Assured returns plan — risk or reward?

For the investor, these schemes offer better returns than investing in a fixed deposit with an interest rate of not more than 10%

After the 2008 global financial crisis, the real estate sector witnessed inadequate liquidity. The problem aggravated with domestic financial institutions reducing exposure to the real estate sector and drying up of private capital. With commercial projects (office space and retail malls) taking most of the brunt of the financial crisis, these projects were worst off in securing funding.

Even if a developer was able to get funding for a commercial project from a financial institution, the interest rate charged was very high, at about 15% to 24%. With weak support from financial institutions and private investors, developers explored alternative ways to raise funds for their projects.

Of late, developers are actively promoting assured return plans (ARP) for commercial properties. In ARP, a developer offers investors a fixed return (generally 11% to 13% a year) on the investment for a certain number of years (generally three to four years or till the time he gets possession). A few developers even offer lease guarantee in addition to ARP, wherein a developer guarantees leasing of the commercial property after completion of the property, even if the property remains vacant.
For the developer such schemes have proved to be a win-win situation as this enables them to raise funds for the project at a lower effective rate in addition to finding a buyer for their project.

For the investor, such schemes offer better returns than investing in a fixed deposit in a bank with an interest rate of not more than 10%. Their investments are secured with an assured return to the investment and can be discounted upfront in case of an upcoming project and adjusted in the price. Further, the investors reap a dual benefit by getting interest and capital appreciation of the property.
However, at times the ARP schemes do conceal more than what they reveal.

There are some hidden costs associated with ARP schemes, which are generally ignored by the investors. In an ARP, the property is generally priced higher than the prevailing market price. A developer offers no bulk discounts which otherwise are available if an investor seeks a property without ARP. An investor can negotiate a lower price for the same property if it opts for a non-ARP. An investor also has to pay the property amount upfront instead of paying in instalments like in a construction linked plan.

It has been observed that an investor ends up paying the same or more amount in the case of an ARP than a non-ARP. Hence, an ARP project may not lead to capital appreciation for an investor other than the general appreciation of the price of property.