Realty Fund- IL&FS Milestone

Invest in realty with Rs 10 lakh

Sandeep Singh
Posted online: Monday , September 17, 2007

Real estate investment trusts (REITs), or real estate funds, are yet to make the transition from policy to product in India. But if you have Rs 10 lakh to invest, you can still invest in diverse pieces of real estate as a financial asset with IL&FS-Milestone Fund-I — a venture capital real estate fund that has slashed the entry limit in such funds from a few crore to Rs 10 lakh.

The productPromoted by IL&FS Investment Managers and Milestone Group, this is a closed-end fund with a tenure of four years, with option to extend by two years. The promoters are looking to collect Rs 1,000 crore for the fund. Investors have to pay only 30 per cent upfront. The remaining can be paid in two instalments between the third and twelfth month. Says Ved Prakash Arya, managing director, Milestone Capital: “We will make a call, with a 21-day notice for the two instalments.”
The fund will work like a pooled investment vehicle. It will collect the monies of investors, and buy properties that are completed and rented out, thus eliminating development risk. It will target offices, IT and ITES buildings, hospitals, warehouses and shopping malls that have long leases and can generate rental income of 12-15 per cent, net of property and service tax. The yield will be paid to investors on a quarterly basis. At the end of the tenure, the fund will sell those properties. Thus, investors get return from rentals through the term and capital gains, if any.
The fund has laid down some rules on investments. It won’t invest more than 25 per cent of its corpus in one project, not more than 40 per cent in a city. Similarly, office property and retail will have a cap of 30 per cent each, IT and ITES 20 per cent, warehouses 10 per cent.
Risks and rewardsThe fund is aiming for rental yields of 12-15 per cent and capital gains, but there are ‘ifs’ related to both. Firstly, the a 12 per cent rental yield drops reduces to 6.9 per cent after paying management fee of 1.5 per cent and tax of 33.99 per cent. Secondly, capital gains are dependent on how property prices move during this period. Thirdly, a 6.9 per cent return on 12 per cent rental is on 100 per cent occupancy. If it is unable to find tenants, or its properties see mild appreciation, worse depreciation, the returns reduce further (See table: The return scenarios). Having said that, the economic outlook is still good. If you have the surplus, invest in the fund.

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