Guaranteed returns: All you need to know

Many overseas property investment opportunities come with guaranteed returns of as much as 40 percent, but do buyers end up paying more and what are they actually worth?
The enticing offer of ‘guaranteed rental returns’ is fast becoming a must-have for many of the overseas developers who are targeting Foreign-based property buyers and investors. The standard net returns being advertised range from 4 percent to 9 percent, normally for a two-year period, although claims of 20 percent-plus or more for short-term periods are not uncommon.
Whilst some may suggest that rental guarantees are just part of a developers’ marketing arsenal, they are often considered to be a deal-clincher for many buyers.

Views from developers and agents vary as to the value of guaranteed rental offerings.

“Guaranteed rental incomes are indeed a very good selling point for potential investors who wish to own a property, as this gives the investors the assurance of a minimum a guaranteed return on their investment.”“In Our luxury developments in different parts of the world, we are offering purchasers guaranteed rental incomes of eight per cent for the first three years. This has proven to be extremely popular with international investors who plan to use their property as a second home, as they have the peace of mind that their home is safe and looked after throughout the year and they also receive a return on their investment straight away.”“They don’t add anything to the price; they just allow the buyer to feel comfortable that he is not going to have to search for a tenant, have any void periods and, most of all, it fixes his income and investment which is what he is looking for.”“Looking behind the guarantees should be a combination of legal, financial and commercial due diligence in order to assess the true value of the guarantee. If a guarantee is to be treated as a financial instrument, with a fixed return on a capital investment, then the substance of the company providing the guarantee should be checked as the return should not be reliant on the commercial success of the project as that involves risk. A guarantee should have only very limited risk. “There are some good deals out there, and some good properties with potentially very good yields, but even in such cases, the style and planning of asset management should also be vetted.”“If you are too much nervous or stressed as to how to believe in guaranteed returns claim by many of the developers then just don’t be bothered to invest in their projects, but remember if you have the right developer who has a proven track record to back his Guaranteed Return Claims than just go for it. . . .”

Mr Rath’s view is shared by Mr. Basu, Chief Executive of Amigo Group.

“Guaranteed rental incomes are indeed a very good selling point for potential investors who wish to own a property, as this gives the investors the assurance of a minimum a guaranteed return on their investment.”“In Our luxury developments in different parts of the world, we are offering purchasers guaranteed rental incomes of eight per cent for the first three years. This has proven to be extremely popular with international investors who plan to use their property as a second home, as they have the peace of mind that their home is safe and looked after throughout the year and they also receive a return on their investment straight away.”“They don’t add anything to the price; they just allow the buyer to feel comfortable that he is not going to have to search for a tenant, have any void periods and, most of all, it fixes his income and investment which is what he is looking for.”“Looking behind the guarantees should be a combination of legal, financial and commercial due diligence in order to assess the true value of the guarantee. If a guarantee is to be treated as a financial instrument, with a fixed return on a capital investment, then the substance of the company providing the guarantee should be checked as the return should not be reliant on the commercial success of the project as that involves risk. A guarantee should have only very limited risk. “There are some good deals out there, and some good properties with potentially very good yields, but even in such cases, the style and planning of asset management should also be vetted.”“If you are too much nervous or stressed as to how to believe in guaranteed returns claim by many of the developers then just don’t be bothered to invest in their projects, but remember if you have the right developer who has a proven track record to back his Guaranteed Return Claims than just go for it. . . .”

Yet not all developers and agents agree that offering these kinds of incentives adds to the cost of a property purchase.
When the value of a property increases, we call this appreciation. While appreciation is not always guaranteed over time, historically, real estate has always increased in many parts of the world, averaging close to 4.5% per year over the past century. Another type of appreciation that can come into play is known as forced appreciation, the concept of increasing the value by physically improving the property.

“Guaranteed rental incomes are indeed a very good selling point for potential investors who wish to own a property, as this gives the investors the assurance of a minimum a guaranteed return on their investment.”“In Our luxury developments in different parts of the world, we are offering purchasers guaranteed rental incomes of eight per cent for the first three years. This has proven to be extremely popular with international investors who plan to use their property as a second home, as they have the peace of mind that their home is safe and looked after throughout the year and they also receive a return on their investment straight away.”“They don’t add anything to the price; they just allow the buyer to feel comfortable that he is not going to have to search for a tenant, have any void periods and, most of all, it fixes his income and investment which is what he is looking for.”“Looking behind the guarantees should be a combination of legal, financial and commercial due diligence in order to assess the true value of the guarantee. If a guarantee is to be treated as a financial instrument, with a fixed return on a capital investment, then the substance of the company providing the guarantee should be checked as the return should not be reliant on the commercial success of the project as that involves risk. A guarantee should have only very limited risk. “There are some good deals out there, and some good properties with potentially very good yields, but even in such cases, the style and planning of asset management should also be vetted.”“If you are too much nervous or stressed as to how to believe in guaranteed returns claim by many of the developers then just don’t be bothered to invest in their projects, but remember if you have the right developer who has a proven track record to back his Guaranteed Return Claims than just go for it. . . .”

The final view on this subject comes from experienced property lawyer Khun Pa

“Guaranteed rental incomes are indeed a very good selling point for potential investors who wish to own a property, as this gives the investors the assurance of a minimum a guaranteed return on their investment.”“In Our luxury developments in different parts of the world, we are offering purchasers guaranteed rental incomes of eight per cent for the first three years. This has proven to be extremely popular with international investors who plan to use their property as a second home, as they have the peace of mind that their home is safe and looked after throughout the year and they also receive a return on their investment straight away.”“They don’t add anything to the price; they just allow the buyer to feel comfortable that he is not going to have to search for a tenant, have any void periods and, most of all, it fixes his income and investment which is what he is looking for.”“Looking behind the guarantees should be a combination of legal, financial and commercial due diligence in order to assess the true value of the guarantee. If a guarantee is to be treated as a financial instrument, with a fixed return on a capital investment, then the substance of the company providing the guarantee should be checked as the return should not be reliant on the commercial success of the project as that involves risk. A guarantee should have only very limited risk. “There are some good deals out there, and some good properties with potentially very good yields, but even in such cases, the style and planning of asset management should also be vetted.”“If you are too much nervous or stressed as to how to believe in guaranteed returns claim by many of the developers then just don’t be bothered to invest in their projects, but remember if you have the right developer who has a proven track record to back his Guaranteed Return Claims than just go for it. . . .”

Looking at both sides of the debate it’s clear that rental guarantee could be important for some investors who need reassurance; however the guarantee is only as good as the strength of the company offering it.

“Guaranteed rental incomes are indeed a very good selling point for potential investors who wish to own a property, as this gives the investors the assurance of a minimum a guaranteed return on their investment.”“In Our luxury developments in different parts of the world, we are offering purchasers guaranteed rental incomes of eight per cent for the first three years. This has proven to be extremely popular with international investors who plan to use their property as a second home, as they have the peace of mind that their home is safe and looked after throughout the year and they also receive a return on their investment straight away.”“They don’t add anything to the price; they just allow the buyer to feel comfortable that he is not going to have to search for a tenant, have any void periods and, most of all, it fixes his income and investment which is what he is looking for.”“Looking behind the guarantees should be a combination of legal, financial and commercial due diligence in order to assess the true value of the guarantee. If a guarantee is to be treated as a financial instrument, with a fixed return on a capital investment, then the substance of the company providing the guarantee should be checked as the return should not be reliant on the commercial success of the project as that involves risk. A guarantee should have only very limited risk. “There are some good deals out there, and some good properties with potentially very good yields, but even in such cases, the style and planning of asset management should also be vetted.”“If you are too much nervous or stressed as to how to believe in guaranteed returns claim by many of the developers then just don’t be bothered to invest in their projects, but remember if you have the right developer who has a proven track record to back his Guaranteed Return Claims than just go for it. . . .”

CHECKLIST FOR PROPERTY BUYERS

Nitin Trikha, Director – Real Estate Division (Huntsman IndiaThai Co. Ltd), offers four points to check when considering buying a property with rental guarantees.

1. What is actually underwriting the guarantee? It is a paper promise or is there an actual contract in place where there is a legal recourse should the income not be generated? If not, then this should be a cause for concern for the investor.

2. Is the rental income figure realistic and achievable in the current market where the property is located? If not, the investor will see reduction in yields and returns once the rental guarantee period ends. Many unscrupulous developers will inflate the rental guarantee figures to create a good impression.

3. Does the developer have the ability to manage the property properly to ensure the income is generated? If not, many developers will inflate the price of the property to factor in the rental guarantee as a “cost” of selling the property.

4. Is the Rental Guarantee being paid to the existing clients who invested with such a Developer?

Personally Nitin Trikha, Director – Real Estate Division (Huntsman IndiaThai Co. Ltd) recommends to opt for a Developer who has been offering Rental Guarantees for more than 5 to 6 years such as New Nordic Group in Thailand which has been offering 10% Guaranteed Rentals for almost 8 Years along with a “Buy Back” Guarantee. This is a very strong group with about 75 projects across Asia which includes projects in Thailand, Vietnam as well as in Cambodia

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