What Is a Real Estate AIF? How Category II Property Funds Work

A real estate AIF is an alternative investment fund whose stated investment policy is to finance property: housing projects, offices, warehouses, retail or land that a developer will build on. Like every alternative investment fund in India, it is a privately pooled vehicle registered with SEBI, it raises money only by private placement, and it invests according to the strategy written in its placement memorandum.

What makes it a real estate fund is not the legal wrapper but the underlying exposure. The fund does not usually buy a flat or a building in its own name. It invests in a project company, typically a special purpose vehicle that holds one project, and it gets its return from that company as interest, as a redemption premium on debentures, or as a share of profits when the project is sold.

Real estate is also the single biggest destination for AIF money. SEBI's sector data for the quarter ended 30 June 2026 put cumulative net investment in real estate at ₹87,969 crore, the highest of any sector. Most of that money flows through Category II funds.

This guide stays on the property-specific mechanics. How Category II funds work in general, how the ₹1 crore ticket is counted and how pass-through tax is filed each have their own guides, and this post links to them rather than repeating them. Listed REITs, which own finished rent-earning buildings and trade on the exchange, are a different product with their own explainers.

Private money has funded Indian property for decades, but the regulated fund format is recent. The milestones explain why today's funds look the way they do.

• 21 May 2012: SEBI notifies the AIF Regulations. Private equity and debt funds that get no government incentive and do not use leverage fall into Category II, and real estate funds land there.
• June and July 2014: SEBI clarifies, in rules now carried in its Master Circular for AIFs, that when an AIF invests in real estate, every investee company must hold, or propose to hold, at least one project. A fund cannot spread the 25% concentration limit by routing money through empty shells.
• 26 September 2014: the REIT Regulations widen the AIF definition of "investee company" to include REITs and InvITs.
• 2016: the Real Estate (Regulation and Development) Act, RERA, requires developers to keep 70% of buyer collections in a separate account for that project's construction and land cost. Buyer money can no longer pay for the next land deal, which increases demand for other early-stage capital.
• 2019: the government launches SWAMIH, the Special Window for Affordable and Mid-Income Housing Investment Fund, as a Category II AIF that lends to stalled housing projects.
• 25 April 2024: a "dissolution period" replaces the older liquidation-scheme route for investments a fund cannot sell by the end of its life.
• 23 July 2024: gains on unlisted debentures become short-term capital gains whatever the holding period, which changes the after-tax return on debt-style property funds.
• 23 May 2025: SEBI rewrites the Category II investment rule so that funds invest primarily in unlisted securities and/or listed debt rated A or below.

SWAMIH is the clearest public record of a Category II real estate fund in operation. According to a government backgrounder published on 13 March 2026, the fund has an aggregate corpus of ₹15,531 crore from the Government of India, public sector banks and LIC, is managed by SBICAP Ventures, and provides priority debt to projects that are viable but stalled.

The results it reports: 58,596 homes completed, 146 projects across 20 cities, 55 full exits and 44 partial exits, and nearly half of drawn capital returned to investors. Budget 2025-26 announced a second fund with a proposed ₹15,000 crore corpus to complete another one lakh units.

SWAMIH is a policy fund for institutions, not a product you can buy, but it shows the full life cycle of a real estate debt fund: lend, monitor construction, collect from sales, return capital.

SEBI's three AIF categories are defined by incentives and leverage. Category I covers funds the government wants to encourage, such as venture capital and infrastructure. Category III covers funds that trade, use derivatives and may borrow. Category II is everything else: funds that get no specific incentive and do not borrow beyond a small operational allowance. A fund that lends to or invests in property developers fits that description, so a real estate alternative investment fund is almost always registered as Category II.

Several rules in the SEBI AIF Regulations, as amended up to 14 July 2026, matter more in property than anywhere else.

• No leverage. A Category II fund may borrow only to meet temporary needs, for no more than 30 days, on no more than four occasions a year and up to 10% of investable funds. The fund itself cannot gear up a property bet; any borrowing happens at the project level.
• 25% concentration cap. No more than 25% of investable funds can go into one investee company, rising to 50% for large value funds for accredited investors. With the one-project rule, a standard fund holds at least four projects.
• Primarily unlisted. Since May 2025 the portfolio must lean towards unlisted securities and/or listed debt rated A or below. Most project debentures are unlisted.
• Close-ended, at least three years. Category I and II funds are close-ended with a minimum tenure of three years. There is no redemption window.
• Minimums. Each scheme needs a corpus of at least ₹20 crore, no more than 1,000 investors, and a ticket of at least ₹1 crore, or ₹25 lakh for employees and directors of the fund or manager. The ₹1 crore floor does not apply to accredited investors.
• Skin in the game. The manager or sponsor must keep a continuing interest of the lower of 2.5% of the corpus or ₹5 crore, and it cannot be created by waiving fees.

Most real estate AIFs are set up as trusts. Four parties matter.

1. The fund (trust). It holds investors' commitments and owns the investments. A trustee oversees it.
2. The investment manager. It sources deals, runs due diligence, negotiates security and covenants, monitors construction and sales, and decides when to exit. It earns a management fee and usually a share of profits above a hurdle.
3. The project SPV. A company or LLP that owns one project, signs the construction contracts and collects buyer money. The fund invests here, in equity, debentures or both.
4. The developer. It sponsors the SPV, holds the rest of the equity, builds and sells. Its brand, balance sheet and record decide much of the outcome.

The money flows in a loop. You commit ₹1 crore; the manager draws it down as deals are signed; the fund subscribes to the SPV's shares or debentures; the SPV spends on land, approvals and construction; buyers pay as the project progresses; and the SPV pays interest, redeems debentures or distributes profit to the fund, which passes the proceeds to you.

The placement memorandum governs the fund; the debenture trust deed, shareholders' agreement and security documents govern each project. A fund's quality often shows in the second set.

A property project's capital stack has layers. At the bottom is the developer's equity, which takes the first loss and the last profit. At the top is senior debt, usually a bank or housing finance company, which is repaid first. Real estate AIFs work in the layers between and at both ends.

In an equity deal the fund buys shares in the project company, often alongside the developer through a platform that will fund several projects. The fund shares in the upside if prices and sales beat the plan, and it carries the loss if they do not. Returns arrive late, usually when units are sold and the SPV distributes profit, or when the fund sells its stake.

Equity suits a well-located project whose developer needs a partner for land and approvals. It is the riskiest layer a fund takes.

Most real estate debt fund strategies lend through non-convertible debentures issued by the project SPV. A typical structured debt deal has:

• a fixed coupon, sometimes partly accrued rather than paid in cash;
• a redemption premium or a share of sales receipts that lifts the return;
• security such as a mortgage over land and the unsold inventory, a pledge of the SPV's shares and guarantees from the developer group;
• covenants on loan-to-value, minimum cover, sales prices and how collections are used;
• an escrow arrangement so that sales money repays the fund before the developer takes cash out.

Structured debt aims for steady, contractually defined returns. Its risk is that the security has to be enforced, which in Indian real estate can be slow.

Mezzanine financing sits between senior debt and equity. It is repaid after the bank but before the developer's equity, so it is paid more than senior debt. In Indian property it often takes the form of subordinated debentures, preferred equity with a fixed preferred return, or debt with an equity kicker such as a share of surplus sales.

Some newer platforms use preferred capital to give a fund priority over the developer for distributions while keeping part of the upside. Mezzanine capital is often used where senior lenders will not go, for example in early-stage projects before construction finance is available.

Read the placement memorandum to see which layer your fund will occupy. Two funds both called "real estate opportunities" can sit at opposite ends of this table.

Real estate funds quote returns as an internal rate of return, because money goes in and comes out at different times. Recent Category II launches illustrate the range. A Prime Securities group fund launched in June 2026 for structured credit in six cities announced a target of 18–20% a year, explicitly not guaranteed. A Sundaram high-yield secured debt fund that invests in real estate debentures and mezzanine securities shows an indicative gross target IRR of 17–21%. Industry research has cited a 12–21% IRR range for real estate private credit.

Three adjustments turn those headlines into what you might keep.

• Gross to net. Targets are usually before management fees, fund expenses and the manager's share of profits, and before tax. Your net figure will be lower.
• Target to outcome. A target assumes the projects sell on time at planned prices. Delays and defaults reduce realised IRR, sometimes sharply.
• IRR to money multiple. A high IRR earned on capital that was outstanding for a short time can still be a modest gain in rupees. Ask for the expected multiple on invested capital as well.

The cash pattern depends on the strategy. A debt fund that pays coupons can distribute from the first year. An equity fund often distributes little until projects complete. In both cases undrawn commitment sits with you, so plan where it waits.

Fees vary by fund and are set out in the placement memorandum: a management fee, usually charged on commitment or on invested capital, and a performance fee or carried interest above a hurdle. GST applies on the fees. Compare these line by line, because a two-point difference in fees on a five-year fund changes the outcome more than most investors expect.

Category I and II funds are close-ended, so the timetable is fixed at launch, subject to rules.

Drawdowns. You sign a commitment and the manager calls it in tranches as deals close, typically over the investment period. Missing a call has consequences set in the contribution agreement.

Tenure. The minimum is three years. Many real estate funds state five to seven years, and investor guides note that some run eight to ten. The tenure can be extended by up to two years with the approval of two-thirds of unit holders by value.

Exit routes for the fund. Debt investments end when debentures are redeemed from sales receipts or refinanced by a bank once construction is advanced. Equity investments end when units are sold and profit is distributed, when the developer buys out the fund, or when a stake is sold to another investor.

When assets are not sold in time. After tenure ends, the fund enters a liquidation period of one year. If investments are still unsold because there is no buyer, the manager can, with the consent of at least 75% of investors by value, either distribute them in-specie or move the scheme into a dissolution period. A dissolution period cannot be longer than the scheme's original tenure, and the fund cannot take new commitments or make new investments during it. Unsold investments at the end of the dissolution period must be distributed in-specie.

For property funds this matters. An in-specie distribution of unlisted SPV debentures or shares gives you an asset that is hard to sell. Ask a manager how many past schemes extended tenure, and why.

Your own exit. There is no redemption. Units are issued in demat form and can in principle be transferred, but a secondary buyer is not guaranteed. Treat the stated tenure as the shortest likely holding period, not the longest.

Category I and II AIFs are "investment funds" under section 224 of the Income-tax Act, 2025, which replaced the old section 115UB from 1 April 2026. The core rule is pass-through: income other than business income is not taxed at the fund, and is taxed in your hands as if you had made the investment directly. The character of income carries through.

For a property fund that produces very different outcomes by strategy.

• Debenture interest from a real estate debt fund is taxed at your slab rate, with surcharge and cess. Industry body IVCA, in pre-Budget representations reported in January 2026, said private credit AIF income is often taxed at around 39% for the top bracket.
• Gains on unlisted debentures that are transferred, redeemed or mature on or after 23 July 2024 are treated as short-term capital gains whatever the holding period, under section 76 (old section 50AA), so they are taxed at slab rates too.
• Gains on SPV shares held for more than 24 months are long-term and taxed at 12.5% without indexation; shorter holdings are taxed at slab rates.
• Business income, which is unusual for these funds, is taxed at the fund at the maximum marginal rate and is exempt in your hands.

Two timing rules catch investors. Income is taxed in the year the fund earns it, even if it is distributed later, because undistributed income is deemed credited on the last day of the tax year. And the fund deducts 10% TDS for resident investors, which is only an advance payment against your final tax. Losses pass through only in limited cases. The full filing routine is covered in our guide to Category II tax paperwork. Tax treatment depends on your facts and may change, so consult a tax adviser before investing.

Many investors weighing a real estate AIF already own property, so the question is which job each does.

An Outlook Money analysis published on 4 October 2026 quoted a wealth adviser estimating that stamp duty, registration and brokerage add 7–10% to the cost of direct property, and that rental yields run around 2–5%. A real estate debt fund instead earns from lending to the builder at contractual rates, so its return depends on the developer's repayment, not on rent.

Listed REITs are a third route: they own completed, rent-yielding assets and trade on the exchange, so they offer liquidity a real estate AIF cannot.

Three forces shape real estate AIFs in 2026.

Scale. By 30 June 2026, Category II funds had raised commitments of ₹13,02,837 crore and made investments of ₹4,28,376 crore, according to SEBI. Real estate's cumulative ₹87,969 crore compares with ₹73,903 crore at December 2024, the figure Anarock drew from SEBI data, when real estate already led all sectors.

Domestic launches. Recent funds are mostly domestic and focused on residential projects in the big cities. The Prime Litmus fund targets structured credit for under-construction projects in six cities; Arnya's maiden debt fund, launched in 2024, is a registered Category II AIF giving early-stage capital to developers in the top eight cities.

Data and process. AIF units are held in demat form. Category I and II funds must value their investments at least once every six months, through an independent valuer. SEBI's performance benchmarking framework has managers report cash-flow data to benchmarking agencies, so investors can compare a fund with peers of the same vintage and strategy. On the project side, RERA registration and separate project accounts make it easier for a fund to track collections.

• Access to developer finance. Lending to or investing alongside a developer at project level is not open to most individuals. A real estate AIF gives access to the same deals institutions see.
• Built-in diversification. The 25% cap and the one-project rule mean a standard scheme holds several projects, often across cities and developers.
• Security and covenants. Structured debt deals carry mortgages, pledges, guarantees, escrow of sales receipts and loan-to-value tests that a typical property buyer never gets.
• Professional monitoring. The manager tracks construction, sales and collections, and investments are valued independently at least twice a year.
• Single layer of tax. Under pass-through, non-business income is taxed once, in your hands, at your rates.
• No landlord work. There are no tenants, repairs or society disputes to manage.

A real estate AIF is decided before you sign, not after. The questions that matter are which layer of the capital stack a fund occupies, how its projects are secured, and how its past schemes ended. PMS Sahi Hai is built for the comparison step, and it is worth being exact about what it does and does not do.

What you can do on the platform

• Start from the right category. The AIF compare page lists the AIFs the platform tracks, with a filter for Category I, II and III and columns for strategy, vintage, AUM, one-year return, lock-in and Nyra score. Filtering to Category II narrows the field to the bucket where property funds sit.
• Line up alternatives. The compare directory lets you shortlist strategies side by side, so a property fund can be weighed against a private credit or private equity fund before you commit ₹1 crore to one theme.
• Ask in plain English. Nyra, the platform's AI research assistant, takes a goal described in ordinary language and ranks matching funds. Its published methodology scores strategies on five pillars, and shows a strategy with under 12 months of track record as "Not Rated" rather than guessing.
• Get the basics right first. Our guides to Category II AIFs in general, the ₹1 crore AIF minimum and how AIF units, NAV and commitment calls work cover the ground this post deliberately skips.

What it does not do

The comparison tables do not show a fund's security package, its loan-to-value covenants, the developers it lends to or the outcome of its earlier schemes. Those live in the placement memorandum and in the manager's answers. Nyra describes itself as an analytical tool, not a SEBI-registered investment adviser, and a high score is not a recommendation.

How to combine the two

Use the platform to build a shortlist of two or three Category II funds. Then put this guide's questions to each manager: equity, structured debt or mezzanine; what security backs each deal; what fees apply before you see a rupee; and how many past schemes needed an extension. The score shows how a strategy has performed; the answers show what you are actually lending against.

• Developer and execution risk. Projects run late, approvals take longer, costs rise and sales slow. Each delay reduces IRR and can push the fund past its tenure.
• Enforcement takes time. Security is only as good as the time and cost of enforcing it. Recovering through courts or insolvency can take years.
• Illiquidity. There is no redemption, extensions of up to two years are allowed, and unsold assets can come back to you in-specie.
• Tax drag on debt strategies. Interest and debenture gains are taxed at slab rates, so a high gross yield can shrink sharply after tax for a top-bracket investor.
• Concentration in one sector. Even a diversified real estate fund is a bet on one industry and on a few large cities.
• Fees and opacity. Management fees, carry and expenses reduce net returns, and valuations of unlisted debentures and SPV shares are estimates.
• High entry ticket. For investors who are not accredited, the ₹1 crore minimum makes it hard to spread money across several managers.

A real estate AIF suits an investor who already has liquid core holdings, can leave ₹1 crore untouched for six years or more, and wants exposure to property finance without owning buildings. It suits less well an investor who needs a predictable exit date, is in the top tax bracket and is choosing a debt strategy mainly for yield, or would be uncomfortable if a fund extended its life.

Before you sign, answer four questions from the placement memorandum: which layer of the capital stack the fund occupies; what security and covenants protect it; how the fees and hurdle work; and what happened to the manager's earlier schemes at maturity. A fund that answers these clearly is easier to judge than one that leads with a target IRR. Shortlisting on PMS Sahi Hai first, with Nyra's scores alongside, means you spend that reading time on two or three funds rather than ten.

A real estate AIF can be a useful way to earn from India's property cycle without owning a building, but only if you know which layer of the capital stack you are buying, how the deal is secured, what you will keep after fees and tax, and how the fund will exit. Put two or three placement memorandums side by side, check the managers' earlier schemes, and commit only the money you can leave alone for the full term.

Start the shortlist on the PMS Sahi Hai AIF compare page, filter to Category II, and ask Nyra which funds match your horizon and income needs. If you would like a second pair of eyes on the final two or three, book a consultation with the PMS Sahi Hai team, and take the answers to your CA before you sign.