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

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.

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.

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.

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.

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.