Indian property firms, including DLF Ltd, 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 (REITs).
Property and infrastructure lender IDFC is at the most advanced stage, with plans to sell at least 3 billion rupees 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, India’s biggest listed developer, is in talks to raise up to 10 billion rupees 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.
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.
More LRD than CMBS
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 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.
DLF’s 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.”
DLF earns more than 20 billion rupees in rent every year, Chawla said. The company has also been selling non-core assets to reduce its debt.
Young debt markets
Indian property developers, typically family-run, usually rely on bank loans and selling equity to fund their operations.
India’s corporate bond market has traditionally lacked the depth and liquidity to serve as a major funding source for all but the highest-rated companies. More exotic bond products, meanwhile, have failed to take off because of low investor appetite and regulatory restrictions that prevent many investors such as pension funds from buying riskier assets.
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. Demand for commercial property in India has also weakened in some cities as corporate tenants rein in costs by consolidating operations, according to a report this month by CBRE.
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.
($1 = 61.6000 rupees)