Real Estate Debentures 101: Pros & Cons For Investors

Real estate NCDs or Non-Convertible Debentures are debt securities that assist developers in pooling funds throughout the early phases of development. Thus, it is a method for developers to obtain a secured loan for the short term from investors.

Share on facebook
Share on twitter
Share on linkedin
Real Estate Debentures

The developers solicit the loans of the investors and repay them with quarterly or monthly interest payments. It provides a consistent flow of money for the investment.

Non-Convertible Debentures, as opposed to convertible, cannot get converted into equity shares. The higher interest rates of the Non-Convertible Debentures justify this. Also, investors can put their money in NCDs via unsecured and secured NCDs.

But, firstly, what is a debenture?

A debenture is a sort of bond that is not collateralized.

Most bonds get collateralized in some way. If the borrower cannot repay the loan, the borrower’s assets may get auctioned to repay the lenders. For investors, collateral is an excellent kind of safety.

A business, for example, may issue a bond to obtain funds for a new product line. Corporation real estate is utilized as collateral, maybe two or three valuable assets owned by the company. If the corporation cannot repay the bondholders, it will liquidate the properties and utilize the earnings to repay the bondholders.

Debentures, on the other hand, are not guaranteed by any collateral. If a borrower cannot repay a loan, investors may not receive the remainder of their investment. As a result, they are riskier than ordinary bonds. They do, however, have advantages.

Debentures get routinely issued by corporations and governments to raise funding.

How Do Real Estate Debentures Work?

These products, which effectively involve three parties, have been created/facilitated by wealth management businesses. The real estate developer who issues the debentures, the HNI client who ‘buys’ them, and the wealth management business that advises the clients all perform the necessary due diligence to determine the developer’s creditworthiness and facilitate the entire transaction.

HNIs lend to property developers who need capital to begin or execute the project using this. HNIs stand to benefit from returns spanning from 16 percent to 23 percent, which is much greater than the returns on regulated loan instruments. The contract is for two to three years. Why, therefore, would these builders contact HNIs rather than knock on their doors?

There was a time when the real estate sector did not receive appropriate funding from banks and other financial institutions. Historically, developers obtained capital from private money lenders, who charged interest rates of up to 30%. HNIs serve as a bridge between conventional institutions and private money lenders, who issue debentures for 18-20% interest rates.

Borrowing from HNIs via real estate-linked debentures is thus advantageous for property developers.

These debentures are a type of secured financing. For example, if the debenture is for 10 crores, the collateral will be worth 2-3 times that amount. Typically, the builder commits the land, as well as any receivables and other properties, to the HNI lender.

Pros of Investing in Realty NCDs?

  • Real estate NCDs are safer investments than other types of debentures. You have a physical asset in Real Estate to assist you in collecting your debts in the case of an unanticipated occurrence.
  • The duration of NCDs in real estate is only a few years. As a result, short-term investments such as NCDs provide a fantastic opportunity to generate a consistent income through handsome interest payments.
  • You may invest in a high-net-worth property using NCDs and receive profits without owning it. It is a convenient way to make money.
  • The coupon payment or interest received at regular intervals draws investors to this sector. These might get done monthly, quarterly, or bi-annually. It is a safe investment since the underlying security is worth twice as much as the investment. As a result, if the developer is issuing NCDs of Rs 100 crore, the underlying securities should be worth Rs 200 crore.

Cons of Investing in Realty NCDs?

  • Development Risk: Most NCDs get discovered during the project’s development stage. If the project takes a long time to complete, it may also take a long time to redeem the NCDs. While this is an excellent moment to invest in NCDs, with yields ranging from 17 to 20%, this is dependent on sales. NCDs may get extended if sales get delayed. So be prepared to wait a year to two longer than first promised. While a total default is uncommon, the developer may occasionally delay payment. Thus, your money may get stopped.
  • The end-use of funds: Another danger is the end-use of funds collected via NCDs, as there are no restrictions on utilization. As a result, investors must keep an eye on whether the funds are being used for construction, payment for floor space index or transfer of development rights, or repayment of existing debt. It is not a good indicator if the majority of the NCDs get used to service outstanding debt. Investors should request quarterly or semi-annual updates on fund utilization. It may be accomplished by requesting a certificate of completed payments from the issuer corporation. While most NBFCs undertake this on behalf of their clients, it is not an issuer practice.

  • Selling too soon might be problematic: If an investor purchases these NCDs to sell them before maturity on stock markets, his investment may be subject to interest-rate risks. Any downgrading in the credit rating of these bonds might result in a significant drop in bond prices on the bourses. When attempting to sell their NCDs in such circumstances, one may encounter insufficient liquidity on stock markets. Even if a buyer gets located, the amount suggested may be significantly below the bond’s actual market value.

Should you invest in real estate debentures?

Debt, according to analysts, is currently at an all-time low. Fixed deposits, bonds, fixed maturity plans, and non-convertible debentures provide high yields, enticing investors in droves.

But when you’re a high-net-worth investor, ‘good’ isn’t always enough. You want to participate in debt while outperforming traditional debt products. If it means assuming more risk in favor of higher returns, then ok.

This urge to make a little additional money frequently drives individuals to exotic goods, which wealth managers continuously build with such clients’ expectations in mind. If equity-linked debentures and other capital-protected structured instruments were popular after the 2008 market crash, real-estate-related debentures appear to be the rage again.

Real estate as an asset is never out of favor with HNIs. Developers create these debentures. They are governed by the Companies Act rather than the Sebi or the RBI.

How do Realty Non-convertible Debentures stack up against REITS?

NCDs are bonds issued by real estate firms. REITs are similar to mutual funds or collective investment schemes in that they deal in real estate projects on behalf of investors, whether in properties, mortgages, or mortgage-backed securities. While real estate NCDs are fixed-income investments for investors, the returns on Reits are market-linked. As a result, they may appeal to different types of investors. Individuals interested in real estate should explore Reits and await for the same.

REITs are safer since an investor receives units equal to his investment in a tangible and running income-generating asset. But, total returns (minus yield) will depend on rent escalation for the property price to rise.

When you invest in REITs, you know precisely your cash flow because it has already been set with minimal changes. In the case of NCDs, project sales and actual value may or may not be realistic, but there is a massive opportunity for higher returns.

How safe are real estate NCDs?

Investments in real estate NCDs are not unsafe since the security that is the continuing real estate project and land held for the NCD issue, is more than 2-3 times the amount funded. Interests on the investment will only accumulate 6 months after the investment gets made. The principal gets paid in installments one year after the investment gets made. Also, in case, the real estate developer defaults, the debenture trustee will always ensure the investor gets compensated because it can dispose of the retained securities.

However, a few problems of real-estate NCD investing should not get neglected. So, you should not invest if you wish to exit before maturity. Consequently, there will be no liquidity for the product on the stock exchange. Plus, even if you can find buyers, the offered price will be well below the bond’s actual market value.

Do you wish to put your money in Real Estate Debentures as well? Assetmonk is a property investment platform that provides interested investors with services. Assetmonk’s NCD investment products are the Sparkle series in Chennai and the Ascend series in Hyderabad. These have an estimated IRR of 21%, allowing investors to put their bucks in high-value properties without property management.

Related Articles

istockphoto 1352723299 612x612 1

PRAN Card: How to Get Your PRAN Number

Individuals who join the National Pension Scheme are given a Permanent Retirement Account Number, which allows them to access their funds. State and central government personnel must register for PRAN cards. Registration information is accessible on the National Securities Depository Limited’s official website. However, one can apply for PRAN in a variety of various ways. Also, read Saving Schemes in India. NPS PRAN Is? National Pension Scheme users are assigned a 12-digit Permanent Retirement Account Number, which allows them to access their funds from anywhere in India. Under PRAN, there are two types of National Pension Scheme accounts.  Tier-I: This account is not withdrawable and is intended for retirement savings. Tier II: This account type, like any other savings account, allows you to withdraw your funds. You cannot, however, claim tax breaks. Furthermore, the National Securities Depository Limited (NSDL) issues this number for life. As a result, once assigned, a PRAN cannot be modified over the subscriber’s lifetime. Furthermore, after…

Read more
istockphoto 175441380 612x612 1


The Government of India has created several investments and savings initiatives to assist citizens in saving money for the future. The Employees’ Provident Fund (EPF) and the Employees’ Pension Scheme (EPS) are two prominent systems (EPS). The primary goal of both plans is to assist individuals in saving money for retirement. Both plans are intended for paid persons and offer guaranteed returns. EPF Vs EPS: A Comparison Features EPF EPS Employee Contribution 12% Nil Employer Contribution 3.67% 8.33% Deposit Limit Predetermined, fixed-rate Maximum- Rs.1,250 Age Limit for withdrawal Not required Min. service- 10 years Max. service-50 years of age for early pension. 58 years of age for a regular pension. Interest Rate Interest received on EPF is exempted No interest rate applied Withdrawal of funds After 58 years of age or if unemployed for 60 days or longer Pension is received after 58 years of age. Premature Withdrawal amount A complete EPF balance can be withdrawn The amount can be…

Read more
istockphoto 1136161903 612x612 1

NSC – National Savings Certificate

The National Savings Certificate, also known as NSC, is an investment product that offers safety and steady returns. The key advantage of this scheme is the tax benefit it offers. The interest earned on NSCs is tax-free while both the principal and the interest are exempt under Section 80C of the Income Tax Act. A minimum amount of Rs 1,000 can be invested in any financial year, with a maximum amount of Rs 1,000,000 being allowed under this scheme. Prematurely encashed certificates will be invalidated, and payments made to certificate holders will be transferable only by postal order. Also read Post Office Investments – PPF, NSC, FD, RD, MIS, KVP, SSY. What is a National Savings Certificate? The NSC is an investment product that offers safety, steady returns, and tax benefits. The National Savings Certificate (NSC) is a government-owned savings scheme that enables you to save your money in a bank account while earning interest on it. You can use…

Read more
istockphoto 1353920585 612x612 1

EPF Nomination Form & Declaration Form

An individual might name one or more family members to receive the provident fund earnings following his or her death. Employee Provident Fund Scheme 1952 defines ‘family’ as husband/wife, kids (married/unmarried, adopted), and dependant parents. According to the Employees Pension Scheme 1995, the family consists of the husband/wife and their children. If an employee desires to modify the names of his or her nominees under the Employees Pension Scheme 1995, he or she must submit an updated Form 2 to the employer. Also read EPF – Employees’ Provident Fund, EPFO Benefits & Process. EPF Nomination Form Types The following are the three types of nomination forms: PF Form 2: This is a popular form (used in pension and PF systems) for distributing fund amounts to candidates. PF Form 11: This form is a member’s statement that he or she works in a factory or firm that is covered by both the Employees’ Family Pension Fund Scheme and the Provident Fund.…

Read more
istockphoto 1029298524 612x612 1

VPF – Voluntary Provident Fund

VPF or the Voluntary Provident Fund is an excellent long-term investment choice with good returns and a minimal risk component. This initiative, operated by GOI, provides candidates with tax advantages. Do not miss Saving Schemes in India. Period Up to retirement or resignation Interest rate 8.1% Amount of Investment  Depending on the employee Maturity Amount Depending on the investment amount VPF is a typical provident fund savings arrangement. On the other hand, the contributor determines the size of the fixed contribution given to the program monthly under the VPF scheme. The interest rate of 8.1% p.a. Investing carries only little risks. It is simple to transfer funds in the event of a career switch. It is simple to create a VPF account. Employees are permitted to make voluntary contributions to their provident fund account under the VPF program. The Voluntary Retirement Fund program is another name for it. The system excludes the statutory 12% contribution that employees must pay to…

Read more
istockphoto 1283384596 612x612 1

2022 Stock market Volatility Continues: Here’s How Fractional Ownership Can Get You Through The FUD

The stock market has been volatile for years, with peaks and valleys occurring now and again. While this volatility can cause investors to lose faith in the market, there are ways to protect yourself from this uncertainty. One such strategy is fractional ownership, which allows you to own a portion of an asset without having to purchase the entire property. A Brief History of the Stock Market The stock market has been volatile for the last few years. The stock market has been volatile for the last few decades. The stock market has been volatile for the last few centuries, and there’s no reason to think that won’t continue into 2022 and 2023 as well. The point is: if you want to invest in stocks, your best bet is to buy fractional ownership rather than an entire company (or even an individual share). Fractional ownership isn’t risk-free—in fact, it’s probably riskier than buying an entire company because there’s no guarantee…

Read more