Developers may be offering free cars, gold coins and iPads to boost apartment sales but a scheme that guarantees rentals is sure to attract buyers looking at a second home as an investment. And that’s what developers hope to cash in on.
Guaranteed rental schemes offer rent payments to buyers for two to three years from the date of possession. It lowers the pressure on EMIs, and also vouches for the location being a desirable one. Also, by agreeing to start paying rents from a pre-decided date, the builder removes concerns of delayed completion.
Calling the scheme a welcome move, Kanchana Krishnan, director of Knight Frank, Chennai, says “from the customer’s angle, it marginally eases EMI pressure and gives them time to allocate resources. It is especially encouraging for second home buyers and NRIs looking at investment purchases, as it reduces the hassle of finding a tenant and the problems associated with tenancy. Maintenance too is handled by the builder, making it a nearly carefree investment.”
The guaranteed rental is given to buyers not as a monthly payment, which is what real tenants would give, but as an upfront discount. For example, Anand Jain, MD, Hallmark Infrastructure, says his project Hallmark Emerald offers a five-year rental agreement. So, if the rent for a Rs 55 lakh apartment is calculated at Rs. 12,000 per month, the developers will reduce Rs. 7.2 lakh from the cost of the apartment upfront, thus reducing EMIs by at least Rs. 5,000.
In turn, developers sign tenancy agreements with MNCs and collect rent directly from them. “We also take care of facility management,” says Jain, adding that steady possession for five years increases the value of the property. Buyers who don’t want the scheme have the option to refuse the discount and find tenants by themselves.
The downside is that if projects are delayed, developers might back out of the agreement. Also, buyers get a flat rent amount upfront, with no annual increase factored in over the five years.
Guaranteed rental is common practice in commercial property, where builders lease the property before sale to a second party. “Many IT parks, for instance, have this scheme. It shows real demand and assures guaranteed returns in the long term. But when it comes to residential property, you need to gauge if it is, in fact, real occupancy. If not, it is just another name for a discount. Buyers should pick a property only if they believe they can live there themselves,” says R.Kumar, Navin Housing.
Arun Kumar, CMD, Casa Grande, agrees that the scheme works better for commercial property. Tenancy is a sign of the property’s strength, he says, but the calculation of rent may be a cause of concern. “If the rent is being paid by the developers, it only means they have factored the expense into the apartment price. If a 2 BHK attracts rent of around Rs. 1.2 lakh per year (Rs 3.6 lakh for three years), it means at least Rs. 80-100 more will be charged per sq. ft. Shouldn’t one opt for a discount of Rs. 80 per sq. ft and find your own tenant instead of opting for this scheme?”
Finally, such schemes might be better when project completion is at hand. Says Krishnan, “When completion is near and when the builder sticks to deadlines, such a scheme could be helpful.” But, she warns, “buyers must be wary of increased negotiation and steep swings in rental yields given the unorganised nature of our residential market.”
