Property on 12% Assured Rentals- Know your risks

The Risk of Assured Rentals

Sanjeev Menon


Obtaining loans for their commercial and residential projects has never been an easy task for smaller developers. And now, as a fallout of the ‘bribes-for-loans’ scam and the subsequent tightening of lending norms for financial institutions, these players could find it increasingly difficult to finance their plans. Developers are also of the opinion that getting a lender to finance a project in an upcoming destination, such as Manesar or Dharuhera around NCR, becomes a difficult affair compared with loans for projects in Gurgaon or Noida. With the supply of money thinning, developers have adopted a new strategy to increase their liquidity position.

Over the past couple of years developers have begun advertising their projects offering ‘assured returns’ on an investor’s property investment. For example, a developer advertises an assured rental scheme in a commercial project in which investors can pick up 1,000 sq ft at Rs 5,000 a sq ft. On this, the developer assures the buyer a guaranteed rental of Rs 30 a sq ft for a period of five years, after which the buyer can take possession of his investment if he chooses to. For the investor, it appears to be a good bet, with an assured Rs 30,000 coming into his pocket every month. But, everything has a flip side.


When an assured return is offered on a property that is under construction, a formal agreement between the buyer and the seller is undertaken, under which the seller promises to give the buyer an assured sum each month till the property is ready and possession is formally handed over. Assured property returns are promised for already built properties as well, wherein the seller finds a tenant and assures a fixed rental income to the buyer. Importantly, in such situations, it is important that the investor and the developer have to mutually agree to an assured amount, which is decided as a percentage of the total worth of the property. This percentage normally varies between 9 per cent and 13 per cent. Although, it looks like a lucrative proposition, buyers who take the bait of assured returns should invest with their eyes open.


Developers calculate the assured rental amount based on several factors including scale of the project, location, viability and appreciation potential. However, it is important that both the investor and the developer finalise a rental rate before signing on the dotted line.

Says Anuj Puri, chairman and country head of global real estate services firm Jones Lang LaSalle India, “To a great extent, rental yields are a function of location and project specifications. As such, it is possible to arrive at a ballpark rental yield based on such parameters, always assuming that prevalent market characteristics continue to prevail. However, much also depends on what kind of tenant a residential project or occupier of a commercial project in a given a location tends to attract, the supply available or scheduled to come in at the location, the nature of that supply in terms of typology and configuration, prevailing and emerging market dynamics – and, of course, the property owner’s ability to negotiate for the expected rent.”

Many developers also tend to keep the leasing rights with themselves even after the project is completed and continue to pay the buyer the agreed rental as the property price has appreciated. The developer may be able to make extra money by charging the tenant the prevailing rental rate and pass on only the agreed upon rental to the investor. Once the investor takes possession of the property, he might find it difficult to retain existing tenants, or finding new tenants.


From the developer’s perspective, the assured rental scheme is just a means of securing funds for their projects. However, they point out that it is in the best interest of both parties. Real estate player Paras Buildtech had offered a similar scheme on part of its commercial project Paras Downtown Center in Zirakpur, Punjab. “It made sense then to partly finance the project through this scheme. It is difficult to get financial institution to lend money for projects in locations that are new. Hence, developers take up various models to finance their projects. It’s a sort of financial real estate jugglery,” says Harmit Chawla, vice president (sales and marketing) at Paras Buildtech.

For a project of say 2 lakh sq ft, a developer may offer 50,000 sq ft on the assured rental scheme. At Rs 2,000 per sq ft, this would ensure ready cash of Rs 10 crore for the project, provided the entire space set aside for this scheme is offloaded, Chawla explains. Meanwhile, the developer manages to secure loans from lenders which are added to the Rs 10 crore. The rest of the Rs 1.5 lakh sq ft are offloaded into the market at prevailing rates through the routine down payment and construction-linked modes. In this way, a developer is available to fully-finance his project.


Developers adopt this method of attracting investors when they require ready cash. The assured rental scheme is only available to those able to make the entire amount, sometimes 90 per cent, of the investment as a down payment. While there are few who have the capacity to make an upfront down payment of Rs 50 lakh, others have the option of taking a loan. Analysts feel that these offers are more lucrative for commercial property investments as developers normally find it easier leasing office space to corporate. A risk an investor needs to take is that of the tenant that the developer chooses. In most contracts of such a nature, the buyer is clearly instructed that the tenant will be chosen only by the developer if assured rentals are promised. Also, contracts state that in case the investor does not accept the tenant identified by the developer, the seller’s commitment to guarantee a rental amount will end. Investors should also try and insist on an exit clause in their agreements. Once an investor puts his money into a project expecting assured rentals, with no exit clause, developers will not refund the money should the investor want out. Investment bankers point out that there are equally profitable schemes available in the banking sector. “Investing in a fixed deposit scheme at best market rates of 7.5 per cent with tenure of just under five years would yield good returns. An investment of Rs 50 lakh in such a scheme would yield a pre-tax monthly return of over Rs 31,000. The amount after tax would be determined based on which tax bracket the investor falls under,” says Siddharth Choudhari, an official of a multi-national lender.So, finally it comes down to the risk the investor is willing to take. Know the developer, research on the location and its potential for appreciation and scrutinise the contract. With so many variables, it would appear incorrect for developers to promise assured rentals, but the onus is on the investor to take the final call. “With such variables at play, it is not credible for any kind of marketing outreach to offer guarantees on rental income. Investors should be guided purely their own factual knowledge, or by the informed advice of a property consultant. While real estate does have certain predictable dynamics, there is always an element of investment risk involved. The level of risk can be reduced, though not entirely eliminated, by factual research,” says JLL’s Puri.