Now, buy real estate as a structured financial product

After three tsunamis of demonetisation, RERA and GST, the real estate market is coming up with innovative offers with structured deals woven together for investors.

The deals involve projects wherein the developer agrees to buy back the units at pre-determined returns if the desired sales rate is not achieved within a pre-defined period.

The investor has the option to go in for real estate as a financial instrument with all the safety nets in place to ensure that they get their returns or the physical possession of the asset at the committed price, say experts.

“Structured real estate products for investors are available in the market today for investors who have investment quantum starting from Rs 1 crore onwards. Since these are all bulk deals, the discounts range anything between 15-25%,” says Anckur Srivasttava of GenReal Advisers that is structuring similar transactions up to Rs 20 crore.

Experts also point out that with stock markets doing well, many investors may look at reaping a portion of their profits into such instruments.

Last year, the distribution arm of a real estate fund manager raised Rs 12.5 crore for a developer active in Dharuhera area to help it complete its project through what is known as profile funding. The project was 85% complete and the amount required by the developer was Rs 15 crore.

The fund manager managed to raise Rs 12.5 crore by floating a scheme through its channel partners who further sold it to their clients. It worked something like this. If an apartment was priced at Rs 40 lakh, the clients had to pay Rs 20 lakh upfront and were promised an assured return of 15% after three years in case they decide not to keep the apartment. But if after three years, the clients decide to take possession of the unit, they will have to register at the cost of Rs 40 lakh. Also, if the developer failed to pass on the assured return of 15% after three years, the client, as per the agreement, has the legal right to get the property registered in his name at half the amount paid by him, ie, Rs 20 lakh.

“The scheme was launched a year ago and all the units have been sold now. But how this scheme will have to adhere to RERA norms once the rules are in place in Haryana,” say sources.

Another scheme that is doing the rounds in the market is that of bulk purchase that has a buyback clause attached. In case after three years, there is no appreciation, the builder can buy back the units sold to investors after passing on the minimum returns promised.

This model works something like this. If the market value of a unit is around Rs 3000 per sq ft, the investor pays the builder at the rate of of Rs 1500 per sq ft and the sale agreement that is drawn has specific safety features built into it. What this means is that if the builder fails to honour his commitment after three years of passing on 15% interest or 18% interest to the investor, he has the right to get the apartment registered under his name at a price of Rs 1,500 per sq ft.

Another developer is reported to have sold around 40 to 45 plots at around Rs 18,000 per sq yards near Gurgaon to a financier. If after three years the price does not cross Rs 22,000 per sq yard, the developer is bound by the agreement to give back Rs 4,000 per sq yard to the financier.

Prateek Pant, head of products and solutions, Sanctum Wealth, says high net worth individuals are today interested in inventory that is close to completion or are ready and are shying away from under construction projects as they involve development risks.

Huge inventory is available in the constructed space and there are good discounts available. Investors are ready to buy inventory in projects at price points that are deeply discounted with an undertaking that the developer will buy it back or assure to sell at the end of the investment tenor or they will have the right to register it in their names at discounts, ranging from 20-30%. Now more and more investors are looking at purchasing assets in their names and prefer to go in for structured schemes that have a buyback or a sale arrangement in place to ensure safety of their capital. Investors are more interested in finished or close to completion projects where the yield is close to 16% to 21% in the form of rent, interest payment and capital appreciation, he says.