Are assured returns ponzi schemes?

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Bottom Line: With a new law clamping down assured returns and declaring it ponzi scheme, Track2Realty questions whether such schemes exposes the developer as a suspicious brand.

Assured returns, Ponzi scheme of real estate, Real estate marketing, Cheating in property market, Funding gap in property market, India real estate news, Indian realty news, Real estate news India, Indian property market news, Investment in property, Track2RealtyShantanu Ganguly had invested in a commercial property in Gurgaon where the developer had promised an assured return of 12% for his investment till possession. He was pretty much satisfied with the deal as his borrowing cost was 10% and the assured return from Day 1 made him immediately commit to the deal that was offered.

However, his dreams shattered in the second year of investment itself when the post-dated cheque of the builder was not cleared by the bank due to lack of funds.

“It is a cheating on part of the builder. I was assured about the returns till possession. Even after the possession I had been offered that if I would leave the commercial space with the builder he would continue to give rental returns. But now he is not even taking my calls and when I visited his office the sales team said there are financial constraints. It was supposed to be assured returns with the post dated cheques given to me for three years,” says Ganguly.

Ganguly is not the only investor in the real estate market who has been trapped with the temptation of attractive assured returns. Most of the investors in such deals are today repenting since the assured returns have stopped. There is no assurance about their investment, forget about returns.

Track2Realty approached to a number of real estate developers who are offering assured returns. Though all of them refused to speak ‘on record’ but privately they admit that their assured returns have failed due to market dynamics than intentional cheating.  

“Assured returns make a win-win situation for both the builder and the buyer. I get my construction finance with my buyers at a rate of 12-13%, which is way below the prevailing market rates from organized sources of funding. The buyer also makes money in the process since he is getting returns from the very beginning of investment. Problem is when the projects are stuck up due to slow sales and the operating cash flow becomes an issue for us,” says a developer on condition of anonymity.

The developers may continue to defend what is indefensible for the buyers, but the fact remains that most of the developers into such schemes lack market credibility and credit reliability among the organized sources of funding. They hence make the buyers their investors.

The deal is stuck, as admitted by the above mentioned developer, when the project does not get sold completely. In this case, the developer has no financial bandwidth to either complete the project or continue to give assured returns to the investors.

Isn’t it like a Ponzi Scheme where the ROI (Return on Investment) is subject to various ‘ifs’ and ‘buts’? The government seems to think so and hence the need to regulate such kind of unscrupulous dealings.

Reality check with assured returns 

The assured returns, often unreasonably high, mostly operate on the lines of ponzi schemes 

There are very few success stories with assured returns while stories of buyers’ regret are very many 

The developer uses buyers as lenders in such schemes 

The failure to sell entire inventory leads to default with assured returns 

The Banning of Unregulated Deposit Schemes Bill mandates the developers to get registered under the designated authority under the proposed law  

The law ‘Banning of Unregulated Deposit Schemes’ has been passed now but it has not put an end to the practice of assured returns in the Indian real estate. The law otherwise aims to clampdown on realtors, jewellers and other deposit-seeking entities, as they will henceforth need to be registered with the designated authority provided under the proposed law.

But doesn’t such assured returns expose the developer as cash starved entity in the market? To what extent does it affect the brand equity of the developer? Should the buyers trust such schemes given the bad experiences and precedents in the market?

Nikhil Hawelia, Managing Director of Hawelia Group maintains that the assured returns is a market linked methodology and there is nothing wrong with the scheme per se, if only it is regulated. According to him, the real estate business in many developed markets across the world adopt ways & means to attract public funding, including the crowdfunding.

“I don’t think it affects the brand equity of the developer if his promise of assured returns is fulfilled. The problem thus far has been lack of regulation and not the schemes. Many serious developers have successfully worked on this funding methodology. The new regulation will definitely put curbs on the fly-by-night operators,” says Hawelia.

There has been instances where the developer has proposed quite unrealistic return to attract the gullible buyers. A regulated market of assured returns may not give that kind of high returns but would definitely go a long way in giving the sector a much needed face lift.

It is nevertheless debatable as to whether assured returns in a regulated eco system helps or hurts the brand equity of the developer offering such schemes.                                                                                                                                          

Ravi Sinha

 

 

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