Arnya RealEstate Launches Debt-Focused Real Estate AIF, Eyes Rs 1,000 Crore Corpus

Arnya RealEstate Fund Advisors is carving a niche in India’s real estate investment landscape by offering debt-focused Alternative Investment Funds (AIFs) that provide tailored capital solutions for developers while enabling investors to diversify beyond traditional markets.

“Real estate AIFs help investors achieve diversification by allowing them to invest in an alternative asset class that may not directly correlate with the stock market,” says Sharad Mittal, Founder & CEO, Arnya RealEstate Fund Advisors, in an exclusive interaction with Bizz Buzz. With plans to raise a Rs 1,000 crore corpus, Mittal shares why early-stage residential projects in India’s top eight cities present an attractive opportunity. Backed by strong risk management, high-yield strategies, and deep industry experience, Arnya aims to redefine real estate financing and returns in a changing economic environment

How has the landscape of real estate debt funds evolved in recent years, and what trends are you seeing in terms of their adoption by developers and investors?

Real estate is a capital-intensive business, and developers require capital for both land acquisition and construction. While construction finance requirement can be met by Banks and NBFCs, regulatory restrictions on Banks and NBFCs for land acquisition funding creates an opportunity for Alternative Investment Fund (AIFs) to step in and fulfil the capital demand. Further, being private capital regulated by SEBI allows AIFs to provide a tailor-made financing solution to developers. On the investors side, while real estate is the most favoured asset class in India (accounting for more than 50 per cent of household assets), investors are increasingly realizing the challenges of investing in physical real estate including but not limited to development risk, high transaction costs and issues with maintaining property. There is a growing trend of adopting financial instruments with real estate as an underlying by investors over the years. Growth of RE AIFs (specifically debt focused) presents a broader preference for more flexible, low-maintenance, and potentially high risk-adjusted return investment opportunities. The above factors position real estate debt funds as a key player in the future of real estate financing in India.

Real estate AIFs have become an attractive investment option. Can you explain why they are seen as a diversification strategy, especially in the current volatile market environment?

Diversification is one of the fundamental principles of investing. The idea is to spread your investments across various asset classes to reduce risk. Real estate AIFs help investors achieve diversification by allowing them to invest in alternative asset class that may not directly correlate with the traditional stock market. AIFs focusing on real estate provide investors with an opportunity to participate in large-scale commercial and residential developments that have significant growth potential. These funds are able to invest in high-quality projects, ranging from residential complexes to office spaces and even industrial real estate. By pooling funds from multiple investors, AIFs are able to undertake projects that would otherwise require massive individual capital outlays. Generally, in an AIF there are multiple projects by several developers spread across various cities and thus for an investor the portfolio gets diversified across project / developer / city as well.

How do you manage investor expectations, particularly in a market that is constantly evolving, and what steps do you take to ensure that your AIFs continue to deliver robust returns?

We focus on high-yield deals that typically are structured with Gross IRR range of 19 per cent-21 per cent. Our strategy is focused on working with Grade A developers across India, ensuring the quality of our investments. We deliberately avoid engaging in distressed or turnaround transactions, which can be volatile and unpredictable. With over 150+ transactions executed in our previous roles, our team brings a wealth of experience and a proven track record. We follow a well-defined process for every step, from deal sourcing to exit. This process-oriented approach ensures that we remain proactive in navigating market changes and continue to generate superior risk-adjusted returns for our investors.

Could you explain the role of debt funds in real estate development? How do they provide financial stability and growth opportunities for developers and investors alike?

As mentioned earlier, real estate requires significant capital for both land acquisition and construction. Debt funds play a vital role in real estate development by addressing the significant capital requirements, particularly during the early stages of a project when traditional funding channels are unavailable due to regulatory constraints. Due to limited access to capital, this creates a unique opportunity for real estate funds to collaborate with high-quality developers, offering tailored financing solutions. For developers, debt funds provide essential capital to move projects forward, while for investors, they offer an opportunity to earn higher returns due to the scarcity of funding and the selective nature of the developers they partner with. This dynamic foster both financial stability and growth prospects for all parties involved.

What makes debt funds an attractive option compared to traditional equity or other financing methods?

Debt is generally considered a more cost-effective source of financing compared to equity. This is because debt financing does not require giving up ownership stakes or sharing profits with investors, which equity financing typically entails. For a development project to be profitable, the Weighted Average Cost of Capital (WACC) should ideally be around 14-15 per cent. Debt funds, particularly in the early stages of financing, tend to have slightly higher interest rates. However, these funds typically stay involved in the project for the first 2-2.5 years, allowing developers to meet their initial capital requirements. After this initial phase, developers can access cheaper capital from traditional lenders such as Banks or NBFCs, thereby optimizing their WACC. This makes debt funds an attractive option for developers, as they provide the necessary capital for a shorter duration at a more affordable rate compared to equity, helping preserve profitability and project viability in the long run.

The RBI’s monetary policies have a significant impact on the lending landscape in India. How do you see the current RBI policies influencing real estate debt fund lending in the coming years?

We are on the cusp of interest rate downward cycle with 50 bps rate cut announced by the RBI already in 2 tranches. Further rate cuts will likely have a dual effect: stimulating demand for residential properties while also creating opportunities for real estate debt funds to expand their lending portfolios to support the increased capital requirements of developers.

With plans to raise a Rs 1,000 crore corpus for your first real estate debt fund, what factors have influenced your decision to focus on early-stage residential projects in the top eight cities in India?

Our strategy for raising Rs 1,000 crore for our first fund is based on a clear understanding of market dynamics and investor needs. We have decided to focus on mid-income residential projects in the top eight cities of India because this segment strikes the right balance between demand, risk, and return. Mid-income housing is seeing robust, consumption-driven demand, with lower delinquency rates and higher transaction volumes. Unlike affordable housing, which operates on thin margins, or luxury projects that face demand fluctuations, mid-income housing offers a stable and profitable opportunity. By focusing on early-stage financing, we aim to enter projects at a crucial development phase where we can generate higher returns while maintaining lower risk. This approach avoids direct competition with banks and NBFCs, who typically focus on construction financing. Additionally, with interest rates currently near their peak, this is an ideal time for investors to lock in higher yields. Our fund provides an opportunity for investors to secure stable, attractive returns by capitalizing on these market conditions while focusing on a high-demand sector in India’s top cities.

With the fluctuating interest rate environment, how do you manage the risks of lending in real estate debt funds? Do you anticipate any major changes in policy that will affect investor returns?

The ability of real estate AIFs to generate returns is largely driven by the demand-supply imbalance in land stage funding. These deals typically occur at higher interest rates, and changes in interest rates do not have a direct impact on AIF lending, as there are limited alternative capital sources available for developers. Additionally, we believe that interest rates are likely to trend downward from this point, which would increase housing demand and, in turn, lead to a higher need for land stage funding.

Can you share the journey of Arnya RealEstate Fund Advisors? What led you to establish the firm?

Arnya was established with the vision of creating an independent investment management platform focused on real estate. Having spent a significant part of my career in real estate investment management, I developed a deep understanding of the sector. Over time, I felt an inner calling to build something of my own. Also, the real estate sector has seen significant growth, especially post-pandemic, which further reinforced my decision to establish Arnya. Our goal is to focus exclusively on real estate investment management, providing comprehensive solutions to investors across the entire spectrum of debt, rental & equity. At Arnya, we aim to leverage our expertise to deliver innovative strategies and maximize value for our clients in this dynamic real estate market.