The Indian realty sector is finding out novel ways to tide over persisting financial problems. The latest attraction seems to be setting up of Property Bonds. Many realtors are hoping that this will help them keep their head above water by infusing the much-needed capital into the debt-laden commercial segment.
The property bonds are to be backed by the income that companies get through rentals from the commercial and retail markets. This move supported by the proposal of SEBI to allow listing of Real Estate Investment Trusts (REIT) should hopefully reduce the debt burden.
Most of the entrants to the Bond market are located up north where there are a huge stockpile of lease rentals that could be off-loaded at a very short notice. Apparently this surprise move has been in the making for a long time now. The seed for the development of the bond structure was sown by a couple of foreign banks through advice given to their domestic clients.
The Bond structure is based on the Lease-Rental discounting model. In such a case the interest on the bond would be paid from the rental income of the leased properties while the total value of the bond would be given at the end of the maturity period. The tenure of these bonds is likely to be around 5 to 7 years.
The front-runners in this category are IDFC and DLF. DLF has been earning a handsome amount as rental income and this is a sure shot way to put it to better use. Primarily it will be used to reduce its credit.
The bull run of Indian real estate in the years preceding the recession saw many a developer queuing up in front of banks. The intention was to gobble up loans with the lowest interest rates. But the financial crisis that followed put a spanner in their works. The realtors are now facing the twin challenges of disburdening the unsold inventories as well as raising enough capital in order to reduce debt from the loans.
The Indian market has not favoured funding for the bond market. This has necessitated the latest move to come up with unique ways of raising money.
Although it is an offbeat venture, the risks associated are still plenty to discourage an investor. Interest payments could be affected if there is no regularity on the payment of rentals. Ironically this was one of the major contributing factors for the sub-prime crisis of 2008. Therefore many developers are adopting the wait-and-watch approach in order to ensure that the bond market can be relied upon lest it may backfire.