Identifying the risk factors in Indian non-listed real estate funds

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 are summarized as five risk factors, i.e. regulatory RISK, foreign direct investment risk, entry risk, business risk and project risk. Whereas the top five perceived risk attributes are investee/partner risk, project entitlement risk, title risk, legislative and regulatory 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.

A real estate portfolio management risk assessment framework for nonlisted real estate funds in India

“…They found money supply, real GDP growth, interest rate, stock market return and components of inflation impact funds' returns, along with investment style, vintage, size, gearing and vehicle structure. In emerging economies, there are even fewer studies on NREF risk factors; this includes Gupta et al (2018), who identified NREFs' risk factors in India. The present study has used their findings to develop a robust risk assessment framework for real estate portfolio management for NREFs in India.…”

“…Gupta et al (2018) have identified 39 risk attributes, which were summarized into five factors using factor analysis and partitioned into risk bands using Euclidean distance. They categorized these five factors into three levels of risk as macro (market risk), meso (enterprise risk) and micro (property risk) risk as shown in Figure 1; Keeris (2008) has classified these risks as systematic, specific and management risk.…”

“…In this paper, we have used these identified factors to develop an AHP value tree for providing weights and ranks. The top 18 risk attributes falling in the high-risk band, based on Euclidean distance analysis by Gupta et al (2018), were considered for subfactor selection. In AHP, to get meaningful responses through a paired comparison, it is important to restrict the number of comparisons.…”

“…Based on these criteria, Figure 2 shows the AHP value tree and Table 1 shows the description of the selected factors and subfactors for the AHP analysis. These factors and subfactors are based on the risk factors identified by Gupta et al (2018) (see Figure 1) and were subsequently validated with industry and academic professionals, seeing all of these factors impacting at different levels on real estate portfolio management. The first factor, the regulatory risk is the risk of change in laws and regulatory environment that may impact the market dynamics and impact the fund's performance; the second factor, the FDI risk impacts the foreign capital invested in the domestic markets; the third factor, business risk arises due to the various decisions made in running a business resulting in exposure to various risks and impacting the fund's performance; the fourth factor, the entry risk arises due to various decisions/choices made at the time of investment.…”

“…However, for real estate, Blundell et al (2005) and Kaiser and Clayton (2008) have questioned the suitability of a single past performance measure like standard deviation for risk assessment. Gupta et al (2018), based on a survey of 125 senior real estate professionals, summarized 39 risk attributes into five key risk factors for real estate portfolio management for NREFs in India. Using these risk factors, this paper aims to provide a risk assessment framework for NREFs in an emerging market context, which are notorious for the issues of transparency, corruption and corporate governance.…”