Real estate Non-convertible debentures (NCDs) are not new products. They are issued by real estate developers and privately deposited with high-net-worth individuals (HNIs). They’ve been operating for three to four years and are highly popular among a specific type of investor due to their high return. The return is higher due to the underlying risk associated with the product. The Economic Times revealed in January that Century Real Estate, a Bangalore-based realtor, failed to pay the scheduled interest on one such bond, which was deposited with investors by Kotak Mahindra Prime, a non-banking financial business (NBFC). Recently, industry sources reported that Sheth Developers, a Mumbai-based builder that solicited funds from investors through IIFL Private Wealth, was experiencing interest payment delays.
Delays do occur but then payments get regularised. Also, penalty interest gets paid for the delay. The risks are substantial, especially in today’s market where property sales have halted. These real estate NCDs are a pull investment because of the high yield. So, before you invest, here’s a brief rundown of what you’re getting.
Who is Real Estate NCDs intended for?
The minimum investment ticket size for such non-convertible debenture securities is Rs. 10 lakh, making them suitable for high-net-worth people. It is also a fantastic option for high net worth investors with a high-risk tolerance to invest in such an NCD option to diversify their investment portfolio. And the coupon rate and tenure vary from 13 to 22 percent and 1 to 5 years, respectively. Interest on the investment is paid monthly, quarterly, semi-annually, or annually.
Property developers can raise financing through house buyer loans, and borrowings from NBFCs or banks. Also, they can raise from NCDs placed with high net worth customers’ private equity players. In other circumstances, institutional or private equity investors buy NCDs and resell them to HNI clients. Lodha Developers, DLF, Bangalore-based Century Real Estate, Wadhwan Group, Godrej Properties, and Parsvnath Developers are among the primary companies that have received cash using NCDs in the last year. These NCDs included both unlisted and listed.
NCDs can get purchased by investors via NBFCs or wealth management firms. Real estate private equity funds also invest significantly through NCDs. After collecting cash from customers, a wealth manager starts investing them in debentures using under-construction projects and real estate businesses’ land as underlying assets. An SPV or Special Purpose Vehicle gets established for investing process. Aso, the funds are invested via a trust established by the NBFC on behalf of the debenture holders. The investment lasts between 1 and 3 years.
But, what makes it so desirable?
The other assets have been underperforming last four to five years. However, there has been a growing requirement for high-yield NCDs. These get primarily offered by property developers. NCDs are aimed at the High Net Worth Individuals, with an average ticket amount of 1 crore. The prize is a voucher worth 16-20% every year that you may acquire. This type of funding is typically raised by developers in Tier I locations. They effectively generate working funds for projects or the organization. To achieve the requisite cash flow, they could either take out loans fromNBFCs or sell properties they are developing. Real estate transactions are currently slowing, and banks have hit their maximum credit limit for this industry. As a result, further finance from private placements with high net worth individuals and NBFCs gets welcomed. The reason for this attractiveness is the product’s life cycle is relatively short—typically 18 months to 36 months. Also, interest rates might vary based on the developer’s profile and projects for which funds are being solicited. Furthermore, the regularity of interest payment is advantageous, with quarterly, monthly, and yearly options available. As a result, you may see your cash flow at regular intervals. Frequently, the developer will have to redeem bonds four to five quarters after or a call option to partially repay.
The call option provides the developer to either pay off this high-cost loan if he has a surplus or excess cash flows. These can be through unanticipated selling surges or when he can again finance the ongoing high-price loan from another NBFC or bank at a cheaper rate and lower his loan cost.
Real estate NCDs are less risky than other forms of debentures. In the event of an unexpected catastrophe, you have a real asset in Real Estate to aid you in collecting your obligations.
NCDs in real estate is only for a few years. As a result, short-term investments such as NCDs offer an excellent chance to create regular income through attractive interest payments.
You may use NCDs to invest in a high-net-worth property and benefit without owning it. It is an easy method to make money.
The regular coupon payment or interest earned attracts investors to this area. These might be completed monthly, quarterly, or biannually. Since the underlying security is worth twice more than the investment, it is a safe bet. As a consequence, if the developer issues Rs 100 crore NCDs, the underlying securities should be valued at Rs 200 crore.
Although no official numbers are available, market analysts predict that the total amount of outstanding NCDs ranges between 3,000 and 4,000 crores. More issuances are possible. The market of real estate NCDs will develop. But it will be mostly determined by the investor’s experience and past track record. The credit history of the developer will also get considered.
Risks Of Real Estate NCDs?
Risks are the other flip side. Essentially, developers will provide property as collateral. Also, the land is actual collateral. The practice is to pay twice the amount of money collected. At first glance, this appears to be a fair safeguard from default. The twist is that the site for which security is supplied is not split into one-crore-rupee parts. In other words, in the unusual event of a default, you may be compelled to reclaim security from a vast plot of land, even though your claims are only on a little portion of it. It may be a time-consuming procedure for both the investor and the developer.
In other circumstances, ready goods worth double the loan amount are utilized as collateral, reducing risk. Finally, the trustee must guarantee that your interests are protected. Trustees get called in at the first sign of a default, which might include a missed principal or interest payment. The trustee will execute the debenture contracts, which include the consequences of noncompliance and the avenues for appeal for overdue interest payments.
Institutional engagement alongside people also provides reassurance. However, if an NBFC sells the majority of its holdings to individuals, it is just minimizing its liability and transferring it to you.
Do you want to invest in Real Estate NCDs as well? Assetmonk is a property investment platform that offers services to interested investors. The Sparkle series in Chennai and the Ascend series in Hyderabad are Assetmonk’s NCD investment products. These have an anticipated IRR of 21%, permitting investors to invest in high-value homes without the hassle of property maintenance.
