We see real estate companies adopting innovative strategies to sell existing stock and to raise funds. Lets dissect one such strategy adopted by Landmark group a construction company.
In a bid to raise funds in this tight market, the company has come up with a very innovative design of raising convertible debt (if I can put it that way) from retail investors.
Landmark group assures a 66% return to investors in 3 years. This would mean a 22% return per year on a simple interest basis and only 18.4 % on a compounded basis. Things still look good.
Now, the ways the transaction has been structure is such that an investor gets INR 72000 per year for 3 years, this works out to 12% interest rate (Compare this to a fixed deposit interest rate of 11% offered by banks), after the third year, the group promises to buyback the asset from the investor at a 30% higher price.
Factoring this additional return (30% mentioned immediately above), the investor gets an IRR = 15.57% from his investment. In other words, this is a neat way of raising money from the market at a cost of 15.5%.
Cost raising fund 15.5% at a time when real estate developers are finding it extremely difficult to raise funds. The marginal cost of debt for real estate players as reported by Economic times is between 15% - 60%. KP Singh, Promoter DLF in his statement mentioned that DLF’s marginal cost of debt is 15%.
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1 comment:
yes thats a good way to raise funds though spend on advertising and volumes attracted would determine actual costing to company.
However, RBI and Finmin should realise that Real Estate development needs to be supported, as of now everyone is bearish on the same which is not a good sign for a fast growing economy.
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