Guide for investing in rental Guarantee apartment projects in Lahore

Ever wonder why some rental guarantee apartment projects in Lahore are 40 to 70% more expensive than the rest of the market? A lot of new hotel room projects and serviced apartment projects in Gulberg Lahore offer lucrative guaranteed rental income agreements. This makes a strong case for investment in luxury serviced apartment buildings in Lahore.

But wait, be careful, many of them are just overcharging you to exploit your insecurities.

The aim of today’s analysis is to find out which guaranteed rental income project is most suitable for investment.

Rental guarantees on certain apartment projects may be one of the smartest ways to overcharge investors. Don’t get me wrong I am not against rental guarantees. Rather, I have favored a few rental Guarantee serviced apartment projects myself and may as well do in the future.

However, some developers and marketing companies seem to go too far when they are offering guaranteed rental income. So you have to be careful while investing in such projects and avoid getting ripped off.

While rental guarantee apartments and projects are usually located in the commercial zone on an expensive piece of land therefore they do have a higher price than the residential towers. However, things get dicey when certain projects raise their price much higher than the actual assessment.

The background of rental guarantee apartment projects in Lahore

The future of Pakistan real estate is in Highrise projects, especially luxury apartments and serviced apartments sectors.

While normal apartments are developed for residential purposes. Malls, serviced apartments, hotel rooms, and hotel apartments in Gulberg Lahore serve mainly investment purposes and rental income.

Competition is fierce as more developers jump on the bandwagon and is expected to grow further in the coming years. In order to beat the competition many developers have started offering rental-guaranteed luxury serviced and hotel apartment projects to make investment attractive but there’s a catch.

1. Rental guarantees are only being offered on commercial projects, this includes Malls, hotel rooms, serviced apartments, and hotel apartments in Lahore.
2. Most developers are overcharging investors on Rental guaranteed projects, thus effectively making them pay more and paying them back their own money as rent.

Kinds of rental guarantee apartment and hotel apartments in Lahore

In general, you will find these three types of rental guarantee apartment projects in the Lahore market.

Post-possession rental guarantee

The most common form of rental guarantee is where the developer offers 3 years or in some cases up to 5 years of rental guarantee after the possession of the project.

Usually, these projects will be 15 to 30% higher in value. The lower the better, and these are our top recommendations if you seek a rental guarantee apartment project in Gulberg Lahore.

Pre-possession rental guarantee apartment project

The developer offers a rental guarantee to begin as soon as the 100% payment is made. Even if the project is under development and needs 3 to 4 years for completion.

How is that even possible when you don’t even have possession? The formula is simple just overcharge the consumer and sell them at a very high price. The rent you are getting is just your money which will be paid back to you in installments. You will end up losing a great deal in capital gains over the years.

Lifetime rental guarantee lease agreement

Usually offered on hotel rooms where you lease out your rooms for a period of at least 10 years, the rental guarantee varies from 10 to 12% in most cases. Most of these rooms also offer a pre-possession rental guarantee as well.

You need to check the price and analyze the prices before investing in such a project. If it is offering rentals before possession and the price is 50% or higher than the market it is better to stay away.

You can also get in touch with an expert consultant to help you decide which rental guarantee apartment project will offer the best ROI.

So what’s the problem?

This all sounds good except that in many cases you are not really getting any real returns.

Here’s why

Usually, all the rental guaranteed models model come with a higher price and while a 15 to 20% higher price is fair enough, some developers and marketing companies have taken it to the next level and charge up to 60-70% more than the actual market price of the property.

Technically, they are just returning your money back to you in form of rentals.

In order to understand these let us take into consideration the following example:

Let’s assume that Building “B” is offering a 10% rental guarantee for a period of 10 years with an increment of 20% every 3 years which is usually the most common lease agreement in the market today.

The actual assessment of the property = 30000 per sqft

Developer price  = 50000 per sqft

Overpriced by  = 20000 per sqft or 65%

Now Mr. X buys this property with 100% payment in advance and starts taking his rentals,

Whereas Mr. Y will pay installments over 4 years and his rental will start after 4 years or after completion whichever comes first.

Now assume that in 8 years time the property is 75000 per sq ft.

Let us calculate how much both of our investors have earned in terms of rental income and capital gains.

Mr. X total return is = 80% in rental return and 50% in capital gains = 130%

Mr. Y total return is = 40% in rental returns and 50% in capital gains = 90%

Now let us get into the mix Mr. Z who is smarter than both Mr. X and Mr. Y. Mr. Z invested in a similar project without a rental guarantee in a similar property for only 30000 per sqft.

In eight years if the property should have a similar value of 75000 per sqft and rent is 10% per annum of invested capital.

Mr. Z total return is = 150% in capital gains and 40% in rental returns = 190%

In eight years if the property should have a value of 60000 per sqft

Mr. Z total return is = 100% in capital gains and 40% in rental returns = 140%

In both cases, he fares much better than Mr. X and Mr.Y.

Let us see the net worth of all three individuals after 8 years considering that they all invested PKR 1 Crore.

Mr. X total net worth after 8 years = 23 M

Mr. Y total net worth after 8 years = 19 M

Total net worth of Mr. Z after 8 years = 29 M

The result

It is clear that Mr. Y is a clear loser. He purchased an overpriced commodity in installments which did not give him good capital gains in the long run affecting his overall ROI. Although the overall ROI is higher than 90% as he paid in installments over four years, he will still lack behind both Mr. X and Mr. Z.

Mr. X had a better ROI than Mr. Y but he had to invest 100% upfront.

Mr. Z invested without a rental guarantee and is the clear winner here for the following reasons :

1. He invested in installments rather than making 100% payment upfront yet his ROI is higher than Mr. X.
2. As he has made payments in installments, his ROI is actually higher than 190 or 140% in both cases, respectively.

Who is responsible for the rental guarantee?

Now if that wasn’t enough, consider this, you are paying a lot of extra money, which is far more than the actual price of that property to a 3rd party. Which is not regulated by SECP or the Government of Pakistan for a promise of giving you the rental guarantee or technically just your money back to you in installments.

بِلّی سے چِھیچْھڑوں کی رَکْھوالی

or in English,

You have entrusted the sheep to the wolf

In most cases, it is the developer. I hope and pray that most developers will keep their word in the long run. We cannot rule out the possibility of a project failing to deliver a rental guarantee because of the failure of the developer to honor his commitment for any reason possible.

What is your fallback plan if the developer fails his promise?

In the case of a hotel room you only have two options:

1. Either accept the lower rentals offered by the developer.
2. Take the developer to the court.

In the case of a luxury serviced apartment, your options are not limited anymore:

1. You rent the property yourself through Air BnB or use third-company services offering short-term rental management.
2. You can rent the luxury serviced apartment on a long-term tenancy.
3. Take the developer to the court.

Recommendations

1. Serviced luxury and hotel apartments certainly give you much more flexibility and peace of mind when it comes to investing in rental guarantee projects in Lahore.
2. If you want to go for a hotel room, paying 100% advance and taking the rental from day one is a better choice.
3. Check the price of the completed projects in the surrounding areas before investing to make sure you are not being ripped off.
4. Hire a good consultant to help you decide.

Captain (Retd) Shahnawaz Yaqub Bhatti

Investment Consultant and CEO at Imlaak

Mob : +92 333 1616160 ( Whatsapp)

Mob : +92 300 2048048 ( Whatsapp)