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Arnya offers real estate debt funds. For the benefit of our readers, can you take us through the concept of real estate debt funds?
Real estate debt funds invest in the debt instruments of real estate projects or companies, such as loans or bonds. The focus of such funds is on providing financing to real estate developers in exchange for interest income.
These funds invest in the early stage of any construction project of mid-size residential projects. This stage requires a lot of private investment because banks, due to regulatory guidelines, are not allowed to finance the projects at this level.
The exit from these investments is financed by other lenders or by sales operations.
Arnya Real Estate Fund-Debt is the first fund offered by Arnya RealEstate Fund Advisors. It is registered with SEBI under Category II of Alternate Investment Funds (AIFs).
What are the opportunities and risks involved in real estate debt funds?
Some of the key risks associated with real estate debt funds are legal challenges and complex framework. Doing an effective risk management exercise and understanding the legal and technical framework of the real estate market are the most important risks associated with real estate debt funds.
I think that the real estate business is a cyclical business. The last downward cycle lasted for around 9 years between 2012 to 2021. Since 2021, the real estate market is in a revival mode.
Further, based on the GDP and per-capita income growth of the Indian economy, I think that the demand will be there for next five or so years.
With this fund, Arnya Is also planning to work with developers as partners. And there are plenty of developers in real estate. How do you shortlist developers?
We are planning to work with the developers who are there in the market for quite some time and have good credibility and financial health.
We will go through the financial health of any developer before deciding to go ahead with partnership. This will include liquidity, order book and debt of the company.
Real estate companies are highly indebted. How do you mitigate this risk?
Real estate companies being in debt is a huge misconception about the industry. It may be true for one or two specific companies but real estate industry as a whole has much less debt than other sectors in the economy.
Why do you think investors should invest in real estate funds?
Traditionally, in every big economy, the money managed in the real estate sector is more or less equal to the money being managed in equity markets. But in India, the amount of money in the real estate related financial market is just a fraction of the money in the equity market.
Over time, Indian real estate is also moving towards formalization and financialization. RERA’s regulatory framework will further reduce the cash deals in the real estate.
Where does real estate debt fund fit into an investment portfolio?
Currently, the real estate sector has only two products for investment - REIT and AIFs; in the coming time there will be more products coming in.
With rising maturity of investors and increasing number of wealthy individuals, the demand of specialized products like real estate debt funds will go up.
The distributors can start experimenting with the real estate funds. It will further diversify the portfolio.