Indian property firms,including DLF Ltd,are gearing up to sell the countrys 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 (REITs).
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 IT park in Noida,outside Delhi,and a special economic zone in Pune,said people involved in the discussions.
IDFC declined to comment.
DLF,Indias 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. Developer K. Raheja Corp is also pursuing an asset-backed deal,but is proceeding slowly,Neel Raheja,group president,told Reuters.
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 IDFCs 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 5-year maturities and an option to extend the borrowing to 7 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. DLFs executive director of finance,Saurabh Chawla,confirmed the developer is looking at such a debt structure for its offices and shopping malls,but gave few details. We are exploring the possibility, he said. There are many such programs that we have which we hope to complete over the next 6-9 months.
The search for new ways to raise funds comes after Indian developers gorged on cheap bank loans during a property boom in 2006-07,which was ended by the global financial crisis as well as high domestic inflation and interest rates.