Real Estate Non Convertible Debentures (NCDs): What are these?

Of the different real estate-linked investment options that have come to the foray in the not so distant past, real estate-Non Converible Debentures (NCDs) is also an investment option for the investor class and a source of raising funds for the sector who find hard to get finances from financial institution due to their over-leveraged financial structure.

And, to take their real estate project to the completion stage, Real-estate developers take on the services of the Portfolio Management Services or PMS, for deciding on the structure of the NCD issue. And after all the ground work is done at the back end, real-estate NCD issue is opened in the market for subscription.

Some of the real estate developers who have come up with a real estate NCD issue include the likes of DLF, Godrej Properties, Lodha Developers, Parsvnath developers and few others. Know how you can invest in NCDs.

For whom: Such non-convertible debenture instruments are for high net-worth individuals as the minimum investment ticket size is as high as Rs. 10 lakh. Also, it is a good avenue for high net worth investors with a considerable risk appetite to plunge on in such a NCD option for diversifying their investment portfolio. And the coupon rate and tenure range any way between 13-22% and 1-5 years respectively. Interest on the investment is provided either monthly, quarterly, half-yearly or yearly.

How safe is investment in real-estate NCD?

As the security i.e. the ongoing real estate project or/and land kept for the NCD issue is over two to three times in comparison to the amount raised, investment in real-estate NCD is not risky. Interest on the investment starts accruing after six months from the investment while principal is paid after a year from when the investment was made (in installments).

Also, in case of default by the real estate developer, debenture trustee makes sure that the investor is paid off as it has the capacity to liquidate the held securities.

Nonetheless, few concerns in regard to investment in real-estate NCD should not be overlooked. Do not delve into the investment in case you wish to liquidate it at a date prior to the maturity date. As in such a event, you may find low liquidity for the product on the bourses and even if you happen to find the buyer, the quoted price may be way below the bond's fair market value.

Comparison of Real Estate NCDs and REITs/ Real Estate Investment Trusts

NCDs and REITs being both an investment avenue have some differences. It must be noted though that RBI is still in the process of giving REITs in India a go-ahead. Real estate NCD is issue of the bond by the real estate developer that offers a fixed rate of return to the NCD holding investor. On the other hand, REITs which are mutual funds or collective investment schemes (CIS) channelizing funds in real estate projects. Returns that shall generate on REITs shall furthermore be market linked. REITs as suggested are good bets for individuals who want to partake their funds into real estate investments as they are indeed more secure. Know about REITs in detail here.

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