Earlier this year, Prime Minister Narendra Modi extolled the role of NRIs (Non-Resident Indians) in India’s progress and emphasized that this is the ideal time to invest in the country’s growth.

However, one look at the wealth distribution preferences of this cohort reveals that most NRIs are increasingly remitting money to India. In fact, in the last fiscal year India clocked the highest growth in inward foreign remittance with the transaction value surging 26 percent to $112.5 billion. The remaining savings are then used for real estate investments, especially in India. It is no surprise that NRIs investments in India real estate have doubled in the past year with their search traffic for purchasing property in India rising by 117.7 percent year-on-year.

Yet, many NRI forums have messages around stalled real estate projects and the limited liquidity in real estate portfolios. This poses a bigger question – can there be a wealth generation opportunity in real estate given the multiple uncertainties? Alternative Investment Funds (AIFs) seem to have presented an interesting option amidst this conundrum.

The alpha opportunity

Over the past few years AIFs have emerged as a popular investment vehicle, especially for NRIs. Add to it the recent regulatory developments, which are rendering them as an investor-friendly option. Though the fundamental drivers of real estate AIFs are underscored by India’s economic growth and the stability of its market, the most attractive aspect is the outsized alpha opportunity that commercial real estate presents in comparison to other global markets.

Such alpha opportunities exist across India’s urbanizing landscape and offer a steady stream of earnings that range between 18 and 20 percent, making real estate a favourable investment choice. A recent study by PMS Bazaar reported that India’s alternative investment sector, which includes Portfolio Management Services (PMS) and Alternative Investment Funds (AIFs), has surpassed the performance of conventional mutual funds industry and grown at a CAGR of 26% with assets under management (AUM) surging to 13.74 lakh crore as of June 2023.

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Though NRIs often have the same investment avenues as resident Indians, there may be a few constrains owing to the requirements of the home country and the Foreign Account Tax Compliance Act (FATCA). For instance, the strict regulations of the US Securities and Exchange Commission (SEC) limit the mutual fund options available to the US and Canada-based NRIs. Additionally, mutual fund investments may not be a wise choice for NRIs domiciled in the US or Canada due to restrictions governing passive foreign investment companies (PFICs).

At this juncture, category II real estate funds, which provide access to the property markets without direct ownership, help overcome some of the impediments.

Low volatility

Considering that AIFs are not corelated to stock markets, they enjoy lesser volatility and act as a hedge against market uncertainties, particularly when compared with traditional equity investments. While this makes them suitable for risk-averse investors looking for stability.

Higher yields

In an era of low interest rates, NRIs are seeking higher returns on their investments. Real estate AIFs often offer attractive returns, making them desirable for these NRIs looking to capitalize their income. The real estate sector can generate rental income and capital appreciation, contributing to higher returns compared to traditional investments.

Tailored Opportunities

AIFs are structured to offer specialized investment opportunities to sophisticated investors. While this helps in filling the void between mutual funds and non-banking financial companies (NBFCs), it enables tailoring and aligning the fund to fit specific investment goals, whether it is diversification across asset classes or exposure to a single sector.

Regulatory Reforms

Under the purview of SEBI, the AIF space has witnessed significant regulatory changes and standardization in the recent times, making them more investor-friendly and aligned with other investment vehicles, such as and Portfolio Management Services (PMS) and mutual funds. Such high compliance measures have helped enhance transparency and regularize commission structures.

Diversification Across Asset Classes

Real estate AIFs offer an opportunity to venture into investment outside stocks and bonds. NRIs may consider adding real estate as part of their investments to mitigate the risks on their profile or even increase their total returns. This diversification is particularly important for people looking to spread their investments across different asset classes to mitigate risk.

Final Thoughts

Currently, the increasing demand in the Indian real estate market for investment opportunities by non-resident Indians is a factor adding up to the current upswing. AIFs have now simplified and lowered investment costs for NRIs investing systematically in the Indian property market. The merits of low volatility, portfolio diversification, greater earnings as well as regulatory reforms make real estate AIFs an attractive option for NRIs who want to expand their investment and take advantage of India’s growing real estate market. The prospect of NRIs’ real estate AIFs is bright as long as the Indian economy keeps expanding and the government maintains supportive policy framework for foreign direct investments.

(By Shiv Parekh, Founder & CEO, hBits)

Disclaimer: This is the author’s personal opinion. Readers are advised to consult their financial planner before making any investment.