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.
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 relator, 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).
Delays do occur but then payments get regularized. 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 NDCs 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 NCDs 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 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. Also, the funds are invested via 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 requirements for high-yiel 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 1 locations. They effectively generate working funds for projects or the organization. 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 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.
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
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
Read Also: Why Invest In Commercial Real Estate?
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 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..
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? Asset Yantra is a property investment platform that offers services to interested investors. The Sparkle series in Chennai and the Ascend series in Hyderabad are Asset Yantra’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.