`Structured real-estate credit funds have become more attractive’

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With the domestic slowdown continuing and coronavirus outbreak creating ripples across the global economy, HNIs (high net worth individuals) are cautiously deploying incremental funds, says Virendra Somwanshi, MD and CEO, Motilal Oswal Private Wealth Management (MOPW). Excerpts from an interview:

How are your clients reacting to the current economic slowdown?

Many of our clients have a documented investment charter defining their asset allocation strategy, and they stick to it in all phases of market conditions. With the recent uptick in performance of the small-/mid-cap segment since January 2020 and the RBI’s introduction of LTRO (Long- Term Repo Operation), benefiting one- to three- year papers in debt mutual funds, our clients are looking to increase exposure to equities and debt as per their asset allocation. Many are looking to liquidate their investments in physical real estate and transfer it to financial assets.

Within alternative investments, what should investors look at? Are REITs (real estate investment trusts) a good option?

Primarily in alternative investments, investors have two options in real estate — high- yield structured credit and REITs. On a risk- adjusted basis, real- estate structured credit is an attractive option. Interest rates on savings have been on a downward trajectory over the past five years. Real- estate credit funds continue to provide premium returns to investors. Given the liquidity crisis faced by NBFCs (non-banking financial companies), real- estate credit funds have become more attractive with special opportunities and discounting of receivables available at good yields.

REITs provide a good option for a retail investor to invest in quality commercial space, which otherwise is out of reach. However, one must keep in mind that overhead cost and vacancy periods can hamper the overall returns. In commercial property, investors expect total yield in the range of 12-14 per cent (rental + capital appreciation). But in case of REITs, pre-tax returns can be 8-9 per cent. The changes in the Dividend Distribution Tax would make investments in REITs unattractive for HNIs and the ones in the higher tax bracket.

What would you recommend investors to look for while investing in real-estate funds?

In residential real estate, demand for end use is still strong; this demand is driven by correct size (400-1,200 sq ft.), correct price, developer ability and relevant location (travel time to workplace, social infrastructure, etc). Any fund which invests in this philosophy can get good returns, since developers are looking at structured transactions as access to a low-cost fund is limited, subvention schemes don’t exist any longer and RERA (Real Estate (Regulation and Development) Act) regulations do not permit pre-bookings.

Apart from residential, investors should explore pre-leased commercial assets with quality tenants. In our client base, we are seeing good momentum in the Motilal Oswal real estate funds, which further invest in reputed developers and only in the affordable housing segment. We expect to close our Fund IV this month at ₹1,200 crore despite negative commentary around the sector, due to our superior performance and track record.

Can you elaborate on the PMS (portfolio management services) products offered by MOPW and the fee model for your clients?

At MOPW, we have empanelled various leading PMS providers including our very own. MOPW has five different PMS products, each having an outstanding long-term track record. For instance, the Value Strategy PMS product launched in 2003 has given a return of 21.9 per cent since inception, beating its benchmark — the NIFTY 50 TRI — by 5 per cent. Another product, the Next Trillion Dollar Opportunity Strategy (NTDOP) has outperformed the benchmark by 9.3. MO AMC manages ₹17,000 crore in PMS alone.

While a flat fee of 2.5 per cent (of AUM) is charged for regular plans, it is 1.5 per cent for profit-sharing plans. Further in profit sharing plans, MOPW retains a said share of profit , depending on the returns generated. For plans that generate returns between 10 and 15 per cent, MOPW retains 15 per cent of the profits. The retention is at 20 per cent when when the returns is over 15 per cent. The profit share and fee structure may vary depending on the product and the AUM invested. Following the recent SEBI notification on PMS (to be effective from May 1, 2020), we expect the industry to launch new direct plans in PMS and the existing pricing structure of regular plans will also change accordingly.

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