How AIFs are Bridging the Liquidity Gap in the Real Estate Sector

[By Bipasha Kundu]

The author is a student at WBNUJS, Kolkata.


The real estate sector holds special importance in the Indian economy, owing not only to its role as one of the major employers but also due to the multiplier effect it has on various other industries operating in the economy. As of 2022, as many as 5,00,000 real estate housing projects were stalled in India and were worth around Rs. 4.48 lakh crores. The same is a manifestation of the liquidity crisis which the real estate sector seems to be perpetually marred with. Traditional routes of financing are proving to be inadequate to keep this sector afloat all by themselves. Meanwhile, Alternative Investment Funds (“AIFs”) are increasingly gaining prominence in India.  As per data published by the Securities and Exchange Board of India (“SEBI”), as of 30th June, 2023, commitments worth around Rs. 8.45 lakh crores were raised, funds worth about Rs. 3.74 lakh crores were raised, and about Rs. 3.50 lakh crore worth of investments were made by registered AIFs cumulatively. Several Category II AIFs have their investment strategy focussed on real estate projects. These AIFs, with time, have become important for financing a number of real estate projects so that they can reach the stage of completion. In this article, I attempt to unpack the nuances of the liquidity crisis in the real estate sector and analyse how AIFs are mitigating the same.

Understanding the Liquidity Crisis in the Real Estate Sector

The premise of the article is that there exists a liquidity gap in the real estate sector in India. Naturally, it becomes imperative to address what exactly does liquidity mean and what the factors contributing to the same are, as far as the real estate sector is concerned.

Liquidity in the market determines how difficult or easy it becomes for real estate project developers to arrange construction finance. Construction finance is not only necessary for the project developers to start the construction of the project, but  also to contribute heavily to the working capital. As per some estimates, working capital can amount to around half of the entire cost of the project, and lack of the same can adversely affect the sustenance of this sector.

One of the major reasons for the liquidity crisis in the real estate sector is the NBFC crisis. The NBFC crisis was triggered by the IL&FS blow-up of 2018. IL&FS defaulted on its repayment for the very first time in June 2018, which was worth about Rs. 450 crores. Three months later, IL&FS defaulted again, and this time it is worth around Rs. 1,000 crores. This is when IL&FS’ credit rating starts to significantly decrease. It was estimated that IL&FS was under a massive debt of around Rs. 91,091 crores at that point in time. A possible reason for this crisis could be the fact that IL&FS chose to fund long-term projects by means of short-term loans. However, as the total debt of IL&FS increased, the cost of borrowing increased too. Consequently, taking more short-term loans became increasingly difficult, which in turn led to a delay in the projects. Ultimately, it became difficult for IL&FS to make timely repayments. Meanwhile, it becomes more and more expensive for the NBFCs to borrow. Additionally, mutual funds become extremely cautious in lending to NBFCs.

The share of both commercial and housing real estate has consistently risen in NBFC lending. Funding in the real estate sector has become more and more dependent on NBFCs in light of the contracted lending from banks. The increased dependence of the real estate sector on NBFCs for funding makes them more vulnerable in light of cautious lending of NBFCs.

RBI released a circular on 19th April, 2022, specifying the regulatory restrictions on lending activities of NBFCs of the middle and upper layers. The circular categorically mentions that loans to the real estate sector are to be disbursed only when the borrower has obtained all the required permits and clearances from the appropriate statutory bodies. The circular came into effect on 1st October, 2022. In light of the 2018 NBFC crisis, these regulatory restrictions seem to be a prudent step in ensuring that NBFCs does not undertake disproportionately high amount of risk. However, NBFC funding has been the most crucial in the very initial stages of real estate projects and these regulatory restrictions could potentially have an adverse effect on it.

The onset of the COVID-19 pandemic further widened the liquidity gap created in the market due to the NBFC crisis as lending decreased significantly. The focus of banks also shifted from commercial real estate to retail loans in the housing sector in order to minimize risk. The cost of common raw materials like cement and steel has also witnessed a significant increase due to the pandemic.

What are Real Estate Based AIFs?

In India, AIFs are regulated by Alternative Investment Funds Regulations, 2012. AIFs are “privately pooled investment vehicles.” The fund itself can be structured as a trust, company, limited liability partnership, or a body corporate and it has to invest the collected funds according to the defined investment policy. Even though the fund needs to be incorporated in India, it can collect investments from both Indian and Foreign investors. However, funds that come under the ambit of SEBI’s other regulations (like the Mutual Funds Regulations and Collective Investment Schemes Regulations) do not qualify as AIFs. There are three categories of AIFs. Category I AIFs are supposed to be “socially and economically desirable.” Category II is the residuary category. Category III AIFs are those that employ very “diverse and sophisticated” trading strategies. Real estate based AIFs fall under Category II. However, it is important to note that these AIFs cannot directly invest in any real estate projects. They can only invest in securities of the real estate project developer companies. Any such real estate based AIF cannot invest more than 25% of its investible funds in a single company. Real estate based AIFs are considered comparatively less risky than several other kinds of AIFs because of its somewhat long lock-in period which makes them less volatile.

The Role of AIFs in Bridging the Liquidity Gap

Real estate-based AIFs have not only opened up a new avenue for project developers to get funding, but they have also given an opportunity to sophisticated investors to diversify their portfolios. Several real estate project developers find it difficult to execute a project to its completion because of a gap in funding and AIFs provide an additional non-traditional route for financing the same. There are several benefits associated with the AIF route of financing. Firstly, each AIF can be tailored to address the highly specific requirements of an investor. Secondly, the expertise of the fund manager in the relevant market also helps in optimizing the investment. Thirdly, AIFs are often preferred by investors who are High Net-worth Individuals because of the prospective long-term growth, which often outweighs the great degree of risk involved. Fourthly, the regulatory framework relating to AIFs has been actively improved upon by SEBI, and by virtue of the same, Real Estate based AIFs contribute towards increasing transparency in the real estate sector.

One of the best examples of AIFs contributing actively to bridging the funding gap in the real estate sector is the Special Window for Affordable and Mid-Income Housing (SWAMIH) Fund launched by the government of India. The objective of the fund is to bail out over 1,600 projects consisting of around 4.6 lakh individual housing units and the corpus for the same was initially set at Rs. 25,000 crores. Out of the Rs. 25,000 crores, Rs. 10,000 crores would be paid by the government, and Rs. 15,000 crores would be provided by SBI and LIC. Subsequently, the government invested an additional Rs. 5 crores in the fund. However, the funding provided by the fund cannot be used by project developers to repay existing debts. To be eligible to get the benefit of this scheme, the projects should be completed to the extent of at least 30% and should be registered under RERA. The projects also need to come under the “affordable” or “mid-income” category, which has been defined taking into account the city in which the project is situated. This specific fund provides funding in the form of non-convertible debentures. As of March 2023, Rs 2,646.57 crore had been released by the government and the fund had been successful in getting over 22,500 housing units completed.


As traditional routes of funding for real estate project developers, such as NBFC lending become arduous, owing to intermingling of factors like the IL&FS crisis of 2018 and the after-effects of the pandemic, the role of AIFs in financing real estate projects and leading them to completion have only become more important. Data published by SEBI clearly indicates that AIFs continue to become more prevalent in India. Real estate focussed AIFs are playing an important role in infusing much needed capital in the sector. The SWAMIH fund is one of the best examples of the same and has proved to be successful in bailing out thousands of housing units in a short span of three years. SEBI has also been quite active in improving upon the regulatory framework surrounding AIFs and it is expected that the same would make them more investor friendly. Real estate based AIFs, specifically, provide an avenue to investors to participate in real estate markets without having to directly own real property assets. In contemporary times, the majority of the funds in AIFs is sourced through domestic investors themselves, and it can be expected that in the coming years, the increasing popularity of Real Estate based AIFs will possibly go beyond tier-I cities in India.

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