Astonishingly, Indians still invest in low-yield FDs, gold, and low-rental-yielding residential properties in today’s digital world. The returns are paltry in such investment instruments.
Real estate is an industry that remains opaque and illiquid. While listing portals have existed for a while, most of the transactions are still offline. Buyers, sellers, and other intermediaries operate in an environment of distrust with each other. The winds of disruption, though, are not very distant.
Demonetization and Benami Transactions Amendment (Prohibition) Act 2016, followed by RERA regulation, has led to consolidation and discipline in the real estate sector regarding timely project delivery and financial prudence. RERA embraced the government’s digital India vision by making it compulsory to set all project-related details on the authority’s website, infusing additional customer trust. The constant regulations and government support have opened up new lanes of growth for real estate developers and piqued the interests of foreign and domestic investors in the sector’s growth story. These regulations strive to improve transparency, bring greater accountability to the realty sector and set disclosure standards to safeguard the interest of all stakeholders. It establishes a regulatory mechanism to deal with disputes arising from transactions and levies penalties to increase institution-investor participation and regulate the sector to make India an attractive investment destination.
Sebi announced AIF regulations in 2012 to construct a structure where a regulatory framework is available to all shades of a private pool of capital or investment vehicles. These instruments have tremendous potential to propel India to a higher level of sustainable growth. SEBI further amended the Alternative Investment Funds (“AIF”) rules via a notification on April 24th, 2022. It amended the SEBI (Alternative Investment Funds) Regulations, 2012. This amendment by SEBI is a critical regulation towards promoting India as a hub for Indian and foreign investments and the inclusion of private equity in its financial ecosystem.
Over the past decades, global financial actors have become increasingly dominant in this market. This new vision, referred to as the ‘financialization of real estate investments, is arguably transforming the primary function of a house from a place to live to a commodity for investment and quick profit.
A Structural shift beyond traditional investment is catching up
AIFs are privately pooled reserves investing into listed and unlisted asset classes structured as early-stage start-up funds, late-stage Pre-IPO funds, infrastructure funds, real estate funds, hedge funds and many more as per Sebi’s category I, II & III categories. Category – II is the most significant, comprising almost 80 per cent. This category includes private equity funds, distressed funds and real estate funds.
AIFs have captured the interest of HNI/UHNI investors seeking diversification via alternatives to maximise risk-adjusted returns by partaking in private markets via private equity and debt.
AIFs give a tinge of novelty and innovation to a new class of investors seeking a unique style of offerings and a different approach to the usual system of managing risks and rewards. Driven by the uncertainty and volatility in the domestic equity markets, family offices and high net worth individual (HNI) investors are expanding their investments into avenues that provide better returns on their fixed income portfolios. Another reason is that equity valuations are stretched and close to historic high levels due to the unleashing of liquidity by prominent central bankers worldwide.
AIFs play a pivotal role in the future of real estate investments
There has been a wave of venture capital investments in India for the past few years. The rise in popularity is said to result from HNI investors pursuing less conventional investment routes to grow their capital and the increasing fragmentation of traditional insurance pools. Moreover, Indian businesses draw a lot of foreign investments too. The Government chose to set up a new category of investments that will drive money into socially and economically desirable sectors like real estate. It will be a unique asset class for investors with fewer investment constraints, leading to increased long-term Indian assets.
Investment managers achieve consistent and compelling value propositions for their investors. They bring adequate AIF investment opportunities, manage financial assets and create strategies to accomplish a specified financial goal for investors. From an asset class diversification perspective, private real estate investment managers provide investors with diversification through various standalone investment opportunities.
It would enable HNIs to invest in a manageable and sustained fashion without feeling like they are not part of the real estate investment ecosystem. The investors can start small and spread their investments across different properties.
By providing a diverse investment portfolio managed by skilled investment managers, an alternative investment fund lowers the risk profile of real estate as an asset class. As a result, it offers the advantage of a defensive investment option.
Real estate alternative capital funds offer an efficient hedge mechanism through portfolio diversification. Unlike direct investments, alternative investment funds offer a far more comprehensive choice of possibilities because they are a pool of assets. Most of the investment would get allocated to various projects spread across multiple projects in optimal locations.
As Inflation disrupts, AIF takes the center stage
Indian AIF industry (alternative investment funds) is currently at Rs 6.4 lakh crore commitments raised as on 31st March 2022 and has grown seven times in the past five years.
Undoubtedly, the AIF’s popularity is growing in India. For the continuous growth of AIFs in India, the Government must accept the industry anticipations of implementing the robust global best practices, support onshore fund management, and unlock the domestic capital pool through sectoral and regulatory support. Investors can enhance diversification and return if AIFs are carefully analyzed and added to the portfolio.
SEBI highly regulates AIFs
India offers a unique combination of a vast market, fast-growing businesses and reasonably strong public markets. Sebi’s AIF Regulations established a regulatory framework that would govern India’s alternative investment fund asset class. The clarity and specificity provided by the AIF Regulations for different pools of capital will help India’s private equity industry to become more mature.
Sebi’s regulatory framework will encourage capital formation and go a long way toward meeting India’s considerable requirements for investment in Real estate. A streamlined, well-regulated Real estate industry will not only strengthen the foundation of private capital in India but also boost investee confidence and eventually increase deal-making opportunities across the board.
Future of AIF in India
AIFs would drive much-needed liquidity into the Indian real estate sector. Aside from the high price that only high net worth individuals (HNIs) and ultra HNIs could afford, the general public had previously been unable to invest in these asset classes due to the dangers, lack of regulation, and lack of liquidity of alternative investments. We have new-age technology-driven platforms offering AIF investment opportunities that can make the process more convenient and transparent. Sebi desires that sophisticated investors understand the underlying risk of such investments and has set the minimum investment limitation to invest in an AIF as one crore.
Given the recent market turbulence, fixed-income alternative assets are a smart choice for everyone’s portfolio. Regulators are assisting in deepening financial markets and protecting investors by adding more clarity to the process. Post the early 90s, access to public stock markets became the capital driver for a considerable part of the population. India is on the verge of an identical opportunity, where participation in alternative ventures will fuel the country’s next wealth-creating boom.