Developers lure real-estate buyers with ‘assured’ returns  

April 5, 2010

Real-estate prices are rapidly going up all across the country, but sales of commercial properties are still recovering from the slowdown of the past year. Developers in Delhi are now trying every trick in the book to lure commercial real-estate buyers.

Thanks to the sky-high prices, commercial properties are facing a tough time in attracting investments across the country. Neither the banks nor high net-worth investors are ready to invest in under-construction commercial properties. Developers in Delhi have found a new way to raise funds for commercial properties. Since they have to pay a minimum interest rate of 17%-18% to banks if they have to borrow for developmental activities—and provide collateral—developers seem to have pounced upon a new opportunity. They are promising 12% ‘assured’ returns if an investor is ready to pay down-payment for a property—which sometimes exists only on paper.

“Banks are not ready to give loans for (construction of) commercial properties, as there is an over-supply of such properties. If at all some banks agree to grant a loan for such properties, they charge the developer 18%-19% interest rate—plus the developer has to keep something with the banks as security. On the other hand, retail consumers are giving upfront down-payment seeing such mouth-watering returns (12%). Consumers pay this money without any security. Such investments are unsecured investments,” said Pankaj Kapoor, founder, Liases Foares, a real-estate consultancy firm.

Most of these properties for which the potential buyer is being offered an ‘assured’ return are located along the various national highways in northern India, near urban settlements. These types of schemes are being offered by many developers like MVL Ltd, ARN Infrastructure and Piyush Group. These developers are offering commercial spaces in under-construction properties (of a minimum of 100 square feet). In a few cases, the construction has still not started. Investors are supposed to pay a down payment (which can start from a minimum of Rs11 lakh, and which varies according to the size/location of the property) for such commercial properties. They are offered 12% annual returns for a specific period (two years, three years or more).

Moneylife contacted a few places to check out these offers. AMR Infrastructure India (P) Ltd is constructing a technology park, ‘Kessel I Valley’, in Greater Noida, spread over 25 acres. The company is offering 12% assured returns for three years for retail investors who are ready to make a down payment of around Rs17,57,500 for 500 square feet (the property is valued at Rs3,700 per sq ft)—which is 95% of the base price.

“We are offering this return only for down payment—not for instalment payments. These returns are assured, because we are giving post-dated cheques for twelve months. We have been doing this for three-and-a-half years and everybody is getting returns,” said a Delhi-based real-estate consultant, who is dealing in the above-mentioned Noida property of AMR Infrastructure. The agent also said that the construction would be completed in two-and-a-half years.

This company’s sister concern, ARN Infrastructure India (P) Ltd, is also promising the same kind of returns to its investors for various projects. One of these projects is ‘Globus Business Park & Imperia Residency’. It has come up with a scheme called ‘construction link payment plan’ or ‘down payment plan’.

According to the ‘down payment plan’, the investor is supposed to pay 20% of the sale value during the time of the booking. The investor has to cough up 75% of this sale value within 45 days and 5% of the sale value plus other charges—including preferential location charges (PLC)—at the time of possession.

If the investor agrees to such a payment schedule, he is assured 12% returns or an 18% one-time discount during the booking of the property.

Piyush Group is constructing ‘Piyush Business Park I’ spread over an area of 2,00,000 sq ft located on the main Mathura Road, NH-2. If an investor is looking for 400 sq ft on the first floor, he has to pay Rs30,40,000 as down payment and is assured 11% returns—working out to an upfront payment of close to 95% of the base price of the property. The company claims that it will complete construction in one-and-a-half years.

A listed developer, MVL Ltd, is coming up with the India Business Centre.  The project has still not been initiated and the company plans to start operations by next month. The company is also promising 12% returns for an upfront payment (for a 500 sq ft commercial space) of Rs19,50,000, which has to be paid within a month of paying the booking amount.

“The return is guaranteed as there will be an official agreement with the company; later on, we will register the property in your name,” said a company official.

“In the current situation, builders are borrowing at an interest rate close to 36%-40% from the wholesale market; every developer is hungry to find a private equity investor. If we look at the inventories, in the past 12 to 18 months, there has been very less movement in inventories versus sales. In such a state, if developers are offering 12% fixed return, it is a serious optical illusion (for investors),” said a senior market analyst, preferring anonymity.

There is an over-supply in commercial office space and large foreign investors are not being able to generate returns from such kind of investments. Ergo, developers are eyeing retail investors by promising them high returns. But will this script play out to the benefit of the investor?  — Pallabika Ganguly