Real Estate Funds for a while were flavour of the month: HDFC, IL&FS, Peninsula, Aditya Birla Group all got in on the act some years ago and now big boy Reliance (Realty) has too. So, are these funds all that they’re cracked up to be?
Short answer: No.
It’s true that none of the funds appear to have lost you money (yet) and that there’s plenty of opportunity in the real estate space and that it’s otherwise a space where you would need to invest significant amounts of money to make a play. But even if you take all of this as plus points for getting into a realty fund, the minus points take considerable sheen off the offering.
If the plus points above are three floors above ground level, let’s see how deep underground the minus points take us.
Basement level 1: The funds ask you to commit to a lump sum of money to invest in the fund. That’s cool. But then they don’t take the money from you until they’re ready – which sounds like a good idea, but in real life, it’s not. They ask you to invest in bits and pieces, often years apart. So naturally, you need to match your available funds with the call to invest – which is unpredictable. So, when the call does come you scramble and may even need to disinvest to make the investment. Inefficient.
Basement level 2: Having got you to invest in bits and pieces they then return the favour by returning the amount to you in bits and pieces. HDFC is a particularly egregious example: as they disinvest from a company, they return you the money with whatever gains or accumulated interest. Again, this sounds good – you’re getting your money back quickly, right? But in real life, it’s much less so. You invest Rs.25 lakhs and then they return you a lakh after a couple of years and then may be another Rs.60,000, and so on. There’s no predictability to this exercise, it’s not on a timetable. So you don’t see your investment coming back in a chunk and the tendency to fritter it away is natural.
Basement level 3: These funds are not listed on any stock exchange so the investment is illiquid. You’re stuck. You cannot trade or get out. Particularly relevant since the lock-in tends to be long – 7 to 10 years with no option to quit is nuts.
Basement level 4: Reporting by the existing funds has been convoluted to say the least. Some send you a glossy brochure with pictures of buildings where your money is allegedly being put to good use. Some send you a sixteen-page list of all the little debentures and investments made with your money in all the innumerable holding companies that real estate types like to use. One even sends you a bank book of the transactions done with your money and what your balance sheet looks like. All of which is completely meaningless and quite incomprehensible.
Basement level 5 (we’re getting into nuclear fallout shelter territory here!): The tax treatment on these funds is completely opaque. One fund treats the amounts it pays you as dividend and doesn’t deduct tax at source but covers its – ahem! – posterior via a five page letter every quarter urging you to seek independent tax advice. Another deducts tax at source from whatever it pays you and issues you swanky TDS certificates. So is it taxable or isn’t it? If the funds themselves aren’t sure, what makes you think you’re going to be?
Basement level 6: Because of all this instalment-based taking of your money and giving it back and the confusion around taxation and the opaque reporting (no NAV? Really?) it’s very unclear what return you’re actually getting on this investment. Which may be the point.
Basement level 7: Real estate as an asset class has actually done pretty awfully over the last 4 years – low returns and fairly stagnant. This might not seem obvious to you if you’re looking to buy a house, but it’s true. As a sector, real estate has done pretty lousy over the last few years and unless the economy picks up, it looks like it will continue to do so. (Example: http://dailypostindia.com/news/10058-outlook-for-indian-real-estate-sector-for-2012-negative-fitch.html)
Basement level 8 (okay, Dante’s Inferno move over): All the players in this space seem equally muddled. Product offerings are opaque, with so much fine print that intermediaries who push the products don’t really understand them, and can’t clearly explain them or the potential returns. A client of ours has an investment in one such fund and when we got him to enquire with his previous advisors to provide more details about his obligations and rights, all he got was a glossy brochure and a confession that there was no one who knew enough about the deal to tell him anything more – like when does he get his money back, what return has he earned so far, when are they going to ask for the balance funds committed…
If dedicated players like HDFC and Peninsula haven’t worked out the kinks, chances that a Reliance will are slim.
I think we’ve gone far enough underground to satisfy even the most tenacious spelunker. If you’re at all claustrophobic or have a fear of (inverted) heights, stay away from real estate funds.