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Business News/ Opinion / Sale-leaseback: the route to invest in tourist properties?

Sale-leaseback: the route to invest in tourist properties?

It is usual to revisit popular destinations; owning a tourist property as a second home makes sense

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

For die-hard tourists, one trip to a destination is never enough. So, buying a tourist residence seems to be a good option for a second home. But with this there are also issues such as maintenance costs and renting to be addressed. An answer could be the sale-and-leaseback (SLB) model where investors purchase the property from the developer and lease it back to that company or person for a specific period, over which they earn guaranteed rentals. The developer benefits as he is able to boost sales and also maximize returns for himself and the investor by re-renting the property to tourists, when the investor isn’t occupying it. The SLB model, though not popular, can be seen in popular tourist and pilgrimage destinations in India such as Goa, Kerala, Rajasthan, or even Tirupati and Haridwar.

A second home that pays while you stay

Given that it is usual to revisit popular tourist destinations, owning a tourist property as a second home makes sense. While one way out could be to outright purchase a vacation home, the huge upfront cost and issues such as regular maintenance or renting out the property will be a task in itself for most investors. Yet, these days, the attraction of a second home, especially if it is in a prominent locale, is irresistible. The SLB model could be an attractive option for investors, allowing them to own a property in such prime tourist destinations, without having to worry about maintenance or having to find a tenant.

Under this model, a property is owned by the investor and then leased back to the developer or a management company. All an investor usually has to do is purchase the property and leave the rest to the developer, who will bear the responsibility of finding tenants, thereby helping investors monetize a deal better. Do note that the leaseback option suits only well-funded investors and is not a first-home option.

How does SLB work?

After purchasing the property, an investor usually leases it back to the developer, for a definite period, over which the investor gets a guaranteed monthly rental. The rentals are generated by the developer who re-rents the property to tourists over the year.

To increase sales, and to sweeten the deal, the developer takes care of the servicing and housekeeping costs, mostly by outsourcing it to a professional management company. The investor can choose to occupy the property for a few weeks when she wants to visit.

The SLB model works better for properties that are centrally located and are close to popular leisure or pilgrim places; if the property is in a remote area, an SLB model will not be suitable for it. Also, the property should ideally be equipped with state-of-the art indoor and outdoor infrastructure, so that it holds high appeal with both investors and tenants.

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Published: 11 May 2015, 08:13 PM IST
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