There is a new trend in town for the hard core property investors. Most property investors are people with super deep pockets and make loads of even more cash.this invites envious bystanders with not so deep pockets to also jump into the fray. They take loans or withdraw money from their provident funds and buy property.
Since they can not time their exits they are either stuck for a life time with the property or sink into the vicious cycle of barely squaring their installments with rent. Over time they get emotionally attached to the property and live with it for a life time, their kids in turn inheriting it and selling it at first opportunity - often due to messy family divisions. They live with a 1 to 2 % return in their sorry lives, whereas if they took the capital appreciation and put the money in banks, they could have lived a rich life. Moreover conservative investors invest only in residential properties. They would never look at a commercial space. Perhaps they would look at retail spaces but conventional Indian wisdom tells us it is almost next to impossible to vacate a shopkeeper who makes a living out of the shop.
So , how does a developer with fdi sell commercial space in his building when no bank would lend him money?lifting cash from the market through private equity route would be prohibitively expensive- in the range of 24-36% ROI. even if he managed the cash, suppose he can't sell or lease the property after construction?
So he comes up with a brain wave - sell the property as well as pick up the cash at negligible ROI. How does this work? he firstly keeps the buyable unit at a very low rate and size. typchandru021y around 20 lacs or even less. This attracts the vast pool of middle class buyers.this is the segment with max volumes. Everyone has got 20 lacs to spare, except the man below poverty line.
Next he works out the cost or market rate of this piece of floor plate. Then he escalates it by 50-60%.then he sells it at escalated rates.but he gives a handsome discount of say 10%. Then he promises a return of 11-12 % for 5-6 years. This part is divided into two parts- assured returns till construction is going on (say 3 years ) and the first guaranteed lease (of next 3 years only). So his net outgo is a 10% discount in the beginning during sale and another 50% over next 5- 6 years (@ 10-111% x 5 or 6 years). total outgo of builder is 60%. He only promises you first lease of 3 years. Why ? commercial leases are for 9 years with rate escalation every 3 years.whereas residential leases are for 11 months with escalation every 11 months.
So he says to you that once a commercial lease is granted, a lessee spends a great deal of money in refurbishing the space. Sso why would he give up the lease after 3 years? he will certainly renew for another 6 years. Moreover commercials spaces that are pre-leased are in great demand for resale today. What he doesn't tell you that the developer will certainly pay you returns for 6 years but from his own pocket. and add to that capital appreciation.the builder sells his project.and gives you back returns from your own money ! he doesn't have to lift money from market.its almost like a ponzi scheme except that you get a piece of land.really..?
not really because most such properties are not lockable spaces.(you get no returns for lockable spaces).and most importantly, the govt had given the land or sez to the developer for his own commercial activity , such as it or ites. and not for selling or leasing out the spaces further like an owner. since the developer himself is also not the owner but a lessee, if you read the agreement carefully - it is not a sale agreement , but a lease agreement.in fact a sub lease and sub lessee.
After getting 60% of your own money back in 5 years - you hope like hell that the developer will lease the office space, or you will be able to exit. otherwise you end up paying obscene monthly maintenance charges for your space !you are lucky to get back 60% of your money.the rest 40% if you get back by lease or resale - consider yourself very lucky.so beware of all risks before you make a commercial investment.
Remember there are 1000's like you invested in that property, and all of them will be selling at the same time.you need a bigger fool than yourself to buy that property.all property investments are like that - the belief that there is a bigger fool than oneself who will come along and pick up the property off your hands.spire edge was the inventor of this ponzi scheme. now its impossible to find a single seller who is not promising you the same scheme.spire edge is also building in greater noida, called spire tec.in spire tec, after selling 500 sq ft office space at 4800/- they have now reduced the investment amount to 7 lacs only (just 100 sq ft).
Hoping to catch fish from the smaller towns, since they don't have this kind of money as in metros.guys, this may work out or it may not. just understand the risks.all the best.
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