AIFs vs REITs vs Direct Property: Where Should India’s Wealthy Actually Park Their Money?

For wealthy investors, putting money into real estate is no longer limited to buying a flat, office or commercial property. Real estate investment trusts (REITs) and alternative investment funds (AIFs) have opened up other ways of getting exposure to the sector, each with a very different risk, return, liquidity and tax profile.

That can make the choice more complicated than it first appears.

A direct property may offer control and the comfort of owning a physical asset. A REIT can provide real estate exposure without the burden of managing a property. An AIF, meanwhile, can offer access to opportunities that may not be available to individual investors.

But the right choice may have less to do with which option promises the highest return and more to do with when the money may be needed, how much risk the investor can take and what role the investment is expected to play in the overall portfolio.

1. Start With Liquidity And Investment Horizon, Not Returns

Investors often begin by comparing returns. But that can be the wrong starting point.

“The mistake I see most often is that people start with the return number. The first question should be: when do I need this money back, and what am I prepared to give up to earn more? Once you answer that properly, the choice between a REIT, an AIF and a flat gets narrow very fast,” says Chirag Mehta, Founder of Arbour Investments.

Liquidity, he says, comes at a cost, and investors should be clear about that cost before committing their money.

“Liquidity has a price. It is not a footnote. If there is any chance you need the capital in two years, something locked for seven is the wrong answer, whatever the headline says,” he says.

This is particularly relevant for wealthy families, where different pools of money may have very different purposes. Some may be earmarked for income, some for long-term wealth creation and some may need to remain available for business or family requirements.

2. Direct Property: Control And Legacy, But Also Concentration And Costs

Direct property continues to have a strong appeal among wealthy Indians. It is tangible, gives the owner control and, in many cases, has an emotional or legacy value.

But rental income from residential property is usually modest, while the upfront costs can be significant.

“Direct property is the only one of the three you can actually walk into, and for a lot of families that matters. It is the house the children will inherit. But it is also the least diversified asset a wealthy person can hold. One building, one location, very often one tenant,” says Mehta.

The costs of buying and holding property also need to be factored in.

“People underestimate the friction. You pay 7 to 10 per cent in stamp duty, registration and brokerage before you have earned a rupee, and then the rent comes in at 2 to 5 per cent. Property can still work, but it works through capital appreciation. It does not work as income,” he says.

For an investor who wants control, intends to hold for the long term or has a specific use for the property, these disadvantages may be acceptable. But buying another property simply because it feels like a safe asset can increase concentration in an already property-heavy portfolio.

3. REITs: Real Estate Exposure With Greater Liquidity

Listed REITs offer a different proposition. Instead of buying an entire property, investors buy units in a professionally managed portfolio of income-generating real estate.

For investors who want exposure to commercial property without taking on the responsibilities of direct ownership, the structure can be useful.

“REITs fixed the two things property never could, which were the ticket size and the exit. You can own a piece of a grade A office park for a few thousand rupees and sell it on a Tuesday afternoon,” says Mehta.

But the convenience comes with a trade-off. REIT units are listed and therefore their prices can move with broader market sentiment, interest rates and investor expectations.

“The catch is that a REIT is priced by the market, not by the building. The unit price moves with sentiment and interest rates. So, you get liquidity, but you also bring some stock market volatility into what you thought was a property allocation,” he says.

The emergence of small and medium REITs has also lowered the entry barrier for investors looking for exposure to individual commercial assets.

“SM REITs have made higher-yielding single assets available at Rs 10 lakh, and that is useful. Just read them for what they are. One building is one building. It is not a portfolio,” says Mehta.

That distinction is important. A lower ticket size does not automatically mean lower risk. Investors still need to understand the underlying property, location, tenants, lease profile and concentration.

4. AIFs: Access Comes With A Price

AIFs can provide wealthy investors access to private-market opportunities that may not be available through listed products. These could include private equity, structured credit or investments linked to real estate projects.

But the flexibility comes at the cost of liquidity.

Category II AIFs typically require a minimum commitment of Rs 1 crore and can involve multi-year investment periods. That makes them more suitable for investors who can leave the capital untouched for the entire investment period.

“An AIF is there to get you into things you cannot reach on your own. Structured credit to a developer, say, or equity in a project at the price the developer pays. You are buying the access,” says Mehta.

However, investors should not mistake access for a guaranteed advantage.

“I will be the first to say an AIF is not for everyone. The minimum is Rs 1 crore. The money is locked for years. And the outcome depends very heavily on how well the manager underwrites. If you cannot stay for the full term, or you cannot do proper diligence on the manager, the structure works against you,” he says.

With the AIF industry expanding rapidly, manager selection becomes particularly important.

The industry has grown very fast, and that makes choosing the manager more important, not less. The distance between a disciplined manager and an average one is much wider here than it is in listed markets.

5. Compare What You Actually Keep, Not Just The Headline Return

Another mistake is to compare the headline return from each investment as though all three work in the same way.

They do not.

A rental yield, REIT distribution and projected AIF return can represent very different things. Their costs, taxation, liquidity and holding periods also differ.

The three are taxed and charged differently. Long-term capital gains on property are taxed at 12.5 per cent without indexation. Category II AIFs are largely pass-through. REIT distributions are made up of several components, each taxed in its own way.

“Compare like with like, and compare after everything. A 6 per cent REIT distribution, a 3 per cent rental yield and a fund's projected return are not the same kind of number. The REIT figure is liquid and already after management cost. The rental figure is before you count your own time. The fund figure is before fees, and it is several years away,” says Mehta.

The effort involved in managing the investment should also be considered, particularly with direct property.

“Ask what you keep after fees, after tax and after your own hours. Property looks much better before you count the stamp duty and the weekends spent chasing a tenant,” he says.

For a wealthy investor, therefore, the relevant comparison is not simply which asset has the highest expected return. It is what return is likely to remain after costs and taxes, how much risk is being taken to earn it and how easily the money can be accessed.

6. So Where Should The Wealthy Actually Park Their Money?

There is unlikely to be one answer.

The three options serve different purposes, and a portfolio may use more than one of them.

“It is rarely one or the other. They do different jobs. REITs give you income and the ability to sell. An AIF is a longer-horizon allocation for someone who has both the scale and the patience. Direct property is for control, for use, or for something you want to hand down,” says Mehta.

The decision, therefore, should begin with the role the investment is expected to play rather than the product itself.

“The label on the product matters less than two things. How long can you realistically stay invested, and how good is the manager or the asset underneath. Returns in all three are neither fixed nor guaranteed. Every one of them carries execution risk and market risk,” he says.

For investors with substantial wealth, this also means looking at the entire balance sheet. Someone who already owns several properties may not need another direct property simply because it is familiar. Similarly, someone with substantial exposure to private businesses may want to be careful about adding more illiquid private-market investments.

“If I had one piece of advice it would be to size each bucket to its purpose and stop chasing whichever number looks best this quarter. That tells you far more about how you will do than the name on the product,” says Mehta.

The choice between direct property, REITs and AIFs, then, is not really about finding a winner.

Direct property can offer control and a tangible asset. REITs can offer liquidity and diversified exposure to income-generating real estate. AIFs can provide access to private opportunities for investors willing to accept a longer lock-in and greater complexity.

The right mix depends on the investor's existing wealth, cash-flow requirements, investment horizon, tax position and ability to handle illiquidity.

For wealthy investors, the better question may therefore not be where can I get the highest return?

It is what job do I want this money to do, and which investment is best suited to that job?

(Disclaimer: For informational purposes only. Not investment advice or a solicitation to invest. Suitability depends on an individual investor's circumstances.)