Alternative Investment Funds (AIFs) have emerged as a vital source of capital for the real estate sector in India. As per the latest data of SEBI, till H1 FY 2025, AIFs in India made an investment of approx. 50 USD Billion and real estate ’s sector share was the highest at 17 per cent at approx. 8.5 USD Billion.
The reason for such significant allocation is not just about investor returns; it actually reflects a strategic shift by the real estate developers that are constantly looking to AIFs to overcome funding challenges and regulatory roadblocks that traditional financing methods often impose.
While investor returns are often highlighted while discussing Real Estate and advantages AIFs offer to Real Estate
Developers, particularly in overcoming regulatory hurdles and optimizing financia structures.
✅What Are Real Estate-Focused AIFs?: Real Estate Alternative Investment Funds (AIFs) are pooled investment vehicles that allow developers to raise capital from sophisticated investors (HNIs, institutions, family offices foreign entities) for targeted real estate projects. They primarily invest in:
🔹 Commercial Properties: Office buildings, retail spaces, hotels.
🔹Residential Developments: Apartments, villas, townships.
🔹Industrial Assets: Warehouses, logistics hubs.
🔹Development Projects: New construction, redevelopment, or renovation. Indirect Vehicles: REITs, SPVs, or project-specific companies.
AIFs are categorized under Category I, Category II or Category III with most real estate AIFs falling under Category II.
✅The Funding Gap: Why Banks & NBFCs Can’t Help Real estate developers with Land acquisition and Regulatory Costs
A critical factor driving the adoption of AIFs by developers is the regulatory environment established by the Reserve Bank of India (RBI), which inadvertently creates funding challenges for conventional lenders.
✅Key Regulatory Constraints
🔹 Restricted Lending for Key Expenses: As per RBI rules, banks are barred from lending to real estate developers for funding the acquisition of land for the real estate project or /and providing lending for getting the regulatory RERA or state approvals—expenses that are among the largest in the initial phases of any real estate project.
🔹 Exorbitant Interest Rates from NBFCs: Although Non-Banking Financial Companies (NBFCs) sometimes step in, their lending often comes at prohibitively high interest rates. This makes financing even more costly and less accessible.
🔹 RBI Circular of April 19th, 2022 on NBFCs: In response to the real estate lending being shifted from banks to NBFCs, the RBI issued a circular mandating that loans and advances to the real estate sector by NBFCs can only be disbursed once the borrower has secured all prior permissions and clearances from the relevant government or statutory bodies. This requirement further complicates early-stage funding for the developers.
✅.How AIFs Solve this Problem: Unlike traditional financing channels, AIFs are not subject to these specific RBI restrictions. They provide a flexible source of capital that can cover:
🔹Land Acquisition Costs: Overcoming the barrier imposed on banks.
🔹Regulatory and RERA Fees: Enabling developers to move forward with critical early-stage approvals without waiting for traditional lenders.
This capacity to finance the initial, often cash-intensive, stages of a project makes AIFs an indispensable tool for real estate developers.
🔹 Tailored Financial Structures for Developer Advantage: One of the most compelling reasons for developers to adopt AIFs is the ability to customize financial structures. Unlike one-size-fits-all bank loans, AIFs allow developers to design bespoke financial solutions like :
🔹Mezzanine Financing: Blend debt and equity to optimize returns for investors.
🔹Revenue-Sharing Models: Tie investor payouts to project milestones
🔹Exit Flexibility: Offer investors exits via buybacks, REIT listings, or strategic sales.
✅Attracting Institutional and Foreign Capital: AIFs offer a structured, transparent investment framework that is particularly appealing to institutional and international investors.
🔹Structured Investment Appeal: Large institutional players—such as pension funds, sovereign wealth funds, and global real estate funds—prefer AIFs over direct exposure to a developer’s balance sheet. The regulated structure of an AIF lends a level of predictability and governance that is reassuring to these investors.
🔹Regulatory Benefits for Foreign Investors: International investors often face intricate regulatory requirements when investing directly in local real estate. AIFs provide a compliant, streamlined avenue that meets these regulatory demands while offering enhanced security.
🔹For developers, tapping into institutional capital via AIFs not only opens up previously inaccessible funding sources but also enhances market credibility, making it easier to secure future investments.
✅Major Restrictions: While AIFs open new avenues, they come with their own set of restrictions designed to protect investor interests:
🔹Indirect Ownership of Assets: AIF funds cannot hold real estate assets directly. They must invest in securities issued by companies that own or propose to hold these assets—ensuring an additional layer of separation and risk management.
🔹Investment Cap per Entity: No more than 25% of the investable funds can be allocated to a single investee entity. This diversification requirement safeguards the fund against concentrated risks.
🌱Conclusion: Alternative Investment Funds are emerging as a pivotal financing tool for real estate developers. They bridge the critical funding gaps created by RBI restrictions on traditional bank loans, provide access to a broader and more sophisticated pool of institutional and foreign capital, and offer tailored financial structures that align closely with project-specific needs.
For developers facing the high initial costs of land acquisition and regulatory compliance, AIFs represent not just an alternative funding source, but a strategic partner in fostering sustainable growth and innovation.
At SHK Global Ventures a Mumbai headquartered boutique advisory firm enabling real estate developers, Ultra-High-Net-Worth Individual investors, Corporate Investors, Family offices and landowners to structure, fund, and execute high value real estate opportunities.
🔹To know more about our solutions, please visit our website – www.shkglobalventures.com.
Reach out to me at shk@shkglobalventures.com
