors can improve their portfolio diversification and returns by carefully evaluating and incorporating AIFs.

The significance of AIFs

Housing credit growth has experienced a significant increase since April 2022, with a growth rate of 16.2 percent recorded in November of the same year. This growth is a reflection of the positive demand from consumers. Following the opening of markets after the Covid-19 pandemic, there has been a greater focus on commercial real estate development. The retail real estate segment has also been affected by the growth of e-commerce. These developments have attracted both local and foreign investors, leading to greater investment in commercial real estate projects. It is likely that the stock of organized retail real estate will increase by 28 percent to 82 million square feet by 2023, hence the use of AIFs to create an efficient capital stack.

AIFs have the ability to infuse much-needed liquidity into the Indian real estate sector

Until recently, alternative investments were only available to high-net-worth individuals and ultra-HNIs due to their high cost and the risks associated with them, as well as their lack of regulation and liquidity. However, now the general public can invest in these asset classes, starting with small investments spread across different properties. With skilled investment managers managing a diverse investment portfolio, an AIF reduces the risk profile of real estate as an asset class and offers a defensive investment option.

Most importantly, the funds will be used in developing stalled and delayed projects – a pain point of the real estate sector. With the sector’s outlook for 2023 being optimistic, the growth will complement the growth of AIFs in India. The property markets in top cities are likely to remain stable and thrive due to an increase in institutional investments and stakeholder confidence.

(The author is CMD, Colliers India. Views are personal.)