By: Amit Bhagat, MD & CEO, ASK Property Investment Advisors
Track2Realty Exclusive: Direct investment in case of leveraged returns has to take into account carrying cost (interest cost) and in case of non leveraged returns should consider opportunity cost.
Opportunity cost is the cost of opportunity lost in case the investment is not yielding desired results i.e. in both cases interest and opportunity is a double edged sword.
The above shortcomings are effectively addressed by Domestic REPE (Domestic Real Estate Private Equity) funds which are managed by team of experts with defined investment strategy. REPE funds are pooled vehicles registered with SEBI. Duration of these funds is typically 5-7 years.
REPE comprises of professionals with experience in real estate, construction and asset management experience. These funds have a defined investment strategy which defines investment criteria, financial norms and location strategy. This mitigates concentration risk of area, developer and segments.
In case of residential real estate, investment strategy involves selection of micro-markets which are established/upcoming growth corridors in a given city/region. Micro-markets are selected based on extensive research of factors like employment growth, infrastructure developments like roads, railways, metro railway, airports facilities, healthcare and educational facilities.
The Asset Management Professionals of REPE funds are in a better position to select right development partner based on objective selection criteria. They have hardcore construction experience to monitor day-to-day progress of projects invested; this ensures timely completion of projects with requisite standards.
Success of REPE funds is based on their ability to invest in quality projects with timely completion. This involves proper assessment of developer risk and completion risk. Developer risk is more on account of over leveraging and over commitment. Completion risk is on account of quality and committed time duration.
Assessment is based on criterion like developer profile, construction quality, execution record, financial position, legal and regulatory history. The projects are also examined with respect to regulatory approvals received and proposed plan. Financial viability of project ensures that proper estimates of cost and pricing is undertaken.
…to be continued
