Identifying the risk factors in Indian non-listed real estate funds
| Pages | 429-453 |
| DOI | https://doi.org/10.1108/JPIF-11-2017-0073 |
| Date | 12 July 2018 |
| Published date | 12 July 2018 |
| Author | Ashish Gupta,Graeme Newell,Deepak Bajaj,Satya Mandal |
| Subject Matter | Real estate & property,Property management & built environment |
Identifying the risk factors in
Indian non-listed real estate funds
Ashish Gupta
RICS School of Built Environment,
Amity University, Noida, India
Graeme Newell
Department of Economics and Finance, School of Business,
University of Western Sydney, Penrith, Australia, and
Deepak Bajaj and Satya Mandal
RICS School of Built Environment,
Amity University, Noida, India
Abstract
Purpose –Investment in non-listed real estate funds (NREFs) in an emerging economy like India has its own
challenges that entail a detailed understanding of the risks. The purpose of this paper is to identify the key
risk factors across the life cycle of a NREF, based on a considered feedback of various real estate fund
management stakeholders. It is important for the investors and fund managers to appreciate these risk
factors to make informed investment decisions.
Design/methodology/approach –The present study based on the literature survey and discussion with
experts identifies 39 risk attributes, which were further summarized using factor analysis into a smaller set of
factors impacting NREF returns (risk). The relative importance of each risk attribute was examined and
ranked using the relative importance index (RII). Further, cluster analysis using Euclidian distance was used
to partition these risk attributes in various segments depending on their importance.
Findings –The risk attributes ar e summarized as five risk f actors, i.e. regulat ory RISK, foreign dire ct
investment risk, entry risk, business risk and project risk. Whereas t he top five perceived risk attributes
are investee/partner r isk, project entitlem ent risk, title risk, le gislative and regulat ory risk and project
execution risk.
Practical implications –This study has significance to the industry practitioners and the academic
community in developing an understanding of the dynamic nature of risks across the life cycle of the NREFs
in India and classifying them at the macro-meso-micro levels.
Originality/value –This paper is one of the first attempts to understand the risks impacting NREFs
in India. It will help investors develop a better strategic understanding of the risks across the life cycle of
an investment.
Keywords India, Risk analysis, Factor analysis, Private equity real estate, Macro-meso-micro,
Non-listed real estate funds, Relative importance index
Paper type Research paper
1. Introduction
Real estate forms an important part of an investment portfolio and many institutional
investors (pension funds, insurance companies, sovereign wealth funds and fund managers)
invest in real estate through non-listed real estate funds (NREFs). These funds are typically
structured as close ended funds having limited period contributions from the investors
called Limited Partners (LPs). There has been a significant growth in NREFs in last few
years and many investors have used it to gain exposure to real estate (Brounen et al., 2007;
Haran et al., 2008; Fuerst and Matysiak, 2013). The importance of NREFs as an investment
vehicle is evident as, reported by Preqin (2018), these funds reached a record high of $81bn
assets under management in June 2017 and since 2013, they have distributed nearly $900bn
back to the investors.
In recent times of global volatility, the emerging and developing economies of Asia have
emerged as an alternative destination for global capital. Apart from providing advantages
Journal of Property Investment &
Finance
Vol. 36 No. 5, 2018
pp. 429-453
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-11-2017-0073
Received 6 November 2017
Revised 29 March 2018
Accepted 4 April 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
429
Identifying the
risk factors
of diversification, this region has witnessed substantial economic growth and provided
investors higher returns than in the developed markets of Europe and Americas (Lee, 2001).
IMF (2018) has projected growth of the global economy during 2018 at 3.9 percent, whereas
the two largest emerging and developing economies of Asia (China and India) are expected
to grow at 6.6 and 7.4 percent, respectively. PREI (2012) has predicted the Asia-Pacific
region to be the largest commercial real estate (CRE) market having 39 percent of the global
market share by 2021, which is likely to increase to 50 percent by 2031. India has emerged as
the fastest-growing major economy in the world; during 2015, it overtook China for the first
time in many decades. It is the seventh largest economy, it is expected to overtake UK and
France in 2018 to become fifth largest. Further, it is estimated to become the third largest by
2032, after China and USA (CEBR and GCP, 2017). Refer to below for the general, financial
and economic profile of India. Though India is only 1.2 percent of the global commercial real
estate market (Gupta et al., 2017), with fast growth and regulatory changes like the
introduction of REITs and the Real Estate (Regulation and Development) Act, 2016 (RERA),
it is likely to be a large and important play going forward. KPMG et al. (2017) estimated
India has a stock of rent-yielding completed office property of 537m square feet, valued in
excess of $70bn.
General, Economic and Financial Profile of India: 2017 (Sources: www.cia.gov; www.
transparency.org; www.weforum.org, JLL (2014, 2016), AT Kearney (2017)):
(1) General profile:
•Capital: New Delhi.
•Area: 3.3 million KM
2
(7th largest).
•Population: 1.28 billion ( July 2017 est.), growth rate 1.2 percent, 45.2 percent is
o25 years age (2017 est.) (2nd largest after China).
•Median age: 27.6 years (2016 est.).
•Legal system: common law system based on English model, with personal laws
for various minorities.
•Major cities: New Delhi (capital) 25.7 million; Mumbai 21.043 million; Kolkata
11.766 million; Bangalore 10.087 million; Chennai 9.62 million; Hyderabad 8.944
million (2015).
•Urbanization: urban population −33.5 percent (2017 est.), Rate of Urbanization
−2.28 percent (2015–20 est.).
•Administrative units: 29 state and 7 union territories.
•Corruption perception: No. 79 (2016) least corrupt (China No. 79).
•Global competitiveness: No. 39 (2016–2017), No. 55 (2015–2016); (China No. 28 for
both periods).
•Real estate transparency: Tier 1/Tier 2/Tier 3 –No. 36/No. 39/No. 52 (2016),
previously No. 40/No. 42/No. 50 (2014).
•Foreign direct investment confidence: No. 8 (2017), No. 9 (2016), No. 11 (2015);
(China No. 3, 2017).
(2) Financial and economic profile:
•GDP (PPP): $8.66 trillion (2016 est., No. 3 largest).
•GDP (Official exchange rate): $2.25 trillion (2016 est.); agriculture: 17.4 percent,
industry: 28.8 percent and services: 46.2 percent (2016 est.).
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