Building Real Estate in India Using Non-Traditional Financing Methods

Real estate in India could benefit from a mew method of financing informally known as Masala Bonds. As things stand today, the real estate sector in India requires large sums to finance projects. One source of funding for real estate in India is to raise capital from homebuyers. Under this financing scheme, homebuyers pay regular instalments as work on a project begins and continue to pay as milestones towards its completion are met.  

Additional Sources of Funding

External Commercial Borrowings (ECB’s) are a source of financing that builders may consider to help finance real estate projects in India. Raising money from External Commercial Borrowings means raising money from outside India. Doing so may be highly profitable yet Indian builders and companies regularly shy away from doing so. The reason this is so could be that even while absolute foreign currency loans could be cheaper than rupee loans, it is only after additional costs such as Hedging, Consultants Costs, Incremental Transactions Costs are added that the true all-in-all interest rate of such a loan is revealed. While much of the real estate in India could be built by loans from an ECB channel which would be cheaper than a rupee loan, the ECB financing option may actually turn out to be a more expensive financing option than a simple rupee loan due to the additional costs mentioned.  

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Who Can Use ECB’s & Masala Bonds?

Another catch to using funds thru External Commercial Borrowings is that only firms that have foreign capital reserves at their disposal are able to borrow money via this channel. Hence fresh entrants who wish to build property in India are certainly ineligible for such a loan. Real estate sites in India often provide information about new launches in a city and also provide information about payment options for interested buyers. This is a standard model for financing building projects in India and one that is very unlikely to be usurped anytime soon by the ECB borrowing model.

Masala bonds are the reverse of ECB’s which means that foreign entities take a loan on a financial instrument which is in rupees and is backed by an Indian entity. Some of the best real estate in India may be built in the future with the use of these instruments.

Conclusion

Due to consolidation in the Indian realty sector and also because of the entry of large corporate houses into the real estate sector, there may finally be companies large enough to have reserves of foreign capital that allow them to raise capital via the ECB or Masala Bonds channel. The buying and selling of property in India will evolve and create new financing models as sturdier players enter the countries real estate market and use tools such as Masala Bonds and ECB’s to finance projects.