AIFs: The New Frontier for India's Wealthy in Real Estate Investing

Indian high-net-worth individuals (HNIs) are redefining their approach to real estate investments by favoring Alternative Investment Funds (AIFs) over direct ownership. This strategic shift is driven by the robust commercial market and the desire for professionally managed portfolios. AIFs provide attractive yields and eliminate the day-to-day management hassles, making them a preferred choice for wealthy investors.

According to Karthik Athreya, Director and Head of Strategy – Alternative Credit at Sundaram Alternates, this trend marks a significant transformation in the private wealth landscape. Real estate has emerged as the largest category for AIF investments, drawing over Rs 73,000 crore in just the first nine months of FY25. HNIs are embracing a hands-free approach to accessing a diverse range of commercial, residential, logistics, and data center opportunities.

The reasons for HNIs and ultra-HNIs (UHNIs) participating in commercial real estate via AIFs are twofold. First, the commercial market is booming, largely driven by the Global Capability Centers (GCC) wave. India is now home to over half the world's GCCs, with leasing at decadal highs. This creates a massive demand for quality office space, offering investors regular income with rental yields of around 8%, plus an opportunity for annual appreciation of 4-5%.

Second, for busy HNIs, the AIF route is a 'no-brainer.' It helps them avoid the headaches of direct ownership, such as finding tenants, managing the property, and dealing with day-to-day issues. Instead, they gain access to a diversified, professionally managed portfolio of top-tier assets with target internal rates of return (IRRs) in the 15-18% range.

Another route HNIs are exploring is listed Real Estate Investment Trusts (REITs), which offer similar benefits but with lower yields and higher liquidity. There are already nearly Rs 22,000 crore of HNI and retail capital invested in REITs.

The shift among HNIs from direct real estate investments to structured exposure through AIFs is driven by the desire to be strategic investors rather than active landlords. They want access to a diversified portfolio of top-tier deals without the day-to-day hassles of direct ownership. Sundaram Alternates has perfected this model, consistently delivering ~15% IRRs for over seven years, which is why more than 700 HNIs have entrusted them with over Rs 2,600 crore.

HNIs are strategically adjusting their real estate allocations through AIFs, with the investment timeframe being a crucial determinant. For investors prioritizing shorter cash-in cash-out cycles of 3-5 years, often seeking senior secured, self-amortizing structures with quarterly payouts, the residential theme remains a preferred choice. Conversely, those with longer investment horizons are leaning towards commercial and industrial spaces. These segments offer stable rental yields and annual capital appreciation, often linked to prevailing interest rate cycles.

A recent Anarock report for FY25 shows that Industrial & Logistics (warehousing) is dominating, capturing 48% of institutional funding. This surge, influenced by large transactions, highlights its long-term potential driven by e-commerce and modern supply chains, offering stable leases and often lower development risk. Office space accounts for 22% and residential for 15%. The 'Others' category, including data centers, has jumped fivefold to 15%, signaling aggressive allocation into these high-growth, emerging sectors. Data centers, while requiring longer horizons and specialized expertise, promise significant long-term appreciation and resilient income due to digital demand.

Family offices and private wealth desks are evolving their real estate strategies significantly. We are observing a clear shift from unregulated equity models to more structured financing, a trend accelerated by the increasing maturity of the Indian real estate finance landscape over the last decade. The substantial inflows into AIFs, particularly within the debt sector, underscore this maturation. Looking ahead, the next two to three years will likely see these sophisticated investors transitioning from purely debt-oriented platforms to embracing more mezzanine and equity-based strategies, aiming for net returns of 18-21%.

This strategic pivot reflects a more nuanced approach to risk-reward in a regulated environment. Family offices are becoming more willing to finance land acquisitions and take on back-ended premium exposures, demonstrating a more sophisticated and strategic approach to real estate investing.