Investors Trust Real Estate Industry over MF’s

The rich rarely admit when they lose money. Often it’s too little to matter. More often, they are too proud to tell the world how wrong they were. A client, who asks a private wealth manager to handle Rs 50 lakh, may change her banker if the man fails. But she is unlikely to write a letter to the editor, or drop a mail to regulators — things that angry mutual fund investors often do. Better known as HNIs, these investor’s fish for ‘sophisticated’ products that appear smarter than stocks or bonds.

Over the last four years, more and more of them have been drawn to properties. They don’t get into cash deals, broker-dealings and paper work — the messy side of real estate transactions. Instead, they ask real estate fund managers to grow their money. Their message to fund managers is simple: “first, don’t buy listed stocks, go for unlisted builders; second, pick those property firms with projects in Mumbai and Delhi, the hottest markets.” Around 15 local real estate funds are today managing Rs 10,000-12,000 crore. That’s as big as the portfolio management business of stock brokers.

Like PE players, their more glamorous neighbours, the property firms offer a hurdle rate of return to investors. Simply put, this means that the fund has to generate a floor return, that varies from 8-11%, before it can claim a slice of the profit. This return (which isn’t guaranteed) goes to investors and anything above it is shared in a way where the fund keeps 20% of the profit and the balance 80% goes to investors. Say, the hurdle rate is 8%, and the fund generates 15%.

The extra 7% over the hurdle rate is split, with investors receiving 5.6% and the fund keeping 1.4%. One of the funds, backed by a blue-chip institution, has been clever enough to raise money before Lehman, sit on the cash for a year and invest it after the meltdown. But not all have been lucky; and a few missed the bull run. The four-year old party is slowly beginning to get a little crowded. Corporates, professionals, builders and brokerage firms are floating funds. And none of them has a problem in raising money.

What’s helping is a near stagnant mutual fund industry. Very little new money is flowing into mutual funds, which can no longer use investors’ money to pay brokers and banks who have so far helped them mop up funds. But real estate funds, away from the regulator’s glare, have no such curbs. They are paying as high as 3-4% commission to whoever is interested to raise money for them.