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Rich investors seek high realty returns

By Mehul Shah & N Sundaresha Subramanian
October 20, 2011 12:40 IST
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DollarsProducts structured on real estate and promising over 20 per cent annual returns are gaining popularity among wealthy investors.

These products, sold by wealth managers to their high networth individual clients, could have land or unfinished properties as underlying assets, with a buyback agreement after a certain number of years.

With a minimum investment of Rs 10-15 crore (Rs 100-150 million), these products are sold to a small number of HNIs.

Real estate developers, who are finding it difficult to get funding from banks, are raising money from wealthy investors through such products.

In one such product structured by the wealth management division of a domestic brokerage, four wealthy clients of the firm have invested Rs 10 crore (Rs 100 million) each in a portion of an unfinished property in Mumbai.

The developer has transferred this portion of the property in the names of these investors at almost half the prevailing market rate.

The developer has also signed a separate agreement with these investors to buy back the property after three years, with an annual internal rate of return of 20 per cent.

If the developer doesn't buy back the property after the lock-in period of three years, investors can sell this property in the market.

"Real estate structured products are becoming popular among HNIs within the alternate asset class category," says Rajev Sharma, country head (wealth management), Unicon Financial Intermediaries.

The commission for wealth management firms selling such structured products is

also good. In some cases, wealth managers do not charge anything from their clients in the first year.

After that, they receive two-three per cent commission every year till the expiry of the lock-in period.

Such deals are offered by developers not only in new residential projects, but also existing commercial properties. Nikhil Kapadia, CEO (wealth management), Avendus Capital, says developers are offering such sale, lease back and buyback deals to wealth management firms.

"Since we have an idea of the developer's balance sheet and how stressed (s)he is, we might be able to get a better rate for our investors."

Kapadia cites an example where a developer in the Bandra Kurla complex was offering a deal where rental yields worked out to 13 per cent.

"The higher yield means the investor is getting the property at a discount to the market price.

"But, apart from price, a wealth manager also needs to look at governance, credit rating, tightness of tenancy agreement, etc, before striking a deal," says Kapadia.

Typically, rental agreements for commercial space operate in the 3+3+3 model, wherein both, landlord and tenant, have an option to extend or discontinue the agreement at the end of three years.

Usually, investors prefer continuity in the rental lease when they enter such projects.

Some investors also prefer clauses which trigger a higher rate of interest or a premature buyback in case the credit rating of the borrower falls during the tenure of the agreement. Such investments fetch up to 19-20 per cent returns for investors on the aggregate if one adds up the yields and capital appreciation.

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Mehul Shah & N Sundaresha Subramanian in Mumbai
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