Investors are always being reminded to be wary about “guaranteed rental return” (GRR) schemes in Malaysia property market. It will not be surprising to see more and more guaranteed rental return (GRR) schemes in the next few years.

As developers seek creative ways to increase the appeal of their property in a more challenging market to come, more hybrid variations will eventually surface. Over the past two years many GRR schemes were offered. The concern here is, however, whether the developer will be financially capable of honouring it.

 

What is GRR? Why is it popular?

GRR, also known as leaseback, buy-to-let or cash back, is resultant of developers’ creativity in wooing investors with a GRR scheme on yet-to-be-built properties like condominium, hotel, retail mall, shop house, vacation property, etc. According to the plan, developers agree to pay buyers guaranteed rentals in a percentage of the purchase price for a stipulated period of time.

A guaranteed rental scheme can provide buyers with peace of mind, safe in the knowledge that buyers will receive a fixed income for an agreed time period. Many buyers like to use the guaranteed rental income to pay associated mortgage and maintenance costs. Additionally, the management of the property is hassle-free as the property developer or management company is responsible for this aspect over the agreed time period.

Many investors like guaranteed rental schemes because they do not want to get involved with the management of the property. Generally, GRR are best for the laidback investors. It has proven to be extremely popular especially among overseas investors who like to know their property is looked after throughout the year while they receive a return on their investment straight away.

Some people will value the ‘simplicity’ of the deal. However there are issues that buyers have to be aware of and comfortable with before entering into such agreements.

What is behind the scene?

The “guaranteed return” is indeed included in the purchase price already. Developers are pricing the property higher than the market price with additional sum equivalent, if not higher, to the guaranteed return. For example, a condominium project with guaranteed 5% annual rental for 9 years may imply that the final price from developer is at least 45% (9 x 5%) higher than the market price.

A quick check to see if the final price is justified under such scheme, is to ask: after deducting this 45% from the price, is the property still looked attractive enough compared to a similar property in the same area at current market price? You may probably use the same amount of money to buy 2 similar units in the same area without the scheme!

In the above example, the total amount of “rental return” for the 9 years is in fact an amount of cash you pay upfront to the developer, borrowed by you from bank if you finance the investment. The developer then returns it piecemeal to you without any interest while you bear all the interest charged by bank.

Meanwhile they still “temporary own” your property to do whatever they want to do for the whole 9 years since you signed a leaseback agreement with them!!! Either they use your property to generate more money for their own pocket or just leave it vacant, they have nothing to lose because they have already got all this money from you, in the selling price…

Think twice and calculate thrice before you invest in such scheme because most projects marketed with such marketing arsenal are implying a weak financial situation (insufficient cash) of developers. Such developers are considered as high risk builders who might not even be able to complete and deliver their projects in the first place.

The Boss, one of Klang’s hottest development projects, has come to a halt victimising 300 confused investors who were promised with attractive return. Most of the buyers were attracted to the guaranteed high returns of 7.5 – 8% a year by the developer. Being launched in 2012, most of the buyers received information in February 2015 that the development has fallen to the hands of a liquidator.

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.

What must be checked up front?

Six points to check before you buy property with rental guarantees.

1. If the GRR is not part of the deal, would you still buy this property?
2. Is the property selling price justified in comparison to other similar properties within the same vicinity?
3. Does the developer have the capacity to build and manage the property, and ensure the income is generated? Assessment of developer’s background, style and planning of asset management must be included in the due diligence.
4. Is the rental income figure realistic and achievable in the current market where the property is located? If not, the investor will see a dip in returns once the rental guarantee period ends, which indicates a potential drop in the value of the property. Many unscrupulous developers will inflate the rental guarantee figures to create a good impression.
5.What is actually underwriting the guarantee? 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.
6. Do you understand all the terms and conditions in the GRR agreement? Inexperienced investors may not understand that the fine prints are 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 (2) 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”.

A wise investor should check the small prints for any hidden clause that allows the developer to avoid paying the guaranteed rent and it is always a must to seek expert advice.

There are some good deals out there and some good properties with potentially very good returns. But even in such cases, part of the essential due diligence is to research whether the investment property represents good value and ascertain what the rental market situation is.

The rental market is volatile, depending on current competition and market conditions. It is a cyclical market, and is subject to the laws of supply and demand as in any other sector of the economy.

There must be real rental demand to substantiate GRR scheme or it will not be able to last through the entire term, especially if the units remain vacant. The scheme could eventually become disastrous when developers face difficulty filling up the units to fulfil their promised rental returns.

This article is contributed by me and Dr. Ong Kian Leong, founders of the first ever online property investment course for Malaysians, called Property Method. Dr. Ong Kian Leong (commonly addressed as Dr. OngKL), is the creator of GoFinanceTM, a tool that allows investors to accurately evaluate if an investment is worth investing as well as worth financing for maximum return. Claimed by himself as a student in the life-long learning journey, he is also the master trainer of Property Method and the blogger behind Real Estate Investment Blog.


KCLau
KCLau

Personal finance author and trainer

    17 replies to "More Guaranteed Rental Return Schemes In The Market?"

    • halif

      Tq for sharing this info. Indeen it is beneficial to me as newbie in this field

    • jangjit singh

      Tq very educational

    • anip

      Exactly as I learnt thru the hard way.. the return only last for 3 years before the developer invoke a clause in the tenancy agreement for much lower return for the next 2 years due to bad market condition at the moment.. never will sign up for any of such scheme..

    • BhLau

      From what I see, the GRR is shearing wool from donkey scam.

      The developer topup your upfront lended money from bank & pay you back monthly. This means you guaranteed them to pay you back later. You pay lended interest & they generating FD interest. If they rent out means the rental received is additional bonus to them.

    • Gan NK

      Hi there,
      What if the property is a purpose-built for student accomodation and is going to be rented out to students throughout the duration of the contract?
      Is it still a no-no?

      Thank you!

      • KCLau

        Hi Gan, there is no fixed rule to investment. You will need to assess the situation and see whether the numbers makes sense for you to invest. Is the selling price already accounted for all the guaranteed rental? Can you find better investment with the same capital?

    • Desmond

      The bridge at Cambodia with GRR.
      What do you think about this project. Any potential

    • Nazir

      Kenwingston Square Garden project at Cyberjaya also offer GRR for 3 years. Any commen6 for expertise?

    • ravien raj

      Great write up.
      I recently came across few developments around golden triangle. One particularly very tempting, located up bukit Ceylon.
      They didn’t exactly sell higher than the market price.
      GRR was 3% monthly rental was fixed and balance based on occupancy. Which seems like a fair deal.
      As most my foreigner friends always choose to live around that area as many as this units are there. I realised it’s always occupied and hard to get a unit for rental.
      I’m your new follower KCLau. Keep up the good work.
      ????

      • KCLau

        Hi Ravien,

        Thanks for stopping by and share with us your experience.

    • Jeyamahla Veeravagu

      Hi, I did invest in a GRR scheme in Seremban about 10 years ago, Dataran Mantin project, We had issues with the developer and many had suffered great loss, Two groups had sued the developer but at the end of the day, nothing much came out of itdayCurrently the units are in a bad state and the purchasers have to pay the instalment for the units without any future income. Most of these units were auctioned off as most owners cannot manage the instalment, I am paving about RM 1ooo for these unit for nothing all theses yaers,

      • KCLau

        So sorry to hear your bad experience. No doubt it is a valuable lesson for most of us.

    • Geoffery Mangalam

      KC,
      Thanks for the blogs. They are very informative. With regards to GRR, wish though that this had come out 3 or 4 years back, then would not have been suckered into a GRR deal with IOI Properties.
      My question with regards to GRR is this, is this income taxable? That is, since I have a contract with IOI Properties, will LHDN tax me on this income?

      • KCLau

        For tax matter, I would suggest that you check with your tax accountant. That’s what I would do too since the tax matters change every year and the professionals stay updated to the most recent practice.

    • Leslie

      Tqvm for sharing.

    • John

      Dear KC,
      Since tis GRR Scheme is such a scam,how come Ministry of Housing or the BNM step-in to put a stop on tis Investment Scam??

      • KCLau

        When developers introduce this, they do hope to make it happens, if they can find tenants for the completed properties.
        But in many cases, the developers couldn’t pull it off. Buyers can then take legal actions.
        The government of course can step in if they feel there is a need.

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