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SG Guaranteed returns: All you need to know

Property Here - Saturday, June 15, 2013

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By Andrew Batt

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 Singapore-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.

Carlos Leal, General Manager of United Investments Portugal says: “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.”

Leal’s view is shared by Murray Adair, Chief Executive of IOREC.

He says: “At Azuri, our luxury development in Mauritius, we are offering purchasers guaranteed rental incomes of five 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.”

Ian Clarke, Director of UK-based Midas Estates offers perhaps a more balanced view.

He says: “It’s a massive plus if a property comes with a rental guarantee, however you have to be very careful. Location is the key when it comes to buy-to-let or short-term rentals.

Clarke cites an example of a worth GBP200,000 with an 8 percent guaranteed rent for two years.

“It sounds very good for both the developer and agent, but if you might the option to pay GBP170,000 for the same property and still rent it out for 8 percent returns as long as it is in the right location. What most developers do is add [the cost of the guarantee] to the price.”

Marc von Grundherr, Director of Benham & Reeves Residential Lettings also urges caution.

He says: “My advice is avoid any 'free' gimmicks as they are never free, and it is far better to acquire the price as low as possible and sort the letting and furnishing separately.

“Buyers in the Far East tend to turn up at shows and be wooed by what is on offer, but investing in property, especially in London, is a very serious decision. Investors need to think very carefully about the investment as it stands on its own - without any guarantee in place.”

Von Grundherr suggests buyers negotiate hard with agents and developer, and ask them to strip out all incentives so they can acquire the property for the lowest possible price.  
He adds: “Some developers who offer rental guarantees are doing so to dupe investors into overpaying, or into buying something that does not work as an investment. One key problem I have seen many times is when the guarantee ends after two or three years. Rents are often lower and clients are left disappointed.”

Yet not all developers and agents agree that offering these kinds of incentives adds to the cost of a property purchase.

Gary Hersham, Managing Partner at Beauchamp Estates, said: “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.”

Hersham adds that the best rental guarantees last for two years or more, and ultimately give the buyer peace of mind.

Samantha Gore, Sales Manager for uv10 in Brazil, underlines how guarantees can be an important part of the property investment.

She says: “Although there’s no need for a gimmick such as a guaranteed rental income, it can be important for an on-site or contracted rental management company to be in place to help maximise client returns.”

Chris Jones of estate agents Fraser & Co argues offers a different view to a widely held view that buyers ultimately end up paying for guaranteed rental promises.

He says: “In our experience, rental guarantees are not essential and do not add value to the actual price of the property being purchased. However, they are a useful incentive as they show confidence from the developer in their product and the investment opportunity on offer.”

The final view on this subject comes from experienced property lawyer Desmond Hughes, Senior Partner at Phuket-based law firm Hughes Krupica.

He says: “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.”

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.For the more experienced property investor though, it could just be an added burden.

Midas Estates’ Clarke probably sums it up best when he says: “If you are nervous go for guaranteed income, but remember if you have the right location you shouldn’t need guaranteed rental. It’s all about location.”  

CHECKLIST FOR PROPERTY BUYERS

Robert Gavin, CEO of Property Horizons, offers three 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 s 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.

 

Andrew Batt, International Group Editor of PropertyGuru, wrote this story. To contact him about this or other stories email andrew@allproperty.com.sg