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%

HT Estates - - Front Page - Neeraj Bansal

Ain­ter­est 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 con­struc­tion­linked 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.

In short, an ARP is suit­able for in­vestors who are pri­mar­ily look­ing for a sta­ble cash flow and not as a tool for cap­i­tal ap­pre­ci­a­tion.

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