Here’s All You need to know about Real Estate Non-Convertible Debentures

Want to invest without buying a property? There are various investment options in Real Estate to earn without buying Real Estate Non-Convertible Debentures. Real estate offers a plethora of investment options to meet the objectives and goals of every customer. The investment options vary widely from Residential to Commercial properties like office spaces and warehouses. While these have been the asset investment options, other options like debentures let you invest without bagging a property and enjoy hassle-free returns. 

Let’s delve into the non-convertible debentures and know how they work better over other investment options like Corporate FDs.

What are Non-Convertible Debentures?

Real estate Non-Convertible Debentures are the debt instruments that help the developers pool the money in the early stages of development. It is a way to raise a short-term secured loan from investors by the developers. 

The developers seek the investors’ loans and, in return, pay the investors via monthly/quarterly interest payments. This ensures a regular flow of income on the investor’s part. 

Unlike convertible debentures, Non-Convertible Debentures cannot be converted to equity shares. This is justified by the higher interest rates on the NCDs. Investors can invest in NCDs through secured and unsecured NCDs discussed in detail in the following section.

What Are The Types of Non-Convertible Debentures?

• Secured NCDs 

As the name suggests, secured NCDs are safer investments as the assets of the company back them. In any unforeseen events that lead to the company defaults, you can liquidate the company’s assets and recover your money. The interest rates offered on these NCDs are low as compared to the unsecured NCDs due to the less risk involved in the investment. As the real estate developers have to maintain a security cover of twice or thrice the amount borrowed, secured NCDs mitigate the investment risks.

• Unsecured NCDs

These NCDs are prone to risk as the company’s assets do not back them. Under any circumstances, if the company defaults on the payments, all that the investor can do is wait for the company to come down and pay the dues. Owing to the high-risk factor, the interest rates offered by these NCDs are high.

What Are The Features of Non-Convertible Debentures?

• Tenure

The Real Estate NCDs have a fixed tenure of two to four years within which the principal is paid along with interest accumulated. The interest may be paid quarterly or monthly, and NCDs work similarly to the Fixed Deposit scheme.

• Interest Rates 

The interest rates are fixed and high as compared to the bank instruments like FDs. NCDs have a fixed coupon rate anywhere between 4-12%. 

• Taxation

NCDs attract the tax corresponding to the tax bracket of the investor. The interest you earn through the NCDs is added to your income and taxed according to the income slabs. 

If you sell the NCDs within a year or less from the date of allotment, then the income would be taxed under short-term capital gains. The earnings through NCDs sale is added to the income and taxed according to the income tax slabs. 

If you sell the NCDs within a year or more from the date of allotment, the revenue would be taxed under Long Term Capital Gains at 10% without indexation and 20% with indexation.  

NCDs vs Corporate FDs: The Difference?

The NCDs and Corporate Fixed Deposits function similarly. You get to deposit your money with the bank or Non-Banking Financial Companies for FDs. Whereas you can lend your money to the developers by buying the non-convertible debentures issued by the company. Both FDs and NCDs offer you interest pay-outs on a predetermined frequency like monthly, quarterly, or annually. 

What Are The Pros of Investing in NCDs?

• NCDs in Real Estate are safer investments as compared to any other debentures. You are backed by a physical asset in Real Estate that helps you recover the dues under any unforeseen events. 
• The NCDs in Real Estate have a short tenure of a couple of years. So, short investments like NCDs are an excellent opportunity to earn a regular income through lucrative interest pay-outs. 
• Through NCDs, you can invest in a high net worth property and earn attractive returns without owning it. This proves to be a hassle-free earning option.

So, How secure is a real-estate NCD investment?

Investment in real-estate NCD is not risky because the security, i.e. the ongoing real estate project or/and land kept for the NCD issue, is more than two to three times the amount raised. The interest on the investment begins to accrue six months after the investment, and the principal is paid one year after the investment was made (in installments).

In addition, if the real estate developer defaults, the debenture trustee ensures that the investor is paid off because it has the ability to liquidate the held securities. Nonetheless, there are a few concerns about investing in real-estate NCDs that should not be overlooked. Do not enter the investment if you intend to liquidate it before the maturity date. As a result, there may be little liquidity for the product on the bourses, and even if you do find a buyer, the quoted price may be far below the bond’s fair market value.

Want to invest in Real Estate NCDs? Assetmonk is a real estate investing platform that renders services to real estate investors. Our NCD investment products Ascend series in Hyderabad, and the sparkle series in Chennai with an expected IRR of up to 21% allow our investors to invest in high net worth properties without property management.