Traditionally, Indian investors have relied primarily on bank deposits, equities, mutual funds and real estate (personal use) for their investments. However, with an improvement in the regulatory environment and availability of new investment avenues, investors have started considering asset classes that were – until a few years ago – limited to institutional participation (eg, Commercial real estate investments, private equity (PE) and venture capital funds). Investments in commercial real estate provide better annualised yields (11-13 per cent), compared to residential real estate (three-four per cent) in India.
Thus, it becomes a favoured investment avenue. High net worth investors have, for a long time, been investing in localised commercial real estate and enjoyed nominal rentals. However, these were largely unorganised and sub-standard and restricted to a few offices in a building.
With a transformation in the real estate sector over the past few years, entry of multinationals and funds, the focus has shifted towards Grade-A commercial properties offering world-class amenities. As a result of a change in quality of these buildings and tenants, the rentals have comparatively moved upwards. Investors can, through various but few private equity channels, invest in such projects and enjoy monthly yields along with annual capital appreciations (four-seven per cent). India enjoys extremely attractive commercial rental yields, compared to other cities in the world, which has made this a favoured alternative asset class for most investors.
As a result of these market changes, and to keep in line with global developments, regulatory authorities had framed guidelines for real estate investment trusts and real estate mutual funds, which are currently under consideration. It is expected that once this space opens up – like in other parts of the world – there will be increased participation from investors.
Over the past few years, retail investors have been exposed to attractive alternative diversification opportunities across the country, especially in real estate, which is poised to grow manifold given the development pipeline. However, key aspects that should be considered by investors are choosing investment managers with a talented pool of individuals having an established investment pedigree and a track record of returning capital and providing returns to investors.
The author heads Milestone Capital Advisors, an independent private equity investment advisory firm