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.
