Real Estate NCDs - Who Is It For & What Are The Benefits?

Real estate developers' non-convertible debentures are a high-return, high-risk investment. Real Estate NCDs get utilized to obtain short-term financing via investors.

Share on facebook
Share on twitter
Share on linkedin
shutterstock 572646343 min 1

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.

Real Estate Non Convertible Debentures FAQ's:

Investing in a real-estate NCD is not dangerous but safe since the security, i.e. the current real estate project or/and land held for the NCD issue, is worth more than up to three times the amount generated.

Related Articles

istockphoto 1312767508 612x612 1

What is National Securities Depository Limited (NSDL)

NSDL or National Securities Depository Limited is a financial institution that was established to keep securities like shares, bonds, etc in the shape of non-physical or physical certifications, that is in demat format. The securities are maintained in deposit accounts, which are similar to funds in bank accounts. It allows for quick securities transfer because ownership gets transferred merely by ledger entries. This is frequently done digitally, saving the extra time required in the previous practice of exchanging physical certificates once a deal was concluded. India’s capital market, which has been around for almost a century, has always been quite active. But, due to settlements that are based on paper, it had significant flaws such as poor delivery, prolonged transference execution, and so on.  To address these concerns, the Depositories Act 1996 was enacted and went into effect on Sept 20, 1995. This legislation mandated the Security Depositories establishment in India to manage securities.  Security is a financial asset that…

Read more
istockphoto 1176996544 612x612 1

Step-by-Step Process for Income Tax Login

Income Tax Login step-by-step process? To finish the E-filing of IT Returns, you must first successfully finish the registration procedure and connect to the IT E-filing site. You may utilize the e-filing site and a variety of services related to tax by finishing the income tax login process. The steps below will walk you through the process of finishing the income tax E-filing site login. Also, read Tax Saving via Deductions Under Section 80C 80CCC 80CCD and 80D. How To Do Income Tax Login? Step 1: Navigate to the Income Tax e-filing website. Select the “Login Here” option in the upper right-hand side of the site.   Step 2: After clicking the “Login Here” option, you will be sent to the Income Tax Login webpage.   Step 3: Also on the login screen, enter your User ID, which is your Permanent Account Number or PAN. Enter the password you created when you registered for your IT e-filing account. After you’ve…

Read more
istockphoto 1252264724 612x612 1

Everything about CSC Digital Seva Portal

CSC Digital Seva Portal is a gateway that provides info on numerous firms and electronic governance to inhabitants in remote and rural areas of India. A CSC facility’s full name is Jan Seva Kendra or Common Service Center. Common Services Centers or CSC is a network based in India that aims to transform India into a digitalized country. CSC Scheme 2.0 got started in Aug 2015 for improving accessibility to digital and technological services for citizens in remote and rural areas of India. The CSC Digital Seva Portal’s Goals Connect 2.5 lacs of Gram Panchayats in India. Citizens of India should access trustworthy and up-to-date info. In villages, all basic services are given in a single place. Deliver low-cost, services that are of high quality to average people. Governmental welfare and social assistance programs are promoted. Develop new rural jobs and promote rural entrepreneurship. Registration for the CSC Digital Seva Portal To commence the registration process, one must comply with…

Read more

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

PMVVY is an Open-ended Deferred Pension Plan. The scheme offers guaranteed return of 8% per annum for 10 years. Minimum pension amount is Rs. 1,000/ month and maximum pension amount is Rs. 10,000/ month depending on purchase price. Returns will be paid on a monthly basis. On maturity, the entire pension wealth will be paid in lump sum and no annuity will be offered thereafter by the Pension Fund Regulatory and Development Authority (PFRDA). The first installment of 5% or 50% whichever is lower is payable within 2 years from the time when account balance reaches Rs 1lakh/- which will happen after completion of 10th year under this scheme i.e before 2040s for most of us today! PMVVY is an Open-ended Deferred Pension Plan PMVVY is an open-ended deferred pension plan that provides guaranteed return of 8% per annum for 10 years. The scheme offers minimum pension amount of Rs. 1,000/ month and maximum pension amount of Rs. 10,000/ month…

Read more
EPFO KYC update for UAN

How to update KYC for EPF UAN?

KYC is being adopted by most of the government and private sector organizations for maintaining the proper records of official matters. The Indian government has already made it mandatory for employees as well as consumers to link their Aadhar card with various types of accounts and digital entities. Therefore, it is also compulsory for you to link your EPF with your Aadhar as well as other important digital documents. Don’t know how to do it? Don’t worry, we have got your back! In this article, we’ll learn how to update KYC for the EPF’s UAN and also go through the basics. Stay tuned until the end to understand it better.  What are the advantages of updating your EPF’s KYC details? A wide range of benefits can be reaped by updating the KYC on your EPF account. Some of those benefits are: You can make online withdrawal claims, which happen only after you link/seed your Aadhar with the UAN The transfer…

Read more
istockphoto 1353920585 612x612 1

EPF Form 10C – Benefits, Eligibility & Documents

EPF Form 10C is used to request a reimbursement of the employer share, the withdrawal benefit, and the scheme certificate for membership retention. An Employees’ pension fund (EPF) or Employers’ Pension Scheme is a retirement plan that EPFO enfranchises for employees working in organized sectors. Both the employer and employee contribute to EPF during a person’s employment period at that company. UAN – This unique number is assigned to each member of EPFO. It consists of 12 digits. An EPF certificate gives information about the employee’s employment, including the service period and the family members that will be able to benefit from the scheme in the event of death. Individuals can choose to continue their work after they retire from a company. You can either transfer the company to your next one or withdraw it. In case of withdrawal, the person must file EPF Form 10C.  Filling EPF Form 10C   Online and offline filings of Form 10C are possible. These…

Read more