Assured Returns, But at Your Own Risk

Assured Returns, but at Your Own Risk

Real estate experts do agree that consumers should invest in assured returns projects at their own risk

Designed, exactly to match your vision and deliver wealth for you and your family, there are full-page advertisements, billboards at prominent locations, and even TV commercials offering you a juicy 12% per annum “assured” return on an upcoming residential or a commercial project.

This is a tricky situation, especially at a time when we are going through a topsy-turvy equity situation and high inflation is reducing the real return on even bank deposits, in such a situation, offer of a 12% return on a long-term appreciating asset like real estate sounds too good to be true, actually.

So how does assured returns schemes work?

If you buy in too such an assured return scheme, you buy a property outright – even when the completion of the construction is two or three years down the line – with either your own funds or a loan from a bank. For instance, is you pay Rs 1 crore for the flat. During the construction period, you get Rs1 lakh a month that is equivalent to 12% per annum of Rs1 crore – through post-dated cheques the builder gives you.

Most interestingly such schemes also provide with an option that once you get the possession of the flat, you can either exit the project or continue with the agreement, but the terms could change as the property will be leased out to a tenant and the developer may share the rent with you.

This looks fabulous but there are some unanswered questions

So the big question is from where is the developer giving a 12% return to his customers?

According to experts, in such a situation, the yield from residential housing is usually in the band of 2-6%. That means the annual rent as a percentage of the capital value is about 4%. And in such a scenario, a Rs1 crore property should get a customer an annual rental of about Rs 4 lakh a year or Rs 33,000 per month.

And hence the big question of how is it that the builder is offering you a return that is three times the rental? There is obviously some other story at play.

Well, here is the inside story, experts in the real estate business opine that when the absorption levels in real estate projects have deteriorated, there is an increase in inventory across prime real estate markets. Hitting them hard, the excess supply is making some developers less creditworthy in the eyes of the banks and private equity (PE) that traditionally funds their business. This is prompting these developers to look for other funding options, such as getting hold of bank finance but routing it through you, the buyer, because you get the loan at much lower rates.

As expressed by most of the business insiders, this is surely a measure taken in desperation to raise economical money from investors and buyers. On the other hand, if the same developer looks for a financing option from banks, the developer would get the money at a high cost (at a rate of 14-15%). Thus for him, getting money for 10-12% means cheaper financing.