GRR schemes tend to crop up when the property market is challenging. Investors who are considering GRR properties, which promise fixed rental returns over a certain period of time, should proceed with caution as such schemes are not governed by the Housing Development (Control & Licensing) Act.
As the property market stagnates amidst the ongoing Covid-19 pandemic, some developers will be ‘hanging the GRR carrot’ to entice naïve homebuyers and laid-back investors. HBA has on numerous occasions cautioned Malaysian homebuyers to be wary of the property projects offering ‘Guaranteed rental returns’ (GRR).
Here is a few important points property investors should be aware of:
What are Guaranteed Rental Return Schemes?
Call them what you like – leasebacks, buy-to-let, cash back, or own-for-free. Some property developers in Malaysia have come up with creative plans to woo investors with GRRs on yet-to-be-built properties. In this scheme, developers would agree to pay buyers rentals ranging from 8% to 12% per annum or a proportion of the purchase price for a certain length of time.
This kind of purchase, which has become increasingly common judging from various property listings online sounds enticing to investors who do not want the trouble of managing their own property investments. You buy the property, and you secure a minimum rental return down the road.
While GRRs could be very attractive, investors need to know that the scheme is not as simple as it seems. They could be very much like ads that appeal to our desire to strike the lottery, lose weight quickly or a get rich fast scheme.
What are the risks of a GRR scheme?
Rental returns might not be realistic
If a developer is offering a GRR, the property purchaser has no way of knowing whether that residential unit is going to achieve its promise in the open market. The developer may not be able to get the guaranteed rent or worse, might not even manage to secure a tenant (s) during the guaranteed period.
GRRs are specifically aimed at selling most of the units within a development to investors. Hence, in most situations, 500-700 condominium units/ apartments will be coming onto the rental market rather than owner-occupiers. You will need to consider the fact that hundreds of landlords with the same property offering will be chasing tenants at the end of the guarantee period.
In areas of high competition, landlords will have to reduce the rent to attract available tenants. Consequently, the market value of these properties will go down rather than appreciate. If you decide to sell off your unit, you will also be limited to buyers who will be mainly property investors. Sellers will also find themselves competing with other developers who are offering higher rental returns with newer developments in the area.
Profits are not sustainable
Most investors will value the “simplicity” of the GRR deal. However, there are issues that buyers have to be aware of before entering into such agreements. A typical mortgage lasts 25-30 years. If you have a guaranteed rental for just the first 3 years, what will happen in the remaining 22-27 years? You are left to sink or swim on your own.
A typical table of returns will show potential buyers a surplus income. A potential investor has to take into account the cost of maintaining the property. These include taxes that come with being a property owner, the cost of maintaining the mortgage as well as all other fees related to acquiring the property – such as Stamp Duty, Legal fees and Valuation fees. Moreover, most GRR schemes require you to buy a furniture package with the apartment and commit yourself to the management charges and sinking fund of the building, on top of the regulatory quit rent and assessment tax.
GRR properties are often overpriced
When property supply exceeds demand, developers will look for ways to avoid having to reduce property prices. Most GRR properties in fact have inflated sales prices (in the Sales and Purchase Agreement) to act as a buffer. Hence, while GRRs may offer attractive returns, it will be a false economy in the long run if the buyer ends up overpaying for the property.
A guarantee is only as good as the company that underwrites it. Even if the guaranteed return seems reasonable and is offered with honourable intentions, investors need to be sure that the developer would be able to sustain the rental returns if the property market were to take a turn for the worse. If developers were to default on the rental income payments, these buyers will likely default on their respective loan repayments, thereby setting off a chain of events with dire consequences.
GRR properties are not regulated
The terms and conditions in GRR agreements are not regulated by the housing laws. The sale and purchase agreement (SPA) for conventional property transactions is covered by the Housing Development Act (HDA) and its Regulations, but the GRR scheme is not. As such, inexperienced investors may not understand that the fine print is often written in the guarantors’ favour. Example of such clauses:
“Provided always and it is hereby agreed between the contracting parties hereto that the Developer reserves its right to terminate the GRR agreement for any reason whatsoever by giving two months written notice to the Purchaser wherein such a case the Developer’s obligation to pay the guaranteed return to the Purchaser shall cease from the date of such termination. Such notice is deemed to have been received within three (3) days from the date of the letter.”
Has anyone had a bad experience with GRR properties?
Yes, HBA has received numerous complaints from naïve and unwary homebuyers pertaining to GRR. For example, some time back, we received an email from an observer who was at a developer’s office. He narrated this incident where he witnessed an elderly man who had just taken vacant possession of his investment units, comprising four apartments with a GRR scheme. He was demanding that the developer take back the units and refund him in full on the purchases.
The man had discovered that four units purchased under the developer’s GRR scheme had depreciated in value by 25%. Worse, the developer had terminated the GRR scheme as allowed in the SPA, leaving him frustrated with his failed investment. Did the “generous” developer give him any refund? Your guess is as good as mine.
These GRR developers are not regulated by the Malaysian Housing Ministry who issues a license to housing developers. As far as the Ministry is concerned, these GRR Contracts are between the buyers and the developers/ their subsidiaries/ hotel operators/ service providers and the Ministry has no role in regulating them. The aggrieved victim could not even file their case with the Housing Tribunal as these cases are not within the scope and jurisdiction of the Tribunal for Home Buyers Claim.
Can I take a developer to court if he fails to pay the GRR?
If the amount of indebtedness is substantial and warrants a civil case against the party (offering the GRR); then yes you can take the developer to court.
There had been cases of property investors taking such property development companies not honouring the GRR schemes, to court. However, the cases were not worth pursuing due to the high cost of taking legal action.
There have been a handful of cases over the years but while some of these individuals won, these cases were against shell companies, hence these owners only won a paper judgment. Mind you the ‘paper judgment’ is not even tax-deductible
While some investors may approach the Tribunal for Consumer Claims, the total amount that can be claimed is capped at RM25,000. The tribunal is an independent body established under the Consumer Protection Act 1999 to hear and determine claims filed by consumers under the Act.
Advise for investors considering GRR properties
GRRs offered to investors should be checked carefully against the local market and current competition. A simple survey within the location will give an investor a fair idea of the state of the local market. If market prices are lower than the proposed rent and numerous incentives and discounts are being offered to woo in buyers, then this is an issue to be considered. It is a classic case of caveat emptor, rental guarantees can sometimes guarantee investors nothing but heartache.
Anyone who has any real estate experience knows there is no such thing as a guaranteed rental. Real estate, as with any other type of investment, has its ups and downs. Anyone who says that he is able to predict the future is spinning the truth. Our economic cycle goes through cyclical changes that respond to economic fluctuations and other external global factors. Projected monetary returns that cannot be guaranteed are doubtful in nature.
Had it been so profitable, don’t you think that the developer, their shareholders and related companies would have snapped them up first, before being made available in the market? Why don’t they keep it for themselves? Guaranteed returns should be accompanied by documentary proof of a trust account nothing more nothing less.