For a new generation of Indian family offices managing the wealth of freshly minted tech and startup billionaires, real estate no longer holds the bragging rights it once did. Their new buzzwords: stocks, private equity, alternative assets, Reits, InvITs, and startups.
It’s not that family offices have completely ruled out real estate investments, but the number of such clients heavily focused on direct real estate investments is steadily shrinking, according to wealth management and family office executives Mint spoke with.
“There was a time when clients would brag about their most recent real estate acquisition. We believe those bragging rights have shifted,” said Sunil Sharma, chief investment strategist, Ambit Global Private Client, the wealth management arm of financial advisory firm Ambit. “Clients today are far more interested in bragging rights about their most recent private equity investments.”
Traditionally, India’s family wealth has been focused on investments in ancestral homes, land banks, properties, and gold. However, a decade-long slump in real estate until 2022, unattractive rental yields, regulatory hassles, and the time and resources needed for managing property have dimmed the sector’s draw, said Sharma.
On the other hand, potential higher and faster returns from equities and private equity have led to a notable shift in investment preferences. “Alternative asset exposure in client portfolios, which typically averaged 5-10% during the past decade, is now averaging 15-20%, and in many cases, it exceeds 50% of the portfolio,” Sharma added. “On the flip side, our engagement with clients on physical real estate has remained generally steady.”
Vikaas M. Sachdeva, managing director at Sundaram Alternate Assets, has a similar observation—that some family offices invest around 50% of their corpus directly or through alternative investment funds (AIFs) in startups. “The investment usually is in private equity but is increasingly getting into private credit as well.”
Next-gen family offices
Another factor contributing to the diminishing interest in real estate is that India’s stock markets have been on a tear the past few years, making equity a compelling option for investors.
Several family offices had faced notable market challenges earlier, such as during the first covid lockdown in March 2020 and the 2018 debt crisis, which underscored the value of asset allocation and diversification, said Shantanu Bhargava, managing director and head of listed investments at Waterfield Advisors.
But since 2020, initial public offerings (IPOs) of shares by companies and a multitude of other promoter-driven corporate liquidity events have resulted in the formation of numerous new family offices. And several of these have seen outsized returns in public equities without any episodes of exceptional volatility.
“As a result of this recent good experience, many newly established family offices are gravitating towards equities, particularly public equities, with some interest in pre-IPO opportunities on the private side,” Bhargava said.
Among tier-1 family offices managing assets exceeding $500 million, there’s a noticeable shift towards structuring standalone private debt deals along with diversifying into high-yield debt and other yield-bearing non-equity asset classes, he said.
As for tier-2 family offices, they recognise that long-term equity returns (over 5 years) are likely to be modest and are expanding their portfolios to include diverse asset classes such as infrastructure investment trusts (InvITs), real estate investment trusts (Reits), gold, and performing credit, Bhargava said.
“In new wealth creation hubs such as Bengaluru, we realised that freshly minted IT billionaires choose pure financial assets and purchase real estate for pure consumption/marginal tax planning to offset capital gains on share sales,” he said. “Whereas, in the case of legacy portfolios, there is a tangible interest in financialized versions of real estate and infrastructure, namely Reits and InvITs.”
The allure of Reits
While direct real estate may not appeal to next-generation family offices, Reits still are a part of their investment strategies.
In recent years, family officers have increasingly shifted away from direct real estate investments such as owning and renting commercial properties, buying land or under-construction assets, lending to developers, and investing in warehousing, said Nishant Agarwal, senior managing partner at ASK Private Wealth.
“Instead, they are gravitating toward Reits or funds for investments and focusing on direct real estate only for self or business use,” he said.
This shift stems from the younger generation’s preference for simplicity and efficiency, as managing direct real estate involves complexities like title searches, taxation, possession challenges, and rent collection. In contrast, Reits offer a diversified, liquid, and tax-efficient investment avenue that also provides the benefit of quarterly rental income, Agarwal explained.
Besides, Reits have delivered impressive returns in recent years, he highlighted.
In April 2023, the National Stock Exchange’s NSE Indices Ltd launched the Nifty Reits and InvITs index to track the overall performances of these listed investment vehicles.
Among stocks in the Nifty Reits and InvITs index, Brookfield India Real Estate Trust has returned 19% over the past year, followed by Mindspace Business Parks REIT (18%), Embassy Office Parks REIT (17.5%), Bharat Highways Invit (11.5%), India Grid Trust (10%), and Nexus Select Trust (8.3%), Brookfield India Real Estate Trust (19%), Mindspace Business Parks REIT (18%). However, IRB InvIT Fund slumped 18% in the past year and Powergrid Infrastructure Investment Trust lost 12%.
To be sure, the Nifty Realty index has increased by about 46% over the past year, outpacing the benchmark Nifty50’s 20% gain in that period.
Even so, “real estate comes with significant challenges such as high maintenance and management demands,” said Rajmohan Krishnan, principal founder and managing director of Entrust Family Office. “Family offices need to have the necessary infrastructure and mindset to navigate these complexities, which only a select few possess.”
Outside of family offices, too, direct real estate investment has become a niche choice favoured by a limited number of wealthy individuals, said Krishnan. Many first-generation entrepreneurs typically limit real estate investments to a primary residence or two and the occasional holiday home.
