Asset-Backed Bonds
New Delhi: Indian real estate majors are preparing to sell the country’s first bonds backed by rental income from their offices and shopping malls. This development comes on the heels of new regulations allowing developers to raise money through Real Estate Investment Trusts (REITs).
Key Players and Plans
- IDFC, a prominent property and infrastructure lender, is set to sell a minimum of Rs 3 billion in debt securities. These securities will be backed by an IT park in Noida and a Special Economic Zone (SEZ) in Pune.
- DLF, another leading real estate company, is in discussions to raise up to Rs 10 billion through a bond backed by lease rentals from two malls, expected to be issued later this year.
Financial Institutions Involved
Credit Suisse and JP Morgan are among the banks tapping property firms and investors interested in the structure.
Bond Structure and Features
- The proposed bonds differ from traditional mortgage-backed securities. Instead, they resemble lease-rental discounting, sold as a bond.
- Both DLF and IDFC are considering bonds with a 5-year maturity period, with an option to extend to 7 years. These bonds will carry the credit rating of the developer.
- DLF alone earns more than 20 billion rupees in rent annually and has been selling non-core assets to reduce debt.
Financing Dynamics
Indian developers, especially those that are family-run, typically rely on bank loans and equity sales to fund their operations. India’s corporate bond market has historically lacked the depth and liquidity to serve as a major funding source. More exotic bond products have failed to take off due to low investor appetite and government restrictions that prevent many investors, such as pension funds, from buying riskier assets.
Next Steps
Bankers have already pitched deals for IDFC and DLF and are currently assessing the risk of the product while awaiting ratings. IDFC is likely to issue such bonds within a month.