In the past 30 years, Malaysia’s real estate industry has seen many changes with a strong influx of both local and foreign investment interest. This created a landscape of strong competition and for developers to stay on top, the real estate industry has seen much creative marketing to attract investors.
Among the many programmes and schemes aimed at investors, Guaranteed Rental Returns (GRR) investment properties were introduced.
What is Guaranteed Rental Return (GRR) Properties?
Guaranteed Rental Return (GRR) properties are investment properties offered to buyers with assured monthly rental returns for a fixed number of years. Once the property is ready for move-in, the developer rents the units on behalf of the individual buyers and deliver the agreed rental return to the buyers.
Typically, in a Guaranteed Rental Return scheme offered by property developers, there will be a promised rental yield for a set period of time. Let’s take the below example for a quick calculation and to understand what the GRR scheme offers.
- Property purchase price: $900,000
- Guaranteed rental return (GRR): 7% per annum
- Rental period: 3 years
- Assured rental return: $900,000 x 7% = $63,000
- Total rental return after 3 years: $63,000 x 3 = $189,000
- Guaranteed investment returns is 21% in 3 years
In my opinion, Guaranteed Rental Return (GRR) properties is another form of real estate marketing to attract investors. The promises often seen in Malaysia can be of rental returns between 5% – 8% for a rental period of 2 to 5 years.
In reality, while not always the case, Guaranteed Rental Return properties have garnered a bad reputation for overpromising on rental returns. In some cases, property developers were taken to court for failing to fulfil their promises and investors left hoping to recover their investments.
If I am in your position, I will always consider Guaranteed Rental Return properties with a big spoon of salt. The simplest way to break down a GRR property’s investment worthiness is to assume the rental return is a rebate to be paid in instalments over 3 years or so.
To get you started, here are some quick questions you should be asking the sales representative,
- Without the GRR scheme, is the property a worthy investment?
- Assuming the rental returns are rebates paid in installment, am I guaranteed the full sum of rebate in 3 years?
- Who will manage the rental properties and what are their experiences and commitment in securing my rebates?
- Will there be management cost that needs to be considered?
- What happens after the rental period is over?
- Are the guaranteed rental returns contractually binding?
How does a Guaranteed Rental Return work?
On the front, a guaranteed rental return scheme delivers an expected monthly rental return to the buyer for a set period of time. Behind the scene, these properties are leased back to the developer for an agreed amount and are rented out to tenants.
In my observation, properties with Guaranteed Rental Returns typically have strong location and amenity advantages to be able to offer a good rental return. For example, properties nearby popular tourist landmarks tend to fetch better return with short term rentals while properties in business hubs tend to attract consistent long term rentals.
With these considerations in mind, developers can realistically project a good rental return for the new development marketed.
In reality, for some GRR properties, “Guaranteed Rentals” are in fact a marked-up into the property’s purchase price. These properties are priced substantially higher than the market fair price and the GRR is used as a rebate to justify the higher than market price.
In such cases, I recommend you not to consider the GRR scheme these developers have to offer. The developers have nothing to lose in such transactions as they’ve made additional money from you in the property sales. As for the buyers, you are bound to a leaseback agreement with developers and is unable to earn an additional income from your investment.
Ultimately, the buyer bears all risk while the developers go risk-free in these transactions.
What determines a good Guaranteed Rental Return property?
A good GRR property should be fairly priced with healthy assured rental returns. The rental assurance needs to be contractually binding and the property to be managed by reputable property managers with a good track record in delivering high rental returns.
With that said, here is a quick guide on what to ask your sales representative when shopping for a property with a GRR scheme.
1. Is the Guaranteed Rental Return contractually binding?
This is a really important question to ask your sales representative. If the Guaranteed Rental Return promised by the developer is not legally binding, there is ZERO possibility for you to take the developers to court for not delivering on their promises.
Everything that is promised, the rental yield, years of the leaseback, cost of maintenance and right to adjust rental returns needs to be clearly stipulated and spelt out in a black and white agreement, signed and stamped by the government.
2. What is the promised rental return and for how long?
While we all love a good investment return, the promised rental return needs to be realistic.
As an investor, you should have your own benchmark of the going rate of similar properties within the location. This will help you appreciate if the guaranteed returns are fair market value or an over-promised that the developers cannot deliver.
If the promised rental returns are too low, you as the buyer stand to lose out on long-term benefits from your investment. Developers can undercut the promised rental and make a decent profit while not owning any of the properties.
In contrast, if the promised rental returns are too high, you should foresee a substantial reduction or adjustment in the promised returns when the leaseback tenure ends.
In essence, you ought to be questioning the developers if the promised rental return does not realistically reflect the market sentiment.
3. Can the developer change or terminate the guaranteed rental return throughout the leaseback period?
In a guaranteed rental return scheme, you the buyer have agreed to lease back the property to the developer for an agreed price. Hence, you want to look out for clauses in the leaseback agreement that allows the developer to adjust the leaseback price.
One thing to note, Guaranteed Rental Return properties are not regulated by the local authority or housing board. Any dispute between the buyer and developer will be brought to the court under contract claims.
To benefit your understanding, contract claims are court cases that result from a breach of contract. In a breach of contract by a party, the other party affected by this breach can file a claim at court to seek remedies, including monetary damages and enforcement of the contract.
4. How strong is the developer’s financial standing to guarantee the rental return?
The guaranteed rental returns are usually done via a leaseback agreement with the developer or their appointed management company. Interested investors should do their due diligence on the company’s background and track record in handling rental properties.
If the developer or engaged management company do not give you the confidence to deliver their promises, I recommend you to walk away from the deal.
Property investment is a bulky investment that is illiquid. I do not want you to make an erroneous investment decision that can set your investment journey back by years.
5. Are there any running cost that is not covered in the guaranteed rental return scheme?
As with any other rental property out there, the landlord is responsible for the maintenance, property tax and sinking fund. Hence, you should assume that these costs are to be borne by you, as the owner of the property.
6. What happens after the leaseback period?
This can be a hard-hitting question for many sales representatives as the future is never guaranteed. However, the sales representatives should be able to advise what is the developer’s direction after the leaseback period.
The common arrangement I observe in the market are,
- The leaseback agreement can be renewed on a yearly basis to reflect fair market rate.
- A profit sharing agreement is set up with the buyer to supersede the leaseback agreement.
- The property is returned to the buyers and is managed by the individual buyers.
7. Why are the developers offering these GRR schemes in the first place?
This can be a tricky question to ask your sales representatives.
However, there is only 2 reason why a developer is offering these GRR schemes,
- The promised rental returns is merely a marketing gimmick to attract potential buyers
- To earn a consistent rental profit by managing these rental properties
If the property is developed in a location with good rental potential, it is reasonable to assume that the developer is offering the GRR scheme to earn a consistent profit from the rental business without having the liability attached to homeownership.
What are my thoughts about GRR properties?
Guaranteed rental return properties have garnered a very negative connotation in the past decade with developers using the GRR scheme as a marketing gimmick.
As I’ve expressed in my writing, not all GRR properties are bad.
So, before you decide to buy any properties with the GRR scheme, you want to ask yourself these 3 main questions,
- Will I still buy this property if there is no guaranteed rental returns?
- Am I buying the property at a fair market value in view of the surrounding development?
- Is the guaranteed rental returns realistic in view of the surrounding development?
Final Words
Thank you so much for reading this article. I hope the information shared through my writing has been helpful in your journey in building your investment portfolio.
Until the next article, take care and stay safe.
