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Indian property firms are gearing up to sell the country’s first bonds backed by rental income from their office buildings and shopping malls.
The bonds would open a new source of capital for a commercial property sector weighed down by $22 billion of bank debt and sluggish rentals, and come on the heels of new rules allowing developers to raise money through real estate investment trusts.
Property and infrastructure lender IDFC is at the most advanced stage, with plans to sell at least Rs 300 crore in a debt security backed by lease rentals from an information technology (IT) park in Noida, outside Delhi, and a special economic zone in Pune, said people involved in the discussions.
IDFC declined to comment.
DLF, India’s biggest listed developer, is in talks to raise up to Rs 1,000 crore in a bond backed by lease rentals from two malls by the end of this year, the people said. The developer has in the past talked about raising funds through such a vehicle.
DLF’s executive director of finance Saurabh Chawla confirmed the developer was looking at such a debt structure for its offices and shopping malls, but gave few details. “We are exploring the possibility. There are many such programmes that we have which we hope to complete over the next six-nine months.”
K Raheja Corp is also pursuing an asset-backed deal, but is proceeding slowly, Neel Raheja, group president, said. Raheja said his company is considering doing a deal in three to six months. “Before we do it, we want to make sure it goes right and, therefore, we are not rushing into it,” he said.
Credit Suisse and JP Morgan are among banks tapping property companies and investors to gauge their interest in the structure, the people said. Both banks declined to comment.
“Bankers have pitched deals for IDFC and DLF to us. We are assessing the risk of the product and waiting for the rating,” said a senior fund manager who declined to be named because the talks were not public. He said IDFC was likely to issue the first such bond, within a month.
While the bond structure is loosely referred to in India as a commercial mortgage-backed security (CMBS), it differs from a CMBS in the United States or Europe, under which lenders securitise mortgages on commercial property.
Rather, DLF and IDFC’s proposed bonds would be similar to so-called lease-rental discounting (LRD), sold in a bond. Rental income is used to pay the interest to the bond investor, while the principal is repaid at maturity, the people said. In an LRD, the principal is amortised over the life of the debt.
Both DLF and IDFC are considering bonds with five-year maturities and an option to extend the borrowing to seven years. The debt would be issued by a special purpose vehicle that owns the underlying property and would carry a credit rating independent of the developer.
DLF earns more than Rs 2,000 crore in rent every year, Chawla said. The company has also been selling non-core assets to reduce its debt.
IDFC is considering an asset-backed security that yields 10.75 per cent to 11 per cent, said those close to the discussions, below the roughly 12-13 per cent interest on a loan for a similar duration.
Property-backed bonds carry risk, as issuers can default if lease payments are disrupted. Defaults on mortgage-backed assets were a key contributor to the 2008 global financial crisis.
The Indian market for property-backed bonds is likely to develop slowly. “The tap may finally open, but not in strong force,” said Sandeep Singh, director of structured finance at Fitch Ratings in Mumbai.
Raheja said his company is considering doing a deal in the next 3-6 months. "Before we do it we want to make sure it goes right and therefore we are not rushing into it," he said.
MONETISING RENTAL FLOW
The bonds could be a lifesaver for a sector struggling with bank debt of $22 billion
HOW IT WOULD WORK
- Rental income would pay interest to investors
- Principal, amortised over the life of the debt, to be repaid at maturity
- Special purpose vehicle owing the underlying property to issue bonds
- Likely to have five-year maturity
- DLF in talks to raise up to Rs 1,000 crore; to use lease rentals from two malls
- IDFC plans to raise at least Rs 300 crore via bonds in a month; to use lease rentals from IT park in Noida and an SEZ in Pune
- K Raheja Corp pursuing asset-backed bonds; deal likely in three-six months
