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Real Estate NCDs Find Favour With HNIs

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Higher coupon rates and comfortable collateral cover are prompting affluent investors to invest in non-convertible debentures (NCD) of real estate companies.

Wealth managers such as Karvy, India Infoline and Edelweiss, among others, are selling 'collateralised' real estate NCDs, which promise to pay 16 – 18 per cent per annum to investors, in large numbers.

Each NCD offering has a size of 200-300 crore. In most cases, the threshold limit for investors starts at 10 lakh, and goes up to 1 crore. Sheth Developers, Kumar Housing, Lodha Developers and  Wadhwan Group are among real estate companies that have issued NCDs over the past few months.

NCDs are similar to bank fixed deposits in many ways. These securities are issued by companies for varying periods, often one to three years, and are listed on stock exchanges. However, most real-estate NCDs are not listed.

“Real estate NCDs are quite safe for investors. The collateral kept to protect investors is as high as 2.5–3 times the money invested," said Sunil Mishra, CEO, Karvy Private Wealth.

“Some of these issuances have a monthly pay-out option.  The money raised via NCDs is only deployed at the project level; this product is used to raised funds for 2 – 3 years,” Mishra said.

Funds mobilised from investors are deployed at the project level. Most NBFCs and wealth managers only agree to sell NCDs of builders with a track record of developing more than 5 lakh sq feet in a city. Most NCD issuers start the repayment of principal in 18-22 months time, wealth managers said.

According to Raghvendra Nath, MD, Ladderup Wealth Management, the most comforting factor in real estate NCDs is that these are secured issuances. On the negative side, investors are taking a high risk exposure in the portfolio by investing in these NCDs, he said.

Investors should understand real estate NCDs well before committing funds. They should understand the sector well and also companies (NCD issuers) in which they are investing.

According to equity analysts, real estate is still a sector with no real “growth visibility”. In overall terms, real-estate developers may continue to face sluggish demand, high construction costs and liquidity pressures.