It is hard to miss the big billboards, the full-page advertisements, the television commercials offering you a lucrative 12% per annum “Assured” return on an upcoming residential or a commercial project. The offer of a 12% return on a long-term appreciating asset like real estate sounds too good to let go. The golden rule of investing is to question any deal that looks too good to be true; it often is too good to be true.
Assured Return In Real Estate
Assured return in Indian Real Estate is the fixed monthly return given by the builder on the amount invested by a person. This is mostly given on under construction commercial properties such as space in Business Park/IT Park, Malls, Shopping Plaza or Studio/ Service Apartments etc.
When an assured return is offered on a project that is under construction, a formal agreement or a MOU (Memorandum of Understanding) between the buyer and the seller is executed in which the seller promises to give the buyer an assured sum each month till a particular period of time. As our research, the assured returns are generally given for the following three flavors:
a) Assured returns till Possession
b) Assured returns till Possession + 3 years
c) Assured returns till Possession + till first lease
Why do builder offer such schemes?
The excess supply is making some developers less creditworthy in the eyes of the banks and private equity (PE) that traditionally fund the business. This is forcing developers to turn to various other funding options, such as getting hold of bank finance.
What is in for the investor?
In our view there is nothing much for the investors apart from the psychological satisfaction of getting monthly returns. The builder generally sells these properties at a higher rate and the investor ideally gets back the excess amount paid to builder back month on month.
For example, you would find that the developer is offering you 12 per cent assured returns at Rs 6,250 per sq ft for 2 years, while in the same project a non-assured return unit is available for Rs 5,000 per sq ft. So, the developer has taken an upfront Rs 1,250 per sq ft extra for the same property. Ideally, this extra money which is paid by you is given back to you over the next two years.
What are the risks involved?
Search on the internet and you would find numerous complaints from cheated buyers of such schemes. We have compiled list of some most common issues faced by buyers.
Cheque Bounce: First and foremost issues is the failure to pay assured return. In most of the cases, the assured return cheque starts bouncing after 8 months to 1 years max. By this time, most of the builders divert the funds and start making excuses. Some of the developers have now started offering assured return in terms of bank guarantee but the fact remains that it is your money(higher price paid) that is coming back to you.
- Does the builder have a good track record?
- Does builder provide bank guarantee for the assured returns.
- How long would the returns last. Till completion or till a first tenant is found?
- If the rental rate is lower than the promised rate of return, will the builder pay for the difference?
- What if the returns cheque bounces?
- Is there any lock-in period.
The Logical Buyer’s point of views
Unless you are a speculator and have the money, legal help and risk-appetite for such deals, stay away from the assured returns projects. They come in with very high-risk (almost 90% of the cost is paid upfront to the developer) and high-return category of assets. There is an investor for whom these will work, but if you are the average salary-earning and EMI-paying homebuyer, stay away.