Unlisted real estate companies are knocking at the doors of wealthy retail investors for funds, as markets are unfavourable for initial public offerings (IPOs) and regulators want banks to go slow on lending to this sector. Realtors are offering an annual interest rate of 16-18 per cent.
In the last three months, four companies have raised over Rs 600 crore in the first tranche by issuing non-convertible debentures (NCD). Normally, NCDs have a tenure of 24-36 months and the face value of each debenture is more than Rs 10 lakh.
Vijay Associates Constructions, an arm of Wadhwa (VACPL), is out with a Rs 450-crore NCD issue, the biggest one in this space, offering an interest rate of 16 per cent. It has already raised Rs 182 crore in the first tranche.
Last month, Pune-based Kumar Builders raised Rs 150 crore at 16 per cent. The developer is also seeking the Securities and Exchange Board of India’s approval to raise Rs 450 crore through an IPO. “The pricing of the issue depends on the company’s financials and credibility. There are NCDs which carry an annual interest rate of 18 per cent too” said a spokesperson of IIFL Wealth Management.
Until recently, such assured returns were unheard of. Some realtors have also tried to tap retail investors through company fixed deposits (FD), but the highest yield is 12.5 per cent, which Ansal Properties & Infrastructure is offering for a three-year tenure. Unitech’s FD fetches 12 per cent for the same tenure. “At present, the only way a developer can raise money to buy land is by partnering a realty fund. The cost, in this case, works out to 25-30 per cent, as they share profits. These firms can use the additional money raised through the NCD issue to free up cash flow and acquire land,” said a fund manager with a mutual fund house.
Banks and non-banking finance companies are not allowed to fund developers’ land-buying activities, but they can fund construction activities.
“The loan to finance projects costs upwards of 12 per cent, depending on the developer’s financials and credibility,” said Srini Gopalan, CFO at Wadhwa Group.
To rub salt into realty firms’ wounds, RBI has been increasing the provisioning requirement on banks’ loans to real estate. This has increased the cost of funds for developers.
India Infoline Wealth Management was the first company to launch such an issue for its client. In May-June, it helped Shree Khodiyar, an arm of the Vijay Kamdar group, raise Rs 150 crore at an interest rate of 18 per cent for its South Mumbai project, Shree Harsh. Then, others followed. Bangalore-based Century Real Estate Holding raised Rs 125 crore at 16.5 per cent.
Some of these companies are planning to list these issues on stock exchanges.
“Foreign investors from Europe, Singapore and especially, West Asia, have shown tremendous interest in our issue. As soon as we finish regulatory formalities, we will list it,” said Vijay Wadhwa, chairman, Wadhwa Group.
Though some portfolio management services and wealth management companies are concerned over possible defaults, companies arranging these issues say the mechanism created can care of the risks.
For example, properties of developers are mortgaged with companies arranging such issues.
Also, the interest payment is on a monthly basis, and from seventh month onwards, investors start receiving the capital portion too. “In the last month, the total outstanding is just four per cent,” said the spokesperson at IIFL Wealth Management. The investor has an option to exit midway too. The borrower charges an exit penalty of around two per cent.
