Mumbai: Cash-strapped property developers are now looking at raising money by selling bonds backed by rental income from shopping malls and offices they own to institutional and high net-worth investors.

A number of developers are bundling their commercial properties, including retail malls and office properties, and raising funds against the rental income they earn from such properties. The bonds mature in 7-11 years and offers investors a fixed coupon payment.

DLF Ltd, India’s most valuable property developer, said in an analyst call on 30 April that it will raise close to 3,000-3,500 crore this financial year by selling such bonds.

Earlier this month, the developer raised 525 crore by selling securities backed by rental income from a luxury mall in south Delhi, owned by its unit DLF Emporio Ltd.

This was the first instance of such fund raising by any developer.

DLF indicated that raising funds through the sale of rental income backed securities will help it reduce its exposure to the banking sector.

The cost of such fund raising is also marginally cheaper than bank loans. For instance, DLF raised the capital with a coupon rate of 10.9% for a fixed tenure of 7.5 years, lower than the 12-14% interest rates being charged by banks.

Other developers are also planning to sell such bonds.

Mumbai-based realtor Phoenix Mills Ltd (PML) said it will sell debt securities backed by rentals from its Phoenix Market City project located in Velacherry, Chennai.

“We are doing a similar transaction with our mall in Chennai to see if it brings down our debt," said Atul Ruia, joint managing director of PML. The developer is looking to raise close to 300-400 crore through the sale.

The Phoenix Market City in Chennai became operational in December last year and recorded rental income of 21.5 crore excluding the common area maintenance charges.

Mumbai-based K Raheja Corp backed Intime Properties Ltd is also looking to raise 340 crore by selling debt backed by rentals.

Intime Properties has developed three commercial buildings with saleable area of 1.71 million sq. ft and its tenants include Novartis India and Hongkong and Shanghai Banking Corp. Ltd.

The firm did not respond to an email sent on Saturday.

While investors including insurance companies, mutual funds and global investors, have been keen to buy such debt, some bankers warn that investors should be mindful of the risks.

Investors in such securities typically get the interest payments during the tenure of the bond and on maturity, the developer will have to pay the entire principal amount. This is where the trouble could start.

According to a private equity fund manager, who was considering selling such debt for a commercial asset in his portfolio, said some developers may find it tough to make bulk payments at the end of five years. “If we see, traditionally realtors have been debt trapped due to excessive land buying, negligible sales and in most cases irresponsible use of initial public offering (IPO) money and have given poor exits to their private equity investors. Also everyone is considering that in the coming years the value of the asset will increase but if there is a significant churn in tenancy there could be downward risk," he said, requesting anonymity, as he is not authorised to speak on the matter.

Commercial real estate as an asset class has underperformed. According to a report released by property consultants DTZ at the end of the first quarter of calendar year 2014, all tier I cities witnessed lacklustre activity in the retail segment whereas rental occupancy office properties have only just started to pick up.

While developers in India are opting to raise funds by offering rental income as collateral, such issuances have been common globally. Defaults on home loans that were bundled into securities and sold to investors triggered the global financial crisis of 2008-09, the worst crisis since the Great Depression.

“The entire global crises was initiated with these products. There is a lot of clarity and awareness which needs to be introduced for example who would hold the risk if there is a non-payment situation, the tax deductions available, etc. without these clarities investors would be cautious to invest in these papers," said Ambar Maheshwari, managing director (corporate finance) at Jones Lang LaSalle India.

However, Pawan Agrawal, senior director of Crisil Ratings, which has assigned ratings on a number of these securities says that there are enough safeguards built into these products to protect investors against a decline in rental income.

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