Photo: Mint
Photo: Mint

Developers tap bond markets to reduce cost of funds

Civil construction, realty, housing firms raised `7,554 cr via private placement of debt, corp bonds, in first half of 2015

Mumbai: An increasing number of real estate developers are raising funds via the bond markets as these firms try to reduce their cost of borrowing and take advantage of investor appetite for higher yielding assets.

As per data compiled by Prime Database, housing, civil construction and real estate companies have raised 7,554 crore through corporate bonds or private placement of debt in the first half of this year. In all of 2014, this set of companies had raised just over 11,000 crore from the debt markets, up from 7,438 crore in 2013.

Developers have been increasingly tapping funding from sources other than banks as traditional lenders have been reluctant to lend to perceived high-risk categories and charge interest rates above 13%.

Market borrowings through bonds or instruments such as commercial mortgage backed securities (CMBS) allow developers to reduce their borrowing costs.

At the same time, the investor pool for corporate debt has also widened.

“The phenomenon has two sides—more developers looking to diversify into the capital markets and away from bilateral bank/NBFC (non-banking financial company) loans, coupled with more funds hungry for higher yielding credits," said Chetan Joshi, head of debt capital markets, HSBC India.

Over the past fortnight alone, two real estate firms have raised funds via the debt markets, including Prestige Estates Projects Ltd, which issued bonds for the first time. The firm raised 500 crore through the issue at a coupon rate of 11.27%, it said in a release to the stock exchanges on Wednesday.

On 23 July, Sobha Ltd raised 100 crore through four-year bonds at a rate of 12.5%, according to Bloomberg.

“We thought we should tap the bond market as we have been looking for multiple sources of raising funds. What attracted us to this route is the fact that cost of borrowing is lower and the interest rate is highly competitive," said Venkat K. Narayana, executive director and chief financial officer, Prestige Estates.

J.C. Sharma, vice-chairman and managing director, Sobha, agreed that tapping the bond market had proved more cost effective for the company due to the competitive interest rates.

To be sure, a shift in borrowings away from banks and towards debt markets is not restricted to the real estate sector. On 17 June, a Mint analysis showed bank borrowings had accounted for only one-third of the debt raised by the corporate sector in fiscal 2015.

Incremental credit from banks in 2014-15 was 5.2 trillion, 30% of the 17.2 trillion raised cumulatively from banks, market borrowings and foreign loans and bonds.

“The merits of issuing corporate bonds include reduction in cost of funds, widening the investor base, and freeing up bank lines. With bonds, real estate companies have far more flexibility with the end use of funds and, hence, more advantageous," said Sunil Hingorani, director (finance) at the K. Raheja Corp. The company raised 340 crore through the debt market in July 2014.

In the case of real estate in particular, banks are not allowed to lend for land purchases, as per Reserve Bank of India norms. A higher risk weight is also assigned to exposure to commercial real estate, which increases the cost of bank borrowings for most real estate companies.

A widening of the pool of investors in corporate debt has also helped a larger number of real estate firms raise funds from the market.

“Mutual funds continue to look beyond just the highly rated CMBS category (commercial mortgage backed security) to corporate-style lendings with a well-structured security and covenant package," said Joshi, adding several mutual funds have become more comfortable with real estate financing over the last couple of years.

To be sure, the subset of real estate firms that are in a position to tap the debt market is still small, with only relatively highly rated issuers with strong financials seeing success. Investors typically seek bond issues backed by strong collateral, which includes high-end residential properties which have visibility in terms of sales, as a way to draw investors.

According to Anuj Puri, chairman and country head of JLL India, a global property consultant, every real estate firm wants to tap the bond market. “However, the credibility of the sector is not high. Unless the sector becomes more transparent and proper corporate governance is put in place by the companies, it has a long way to go," he said.

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