How to verify whether you will get the assured high returns before you invest in an office property
Sep 23, 2013
Source : The Economic Times

 

DELHI: If you drive along the Noida-Greater Noida Expressway in the National Capital Region, you will come across several advertisements by builders promising 12 per cent assured return on office space. For people looking to invest in real estate, the return appears attractive, but should you opt for such schemes offered by developers in the commercial segment? What exactly do these offer and do they actually deliver what is promised?

Catch in the scheme

With banks reluctant to lend to developers, or demanding an interest rate of 17-18 per cent on construction loans, developers are trying to raise money from individuals by offering assured returns of 11-12 per cent. This return is paid monthly while the building is under construction. The payments usually last till the first lease or for 1-2 years after the construction is completed.

The biggest catch in these schemes is the pricing. If you compare the price of an office property offering assured returns with that of a similar building in the vicinity that doesn't offer this, the former is likely to be more expensive.

Says Sajid, manager at Silverline Realty, a Bangalore-based real estate consultancy: "If the market rate of the property is Rs 10,000 per sq ft, the builder will charge Rs 13,000 per sq ft. He may promise you an 11-12 per cent return till the project is complete, but essentially, he is giving back your money to you."

Rajan Ahuja, director, Realty Verticals, a Gurgaon-based real estate consultancy, says that such assured return schemes are typically priced 40 per cent higher. "If you want to earn a higher return, you would be better off avoiding these schemes," he adds.

For instance, if you buy a 1,000 sq ft property at Rs 5,000 per sq ft instead of Rs 7,500, and you manage to rent it out at Rs 50 per sq ft, your rate of return will be 12 per cent at the former price, but only 8 per cent in the case of the latter (see table). Besides, there's the risk that the developer may not pay you the promised return.

ET Wealth: How to verify whether you will get the assured high returns before you invest in an office property

As Rajeev Bairathi, executive director, Knight Frank India, warns, "Such schemes are good for only as long as the developer is doing well." The moment he runs into financial trouble, his post-dated cheques may begin to bounce. Also, be warned that your return is likely to dip once the assured returns end. While this return tends to be in the range of 11-12 per cent, the rental return is usually 7-8 per cent.

 

Points to check

Before opting for an assured return scheme, you should clarify several things and get the developer's assurance in writing. First, enquire whether the return will last till the completion of the project or till a tenant is found. If the scheme is only till the building's completion, you could be left high and dry till a tenant is found, which may not happen in a hurry given the weak market at the current juncture.

Second, if the offer lasts till after the construction, and the rental rate earned is lower than the promised rate of return, will the developer make good the difference, or will he give you more space?

Three, if the tenant leaves midway through the first lease, will your assured return continue?

Four, check the developer's track record. What if you don't receive a cheque or it bounces? Does he have a reputation for being responsive to complaints?

Five, is the developer good at finding tenants? Avoid those with a poor record on this count.

Finally, however attractive the assured return, you must give greater weightage to the location and quality of building, as well as the developer's financial strength.

Pros and cons

A popular practice in the office segment is that the builder develops a large floor area, which he then slices and sells to a number of buyers. The buyer's space is not demarcated, nor does it have a boundary. All he has are the papers to prove his ownership of a portion of the space. The possession rights are given to the builder, who then finds a tenant on behalf of the buyers. The good thing about this scheme is that it lowers your entry barrier.

Says Anshuman Magazine, chairman and MD, CB Richard Ellis, South Asia: "In such schemes, the ticket size becomes low, so you can invest with a smaller amount."

Sajid of Silverline Realty says that such schemes are common in technology parks, and based on his experience in the Bangalore market, he feels there is not much risk in these. However, they do have certain disadvantages.

According to Magazine, there could be disputes among owners. "When a tenant is hard to come by, you may want to rent out the floor at a lower rate, but the rest may not agree with you," he says. Moreover, you can't take possession of the property and rent it out individually or utilise it for your own needs. "If your space is in the middle of the floor, having access to it will be difficult," says Ahuja.

According to Pradeep Mishra, head of Gurgaon-based Sainik Estates, there could be legal problems in asserting ownership rights since your area is not properly demarcated.

Exiting such schemes is also difficult. "Shared ownership could lead to a lot of complexities," he says.

 

Soft launch

About a couple of months before its formal launch, developers conduct a soft launch, wherein they offer the property to investors at a discount of, say, 7-10 per cent. The short-term investors, who sell the property within 6-8 months, often opt for such schemes. While the discount pushes up the returns, remember that if prices tank, you may not be able to make a quick exit.

Says Sajid: "This is a high-risk game that only large investors should play." So, study every scheme carefully and invest your hard-earned money in it only if you are convinced.

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