The math of assured returns on property!

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% and the investor gets the promised return even if the market faces a recession?

On the face of it, the scheme definitely seems to be good. But, is it all that beneficial, as it appears to be?

Assured Return Property

Assured Return Property

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. Alok Tyagi is the CMD of ATN Infratech, “Rental values in cities like Delhi-NCR are witnessing an increase of 20 to 25% 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 bigger part 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.

“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.”

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. For this kind of risky agreement, you can take the help of legal advisers.

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This entry was posted in Ghaziabad Properties, Greater Noida, property in gurgaon, property in noida, Real Estate, Real Estate Development, Uncategorized and tagged , , . Bookmark the permalink.

5 Responses to The math of assured returns on property!

  1. khushi says:

    12% Assured Return Real Estate Project Not Permissible Under Law

    REAL ESTATE COMPANIES ON ASSURED RETURN BASIS IS AGAINST SEBI & RBI ACTS AS PER COURT ORDER DATED 29.08.2012

    Division Bench, consisting of the Hon’ble Acting Chief Justice and Hon’ble Mr. Justice Rajiv Sahai Endlaw of the High Court of Delhi, on a public interest litigation WP(C) 5324/2012 filed by an investor, have issued directions to the Reserve Bank of India and Securities & Exchange Board of India to investigate against real estate companies who are inviting booking of property from the public with assured returns. The Hon’ble High has also further issued directions to take further remedial steps not only in restraining inviting booking on assured returns but also to take other action as permissible under law as well.

    ORDER / 29.08.2012

    1. This petition is filed in public interest. The petitioner has brought to the notice of this court that respondents no. 7 to 10, real estate development companies are inviting booking from public with assured returns . The submission is that the same amounts to banking activity within the meaning of Section 45-IA of the Reserve Bank of India Act, 1934 as applicable to non-banking financial corporations and is without the permission of the Reserve Bank of India as well as SEBI and cannot be undertaken by respondents no.7 to 10. It is further pleaded that not only are the said activity illegal but it is possible that small time investors having limited funds would be duped by such companies.

    2. We find that the petitioner had sent a representation to the Reserve Bank of
    advance notice and has submitted that on the representation of the petitioner, action has been initiated and the matter is under investigation. He has produced copies of letter dated 06.08.2012 addressed to respondents no.7 to 10 asking them to submit required documents to take further action.

    3. Since the matter is already under examination by the concerned authorities, it is not necessary to entertain this stage except for directing the RBI and SEBI to conduct and conclude the probe at the earliest and if it is found that respondent no.7 to 10 are not eligible to undertake such activities, take further remedial steps not only in restraining these respondents but also to take other actions as permissible under law as well. Petitioner shall be intimated about the outcome of the proceedings of the SEBI. In case the petitioner remains aggrieved by the action taken by the concerned authorities, he would be at liberty to approach the Court.

    With the aforesaid directions, the petition stands disposed of.

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