scorecardresearchStructured debt investments in commercial real estate: Balancing risk and

Structured debt investments in commercial real estate: Balancing risk and returns for investors

Updated: 17 Aug 2023, 04:14 PM IST

Commercial real estate sector is experiencing growth with a projected CAGR of 21.20% (2023-2028) driven by demand in key cities, and structured debt investments in commercial real estate are emerging as a strategic option for investors, facilitated by notable PropTech and Neo-Realty platforms.

Structured debt investments in CRE offer a compelling avenue for prudent market navigation and unlocking investment potential.

Structured debt investments in CRE offer a compelling avenue for prudent market navigation and unlocking investment potential.

In India's evolving commercial real estate market, opportunities abound for investors aiming to balance risks and boost earnings. A report from Research and Markets projects a CAGR of 21.20% (2023-2028), driven by growing demand for office, retail, and industrial spaces in key cities. 

Structured debt investments in commercial real estate (CRE) offer a compelling avenue for prudent market navigation and unlocking investment potential. Today, there are some renowned PropTech and Neo-Realty platforms to facilitate these opportunities for investors.

Why structured debt investments in CRE?

Structured debt solutions are becoming popular among businesses as they offer flexibility in repayment terms, collateralization, and structuring. These options are particularly useful when traditional financing falls short or when substantial capital requirements arise. By utilising structured debt instruments in the commercial real estate sector, investors can enjoy consistent income, diversification, risk-aligned returns, adaptable repayment choices, and the guidance of professional managers.

Popular structured debt frameworks in CRE

Lease Rental Discounting (LRD) Model: Lease rental discounting (LRD) is a financial framework  which helps businesses to raise funds from financial institutions, using future rent receivables as leverage from their current real estate. 
Loan Against Property (LAP) Model: Another structured debt investment framework  in commercial real estate is Loan Against Property (LAP). Under this framework, businesses/ individuals (borrower) utilise their properties as collateral to get loans from financial institutions. 

In both frameworks of LRD and LAP, Non‐Convertible Debentures (NCD) are issued to the investors.

Opportunities presented by LRD and LAP Framework

Higher and Consistent IRR: LRD and LAP offer enhanced profits with stability. Investors can earn an impressive 11-15% internal rate of return (IRR) through structured debt.

Portfolio Diversification: Both LRD and LAP are valuable assets in an investment portfolio, providing stable income and mitigating risk. Their unique features allow for a diversified investment strategy, spreading the risk across different types of security assets and ensuring robust, consistent returns.

Reduced Risk: Both investments are secured. LRD is backed by reliable tenants' rental income and long-term leases, while LAP is collateralized by property, providing default protection.

Optimal Fund Utilisation: LRD and LAP frameworks, spanning 1.5-4 years, optimally utilize funds. Both offer the potential for investors to efficiently reinvest returns within this timeframe, enabling continuous profit generation. Importantly, some savvy investors may reinvest their forthcoming returns, using these frameworks to continually generate further profits within the set period.

Incorporating LRD and LAP investments diversifies and strengthens portfolios, blending higher, consistent returns, reduced risk, and optimal fund utilisation for a holistic investment strategy.

Potential risks and importance of choosing the right platform

Understanding the intricacies of Lease Rental Discounting and Loan Against Property investments involves analysing potential credit and property market risks. For LRD, evaluate the borrowing company's financial health; for LAP, consider the property and borrower risk. A strong risk management strategy is imperative.

Choosing the right platform for these investments is also essential. Look for platforms with a strong reputation, demonstrating credibility, transparency, and a good performance history. Comprehend their investment structuring for insights into their risk management approach.

While LRD and LAP present attractive investment models, it's crucial to approach them with caution, comprehending and managing their inherent risks. Trusting a reputable platform and making informed decisions can help protect your investments and optimise returns. Remember, choosing the right partner is key in your investment journey.

Aryaman Vir is the CEO of Aurum WiseX

REIT offer exposure to real estate market without a lot of the hassles that usually come with it. 
First Published: 17 Aug 2023, 04:14 PM IST