New Delhi: In an attempt to convince homebuyers to make upfront payments, real estate developers are increasingly offering assured returns to such customers for a fixed period or till the time the buyer gets possession of the apartment, but experts warn such schemes could be fraught with risk.
Earlier, developers offered such schemes for commercial properties but now this is being extended to homes as well.
AMR Infrastructures Ltd, Supertech Ltd and Wegmans Industries Pvt. Ltd are among those developers offering assured returns to buyers for their furnished studio apartments.
A typical scheme works like this: The buyer signs an agreement with the developer to pay 95% of the apartment cost upfront and once the payment is done, the developer agrees to pay the buyer an assured return—at the rate of 12% a year for Supertech, for instance—every month until possession.
The second option is that the buyer can enter into a profit sharing agreement with the developer. Here, the developer will pay the customer a lower assured return (6% for Supertech) in the construction phase. Upon completion, the developer leases out the apartment on behalf of the buyer and shares a percentage of the profit earned with the buyer. Supertech and Wegmans, for instance, are offering buyers 60% of the profit earned from the leasing.
Consultants said such schemes help developers get credit at a lower rate of interest. “This is just interest cost discounting by the developer,” says Aditi Vijayakar, executive director of residential business at real estate advisory Cushman and Wakefield. “Developers are offering an interest to buyers for paying the total price of the apartment upfront instead of paying in instalments… If the developer were to borrow the same amount from a bank the banks would charge 16-18% rate of interest whereas here they are only paying 12%.”
Amit Handa, Supertech’s vice-president, sales and marketing, says: “Instead of taking a bank loan, we are involving customers by taking payment upfront from them and giving them a rate of interest for the payment.”
At Supertech, in a scheme called “100% cash back scheme”, buyers earn 12% assured return every year on the investment for eight years and four months.
“If you purchase a studio apartment of 475 sq. ft for Rs21 lakh, you would receive Rs21,000 per month paid annually through post dated cheques for a guaranteed period of 100 months,” the company says on its website.
The scheme is being offered for the company’s Ceyanne Tower project, which was launched some three months ago and is expected to be completed in three years, on the expressway connecting Noida to Greater Noida, which will have 324 studio apartments. The apartments cost between Rs22.74 and Rs27.82 lakh. AMR Infrastructures is also offering a 12% assured return to buyers till the time of possession for its furnished serviced apartments in its Kessel I-Valley project on the Taj Expressway in Greater Noida.
“If a buyer pays us 100% of the price of the apartment upfront, we will pay the buyer 1% assured return on his investment every month till the time of possession,” says Vikas Gupta, director at the firm.
Wegmans also has a 12% assured return scheme till the time of possession for the furnished luxury studio apartments that the company is developing in its project Knowledge Park-III in Greater Noida. The project will have 200 studio apartments.
Schemes such as these target the investor buyer community, says Gupta of AMR Infrastructures. Such buyers have become cautious about investing in residential projects. “We want to attract small investors,” he says. “...all developers are talking about affordable homes and studio apartments… Banks also prefer to lend to smaller ticket size houses.”
Such schemes may not be a significant source of income for developers, says Mona Chhabra, associate director for infrastructure, real estate and government services at Ernst and Young Pvt. Ltd. “The risk perception among buyers has gone up and given the indiscriminate messages you receive from developers on these schemes, it looks like they are facing a challenge in selling such schemes.”
Cushman and Wakefield’s Vijayakar cautioned against the inherent risk in such schemes. “It is a risky thing for buyers to pay the entire amount upfront because there is no guarantee of the projects being completed on time or that the developer will pay the returns every month.”