How real estate AIFs generate returns

7 min read · By Viren Makwana

Real estate is the largest single sector for AIF investment in India, according to SEBI’s June 2026 data. Yet “real estate fund” covers very different risk profiles. Some lend against a building that is almost finished; others own a share of a project that has not yet broken ground. Knowing where in that range a fund sits tells you most of what you need to know about its returns.

Why developers turn to AIFs

Banks lend to real estate cautiously, especially for land purchase and early-stage construction, and NBFCs have pulled back from parts of the sector since 2018. AIFs fill the gap with flexible, faster capital, and they price that flexibility into their returns.

The four main structures

1. Structured senior debt. The fund lends to a project company through secured, non-convertible debentures. Returns come from a fixed coupon, often with a redemption premium paid at exit. Protection comes from a mortgage over the land and building, a charge on sales receivables, and personal or corporate guarantees from the promoter. This is the most common structure and usually the lowest-risk.

2. Mezzanine and quasi-equity. The fund sits behind senior lenders but ahead of the developer’s equity. It earns a lower fixed coupon plus a share of project surplus, often through optionally convertible debentures. Returns are higher, and so is the dependence on the project selling well.

3. Project equity. The fund co-owns the project with the developer, usually through a special purpose company. It earns a share of the profit when units are sold or the asset is leased and exited. Returns are uncapped but so are the risks: approvals, construction, pricing and sales speed all flow straight through.

4. Last-mile and special situations. The fund finances stalled or nearly complete projects, where a modest amount of capital unlocks completion and sales. Pricing can be attractive because few lenders take on this work, but outcomes depend on legal clean-up and the condition of the project.

Where the returns actually come from

Contracted cash flows. Coupons and redemption premiums on debt structures.
Sales velocity. In most deals, investors are repaid from the sale of units. Faster sales mean earlier repayment and a higher IRR.
Price growth. Equity and mezzanine positions gain when selling prices rise faster than costs.
Exit routes. Refinancing by a bank once the project is de-risked, a sale of a leased asset, or a listing through a REIT.

How investors are protected

The better funds control the money, not just the paperwork. Under RERA, developers must keep 70% of buyer collections in a designated project account used only for that project’s land and construction costs. Good lenders add an escrow over the remaining cash flows, a priority waterfall that repays them first, and covenants on minimum sales and price levels.

They also monitor actively: monthly sales and collection reports, site visits, cost certification by independent engineers, and approval tracking.

The risks to understand

Approvals and delays. A slipped approval pushes out every cash flow.
Cost overruns. Higher material and labour costs eat into the cushion that protects lenders.
Developer risk. Cross-default across a group’s projects can hurt even a healthy project.
Enforcement time. Security is only as good as how fast it can be enforced. Recovery through courts or insolvency can take years.
Interest rates. Higher rates slow buyer demand and raise the cost of refinancing exits.

Questions to ask a real estate fund manager

What share of the portfolio is senior secured, mezzanine and equity?
What is the average loan-to-value and cash-flow cover at entry?
How many past deals were repaid on time, how many were extended, and were any enforced?
Who controls the escrow, and what triggers a sweep of surplus cash?
How concentrated is the fund by developer and by city?

Real estate credit has given patient investors steady, contracted returns in India. The difference between a good and a poor outcome usually lies in the structure, the security and the discipline of the manager, not in the market itself.

Sources

This article is for general information only and is not investment, legal or tax advice, or an offer or solicitation to buy or sell any security or fund units. Figures are drawn from public sources as of the date shown and may change. Speak to a qualified adviser before making any investment decision.