Real estate is increasing in India.

Here is your chance to own a slice of office property at Nariman Point by investing just Rs 5 lakh. The 30-40% decline in property prices (from peak levels), coupled with firming interest rates have resulted in private equity (PE) funds eyeing investment opportunities in real estate rental space. A few fund houses have already begun seeking investment commitments from investors, indicating 16% to 22% as annualised portfolio returns.

PE funds investing in real estate rental space follow a simple investment strategy. These funds are suited for investors who are risk-averse and prefer returns similar to those from fixed income schemes. According to PE industry officials, Milestone Capital Advisors, Xander Real Estate Partners, Indiareit Fund Advisors and an investment arm of Delhi-based real estate company DLF are planning to launch rental yield funds in India.

“Real estate rental funds are launched when property rates are close to their troughs. This helps funds to buy property at lower prices. Moreover, yields of investments increase in a rising interest rate environment,” said Ashish Joshi, managing partner, Milestone Capital Advisors, which raised money for a second fund investing in rental assets.

A ‘rental yield PE fund’ only invests in properties that are either occupied or under long-term lease or rent. In simple terms, the money collected from investors is used to buy out the property from the current owner. Once the property is acquired, the PE fund becomes eligible to receive rent from tenants. The rent portion is restructured or re-negotiated regularly in order to meet the return profile of the investor. The fund (and its investors) gain by way of rent recovery and appreciation in property prices. PE funds, normally, invest in commercial property. The managers route a major chunk of the pool into office properties and the remaining into IT/ITeS parks, shopping malls and warehouses.

“The segment looks good as rentals are likely to go up 10-15% over the next few months. Demand for commercial real estate space will go up as supply has come to a standstill post the economic slump. This will not only improve yield for investors but also increase overall commercial property value,” said Kamal Khetan, vice-chairman & MD, Piramal Sunteck Realty.

Rental returns from real estate investments have been traditionally higher in India compared to other Asian countries. This is mainly due to the restrained capital flows and the lack of an organised institutional investment market. According to real estate experts, a sharp correction in rentals during 2008 and first half of 2009 will result in rentals surging over the next few months. The rental market usually reacts to the surge in equity market with a 5 to 8-month lag.
As per industry estimates, Mumbai office rentals have declined significantly over the past two years. Rentals in Nariman Point declined by a maximum of 14% from 2008 peak levels, and currently range from Rs 200-400 per sq.ft. per month. In the IT hubs of Gurgaon and Noida, rentals declined by almost 25% from 2007 peak levels, but have since stabilised. Hyderabad was one of the worst affected, as rentals dipped over 35% from peak-levels.

Investors who want to invest in rental yield funds should re-focus their investment strategies around rental income rather than property appreciation, which has been the case for most investors up till now. However, experts point out that the tax implications of investing in rental yield funds may turn out to be cumbersome.

“Rental yield funds have huge tedious tax implications. Investors will have to pay tax on income generated by way of rental yields. Moreover, expenses are high on such funds and are payable upfront to the fund manager,” said independent financial planner Gaurav Mashruwala. According to Mr Mashruwala, such funds will do well if asset are bought at lower price levels or just after a deep correction.

It's been long that we have heard of any possessions of the housing projects. Or is it that only launches of projects make news? "Yes , only
launches make news, which is relevant only to real estate developers to attract gullible buyers. How many times have possessions made news? Never" , said Manoj Thaldi, a prospective flat buyer to FINANCIAL TIMES. Manoj is looking for a project nearing possession.

Apparently, it's time only for new launches and no possessions (read delivery of goods promised in the contract). Let's take the most recent example of the Amrapali Group, which announced the launch of its new project Amrapali Zodiac, last week. About a couple of months back, it had announced Amrapali Empire. It's not just to do with Amrapali, other real estate developers like DLF, Vipul, Pearls, BPTP, Mahagun, Omaxe, SVP and Assotech - all fall in the same league. Omaxe and Assotech have announced about two to five projects in past five months in NCR and prominent cities of India.

Good news, so far, is for the customers of the Meriton Group; the developer soon promises to give away possessions. "We will hand over the flats of the Orange County project in Indirapuram to the flat owners, maximum by April 2010, which will exclude condominiums" , said Avnish Agrawal, one of the directors, Meriton Group, ABA builders. Though like any other project, Meriton Group's two projects - Orange Country and Olive County are also running behind time by about eight to 10 months.

Rohtas Goel, CMD of Omaxe, promises to deliver Grandwoods Noida, Omaxe Heights Faridabad, Omaxe City Sonipat, Omaxe City Bhiwadi, Lucknow, PDA OmaxeCity Patiala, within the next six months.

Ashiana is one of the builders in NCR, which is always praised amongst its buyers, for timely delivery of its projects. "We have always delivered our projects within time. The last one we handed over was Ashiana Upvan in Indirapuram and the one nearing possession is Ashiana Palm court in Raj Nagar Extension, Ghaziabad. We will start giving the possession from June 2010", Rohit Raj Modi, director Ashiana Homes Private limited and spokesperson Raj Nagar Extn NH-58 .

While the SVP Group's two projects - one Gulmohar Greens in Mohan Nagar and other Gulmohar Towers in Ghaziabad are nearing possession too. They too are running behind time by four to eight months. "We will give possession of Gulmohar Greens' flats by March 2010 and Gulmohar Towers' flats by April 2010," said Sunil Jindal, CEO, SVP Group.

Notably, when buyers book flats, builders promise them possession before time, which never happens . Also, they promise compensation if the project gets delayed. But do the buyers actually get compensation ?

"I am heading for possession of my flat in Indirapuram, which has got delayed by a year. Apparently, the builder is only talking about the registration money and last five per cent payment. He doesn't want to touch the topic of compensation. We won't even get it if we will not fight for it" , said Ganesh Sharma, a flat buyer.

Yes, even builders forget the compensation topic if a customer doesn't bring it into notice and fight for it. "Every builder company has a clause to pay and compensate its customers if a project is delayed. If the customer asks we do pay him/her compensation, considering it as a penalty on our part" , admitted Jindal of SVP group.