[ecis2016.org] While assured returns schemes seem to provide a win-win situation for both, the builders and the buyers, by providing returns for the buyers and finance for the builders, the reality may be quite different. We look at the factors that buyers should consider, before opting for such schemes
Shantanu Ganguly had invested in a commercial property in Gurugram, where the developer had promised an assured return of 12 per cent for his investment, till possession. His borrowing cost was 10 per cent and the assured return made him immediately commit to the deal that was offered. However, Ganguly was in for a shock, in the second year of investment, as the post-dated cheques of the builder were not cleared by the bank due to lack of funds. “I was assured about the returns, till possession. Even after the possession, I had been offered that if I would leave the commercial space with the builder, he would continue to give rental returns. However, the builder is not even taking my calls now. When I visited his office, the sales team said there are financial constraints,” Ganguly laments.
You are reading: Should home buyers trust assured returns schemes?
Ganguly is not the only investor in the real estate market, who has been trapped by the temptation of attractive assured returns. The government has also expressed the need to regulate such unscrupulous dealings.
A proposed law -‘Banning of Unregulated Deposit Schemes’, has been cleared by the union cabinet and is expected to be introduced in the parliament. This law is expected to put an end to the practice of assured returns in the Indian real estate market. The bill aims to clamp down on realtors, jewelers and other deposit-seeking entities, as they will henceforth, need to be registered with the designated authority, provided under the proposed law.
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Several developers, have privately admitted that assured returns schemes have failed due to market dynamics, rather than intentional cheating. “Assured returns schemes provide a win-win situation for both, the builders and the buyers. Builders get construction finance from buyers at a rate of 12-13 per cent, which is way below the prevailing market rates from organised sources of funding. The buyer also makes money in the process, since he is getting returns from the very beginning. Problems start, when projects get stuck due to slow sales and the operating cash flow becomes an issue for us,” says a developer, on condition of anonymity.
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Assured returns schemes: A risky proposition
While developers may continue to defend the scheme, many of them opt to make buyers their investors, as they lack credit reliability among the organised sources of funding. The risk arises, when the project does not get sold completely and the developer has no financial bandwidth to either complete the project or continue to give assured returns to the investors.
Ramesh Nair, CEO and country head, JLL India, points out that it is important that developers and projects are registered with the states’ Real Estate (Regulation and Development) Act (RERA), which will ensure that they comply with statutory requirements. Real estate developers should also take cues from SEBI regulations, to ensure that their investment schemes are safe, he adds. “A rating system could be devised for developers, akin to stock and credit ratings. This independent rating system would rate companies on parameters such as construction risk, legal risk, financial risk and marketing risk. A strong rating for companies, will be a definite way of attracting investments, both from institutions, as well as on the retail level,” Nair suggests.
Will better regulation protect home buyers, vis-à-vis assured returns schemes?
However, the moot question is whether buyers can trust such assured returns schemes. Don’t such schemes merely expose the developer as being cash-starved? Nikhil Hawelia, managing director of the Hawelia Group, insists that assured returns schemes follow a market-linked methodology and there is nothing wrong with such schemes per se, if it is regulated. He points out that real estate businesses in many developed markets across the world, adopt various ways to attract public funding, including crowdfunding. “Many serious developers have successfully worked on this funding methodology. I don’t think it affects the brand equity of the developer if his promise of assured returns is fulfilled. The problem, thus far, has been lack of regulation and not the schemes. The new regulation will definitely curb fly-by-night operators,” says Hawelia.
The proposed law will, no doubt, put an end to speculation on part of builders and buyers. Consequently, while a regulated market of assured returns could go a long way in giving the sector a much needed face lift, it may not give the type of high returns that were promised, so far.
Assured returns schemes: Main risks
- Assured returns schemes, which often offer unreasonably high returns, mostly operate on the lines of ponzi schemes.
- There are very few success stories, vis-à-vis assured returns schemes in the market.
- In assured returns schemes, the developer uses buyers as lenders.
- Failure to sell the entire inventory, can lead to default on the part of the developer offering the assured returns.
- To protect buyers, the government has proposed the Banning of Unregulated Deposit Schemes Bill, which mandates that developers should register under the designated authority under the proposed law.
(The writer is CEO, Track2Realty)
Source: https://ecis2016.org/.
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Source: https://ecis2016.org
Category: Lifestyle
