Ban on fixed return schemes in real estate

You must have seen advertisements of builders and developers promising assured return on your investments and easy payment plans if you book a flat, shop or office in their under construction or semi-finished projects.Now, these offers would be a thing of the past as the government has taken a serious view of such offers. The Union government has cleared the Banning of Unregulated Deposit Schemes Bill which seeks to place a ban on such schemes by real estate developers.

The Bill treats all such offers as ‘Ponzi’ schemes and bars builders and developers from accepting money from the buyers by promising fixed returns until possession of the property. The developers would be now required to register with the designated authority before accepting any such deposits from the general public.

These types of schemes were offered by developers who were facing cash crunch due to slowdown in the real estate market. The interest rates offered by developers on these assured returns schemes ranged from 10%-12%, which were quite lower than the 15%-18% interest rates that the developers had to pay if they borrowed from a commercial bank or a non-banking finance company. The buyer had to make an upfront down payment of 90%-95% of the total cost of the property at the time of booking or within a few days of booking. Hence, these schemes provided the developers with cheap funds for the projects. After receiving the payment from the buyer, the developer paid interest to the buyer every month at the rate specified in the Agreement of Assured Returns and continued to pay the interest till the developer leased out the property to a lessee and payment of monthly rent of the property commenced. The buyer was then required to pay the remaining 5%-10% of the purchase price to the developer.

However, many developers stopped paying interest to the buyers after a few months citing financial constraints due to slowdown in real estate market. This has prompted the government to take the step of banning such schemes. However, this ban would further aggravate the liquidity crunch faced by the real estate sector. Hence, there is a need to regulate the real estate market through more stringent registration process and stricter oversight by the regulatory rather than banning such innovative schemes outrightly.