Assured Return: Myth/Reality?FOR MUMBAIAKRS….

Assured Return means an investment which can yield guaranteed income over a period of time and also give assured money on maturity. The innovative concept of ‘Assured Return’ in real estate pursues the same course. However, the end result remains in doubt in most cases.

Assured Return; the concept  The concept of ‘Assured Return’ in Real estate is inspired from banks’ Fixed Deposits (FD). Investing money is a risky venture; a good investment strategy requires a right mix of safe and risky investments. Since a very long time, FDs are considered as the safest option by the people to invest their hard-earned money as they provide timely returns on maturity and are a good source of quarterly or monthly income and that too at a fixed rate of interest.

A way to discount prices Behind the heavy mathematics of profit, the concept of Assured Return Schemes (ARS) in real estate is not hard to understand. E Jayashree Kurup, Head Content & Research, MagicBricks.com says, “Assured Return is a system by which developers allow buyers to invest in property that is under construction or launched. The buyer pays the money upfront and does not avail the bulk discount. That and a little more is given back in monthly installments to the investor by the developer.”

No money, no workThere were many factors that led to the development of Assured Return Schemes. Every real estate venture requires big investment. When economy was at its peak, real estate was witnessing a sky-rocketed growth. Riding high on the success horse, developers took slew of loans from the banks and financial institutions to create big land banks.

However, the Indian property bubble soon busted.  Due to rising inflation and dwindling demands, the sector soon lost its edge and started reeling under huge debt pressure.

The X-ray of realtor’s generosityThe rate of return offered by the developer in an assured return scheme is beneficial for him as well. Ravi Ahuja, Executive Director, Office Transaction, Cushman & Wakefield,

says, “Now-a-days banks seldom fund realtors. Even if they do, the interest rate is very high, i.e., 15-23% or more. It becomes very costlier for a developer to do construction at such a high rate. On the other hand, in the ARS they give returns at 11-12% which is anyway better than the former.”

Moreover, no guarantee is obligatory when the money is coming from the buyer unlike the case in banks, where it is a pre-requisite to secure a loan. Also, no bank funds a project completely. They sanction loans equivalent to 60-70% of the total project cost. However, retail buyers are giving upfront down-payment seeing mouth-watering returns without creating a fuss about security.

The Payment ModuleEven the payment module of an ARS is pro-developer. Assured Return projects are primarily commercial projects where people put their money usually for the sake of investment. They invest in bulks and expect as much returns as possible. But for developers, such schemes are a way of generating quick and hassle-free money. Therefore, it has been seen that the payment module of the schemes are made in such a way that approximately 80-90% of the payment is acquired while the building is still at the budding stage.

The aesthetics of profitDevelopers manage to acquire large profits even after giving good returns to the buyers. While planning an assured return scheme, developers don’t usually sell every unit in one go itself. Walking on the footsteps of ‘Break and Make’, they sell their product in stages. For example, if a builder is having 40 shops in a building, he will divide them in four stages and will keep a varied per square feet rate for every stage in order to maximise his profits.

Reading Between The Lines‘Less is spoken, more is hidden.’ In an assured return project too, the contract is made with a number of clauses that stay hidden from the eye of an ordinary buyer till he gets the heat of one of them. Buyer in the awe of the sample property and heavy returns, doesn’t read the agreement carefully and falls into the honey trap of the developer. “Generally, the developer floats an entirely  new venture vehicle everytime he brings out a project thereby making that floated firm responsible for the project and not the whole group,” comments Harsh Roongta while discussing the irregularities of an Assured Return Scheme.

The Web of Black moneyBlack money and real estate share age-old relation. While the industry doesn’t want to accept it, the truth is, it is running into the veins of the industry. According to a survey by consultancy firm KPMG, 32% of respondents voted real estate as the most corrupt sector in India. Here the black money can be found at every stage. Starting from acquiring land to getting the necessary approvals, bribe is stipulated at every step. Builder, in turn, gather the unaccounted capital from the buyers who in the greed of saving tax money, pay him illegally through cash or either support him in downplaying the whole transaction.

Escrow Account- a mandatory prepositionOne of the biggest reasons for delay in real estate projects is the shortage of funds. While the buyer pays regular installments to the banks, the real estate firms use the funds for various other purposes like servicing their earlier debts, paying taxes or interest or even start new projects rather than concentrating on the prior one, due to which the buyer suffers in the end.

A builder too is vulnerableBringing out such schemes is also essential for the developer. “A developer needs money to fund his new projects and to keep the older ones running as well. Presently, his means of

finances are at all-time low and he is already under huge debt pile. At such times, he brings out an Assured Return project to generate cash at low interest rates,” Mr. Ahuja said.

Don’t enter in a bad deal“A buyer before investing in an assured return scheme must understand that this is a high risk product, it completely depends upon market and can get stalled at any point of time. There are numerous risks involved which a buyer should keep in mind. First, he should stay prepared that a market may fall causing a sharp overnightly drop in prices or rise in construction cost. Secondly, the developer may step back and halt the construction work citing lack of funds which can cause delay in possession and fall in prices. Thirdly, the property may not be able to yield expected returns due to various miscellaneous reasons such as unfeasible location, improper maintenance etc.

What if a buyer struck in a bad deal?There are chances that despite taking every precaution you may end up entering a bad deal. As a matter of fact, there is no Consumer Law exists to keep a tab on fraudulent practices done in the assured return schemes due to which realtors willingly cheat with the buyers. There are cases when property buyers report delays in possession spanning to months even years. However, using buyer courts, citizens can get back their money from sloppy builders.

Keep your fingers crossedWhile more benefits can be earned from Assured Return Schemes, it is very important for a buyer to actually pay attention to every minute detail of the project to save his skin from any fraud.

“In the current fluctuating and dwindling market scenario, property is the best investment to fight against inflation. These Assured Return projects are very much effective and fruitful because the returns are confirmed with high rate of interest. It is always advisable to invest on those sources where the revenue margin are predictable and can give lower rate of interest as compared to inflation. But it is always advisable to do a complete research of the project and check the credentials before hand and also read and understand all documents carefully,” says Mr. Batra.

But for many, Assured Return Schemes are nothing but a way of cheating. “If somebody gives you a guarantee, two things become the most crucial ones. First, the credentials of the person who is giving guarantee for you and secondly the terms and conditions surrounding the guarantee. On both parameters, the Assured Return Schemes offered by real estate developers fall flat. Hence, one should restrain himself from investing in such schemes as they are not beneficial,” counters Mr. Roongta.

If we narrow down the complete perspective, Assured Return Scheme is like a dream seen from open eyes which could be shattered at any moment. It is a gamble in which you either win or lose. Henceforth, a buyer should remain watchful throughout the process to save his money from the clutches of the deceit.

By =anshul Sharma

Student manager

BITM,PUNE