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Anatomy of assured returns on property

Property experts warn that the assured return scheme may have its advantages, but investors must weigh the pros and cons, reports Varun Soni.

india Updated: Dec 09, 2007 23:10 IST
Varun Soni

Lured in by the promise of an assured return in the form of a regular monthly income in lieu of investing in commercial property? Especially, when the return promised is to the tune of 10 to 12 per cent and the investor gets the promised return even if the market faces a recession?

On the face of it, the scheme definitely sounds good. But, is it all that beneficial, as it appears to be?
Property experts opine that though the assured return scheme does have its advantages of a regular, monthly rental income, investors must weigh the pros and cons before investing in such a scheme.

The biggest risk involved is: what if the developer suddenly stops paying the monthly payment, on some pretext or the other? In such a situation, what is the best recourse?

While some developers give these returns for a period of 2 to 3 years, there are certain builders who also give it for 9 years. The return usually ranges between 10 and 12 per cent. However, according to experts, such a scheme is a simplified way to raise capital on the part of the builder, who instead of paying installments to a financial institution pays ‘assured returns’ to the investor. Says Sanjay Kackar, Chief Operating Officer (Sales and Marketing), AEZ Group, “Rental values in cities like Delhi-NCR are witnessing an increase of 20 to 25 per cent per annum. A constant watch on the prevailing rental developments in the country will provide serious opportunities. The trend in the commercial sector is to rent space instead of buying it. It also ensures low risk and less worry on maintenance. So, it is always a win-win situation for any investor putting his money into such commercial property.

“However, the beauty of the business here is that even if the market is down, returns are assured in the initial years. And in the long run the market is only going to grow.”

But, what happens if the commercial space does not get leased out after completion? Or the builder does not keep his promise of paying the assured return? The solution to this danger lies in including a recourse plan in the agreement to safeguard the investor’s interest.

Says Sanjay Verma, Executive Managing Director, South Asia, for property consultant Cushman & Wakefield, “Investing in such schemes is a risky proposition unless the property is already leased or there is an implementable recourse if the developer stops paying the assured return. In an already leased property, the level of risk is less as compared to those office complexes/malls, which still have to be leased.”

Other risks involved relate to the tenant mix as well as the possibility of appreciation in the future. Also, in case of an oversupply situation – which is what is happening nowadays – there is always the danger of the rental income coming down. However, experts say that in case of a commercial project being financed by a bank, the latter can always sell it off in case of a default by the developer. But, in the case of such schemes, what should an investor do if the developer defaults or stops paying the assured return?

“The investor has to take care of this problem while signing the agreement. Most agreements are loosely based and do not touch upon this aspect at all. If the investor is able to cover this risk, then he should go ahead with such a scheme. But, if the decision is on a leased property, then the level of risk is much less,” says Verma.

In a nutshell: do not get lured in by such schemes. Do your homework well before signing on the dotted line. And most of all, keep your eyes open when reading through the agreement.