Guaranteed Rental Returns? What to know

Feb. 16, 2017, 12:56 p.m.

Many new property investment opportunities throughout the Kingdom come with guaranteed rental returns (GRR). But a wider consideration is necessary to ascertain these guarantees’ true and lasting value.

In layman's terms, GRR is a future rental income that is guaranteed by the developer or management company to the property purchaser for a contracted period of time after the purchase agreement is signed. 

Sharon Liew, CEO of Huttons CPL, notes that Guaranteed Rental Returns is a reassurance scheme for new investors looking to try out a new, somewhat unchartered international market. Standard net returns being advertised in the condos and new developments market range from 4 percent to 9 percent, normally for a two to five year period, although claims of 20 percent or more for short-term periods are also being touted by some operators.

Saraboth Ea, managing director of  Maxem Property, says that a healthy skepticism around GRR is only natural in Cambodia, as it is a relatively new concept for local buyers and investors: “Rather than being the sole incentive for a buyer, we view it more as a gauge of the developer's confidence in their project.”

For potential investors faced with promises of Guaranteed Rental Returns, there are three points to verify before signing up.

Firstly, it is crucial to find out exactly what is underwriting the guarantee. If it is merely a paper promise it is potentially illusory - a marketing exercise that will collapse after the developments launch. However, if there is an actual contract in place, containing the potential for legal recourse should the income not be generated, the GRR presents some value.

Ea warns, “GRR needs to be considered amongst many other factors that determine whether an investment is a good value or not. This will consider the buyer's' objectives and investment timeline, which varies from individual to individual.”

Sam Kiers, director of sales and marketing at Elevated Realty, agrees: “foremost, investors should consider is the time it takes for the investment to turn profitable.”

Liew explains that, “in general, the projected GRR is usually lower than the market rental rate by about 20 percent, to protect the developer from any losses - this means, that anything higher than 20 percent is likely too good to be true.”

Desmond Yap, general manager of Yong Yap Properties, believes that if it is the developer offering GRR, it is fair to assume they have done their calculations and have ensured they will not create a loss of profit for their company. “Thus, in effect,” says Yap, “the buyer is paying for their own Guaranteed Rental Returns.”

For investors, the second consideration about any GRR promise should be whether the rental income figure appears realistic and achievable in the current market, keeping in mind where the property is located. If is clearly unrealistic, the investor should foresee a dramatic reduction in returns on their unit once the guaranteed rental period ends.

Keep in mind too, the vast number of properties set to come online in a similar timeframe in Cambodia, around 2017 and 2018, will readjust the rental market supply and naturally suppress demand.

It is not uncommon for developers to inflate the rental guarantee figures to create a good impression on buyers considering longer term benefits of their investment.

A common mistake that some novice investors make is to take the Guaranteed Rental Returns that is being offered as a reference point to calculate their returns.

When you sell something at 100 percent premium, of course you can still offer even a 10 percent return over 3 years and still make a hefty profit.

Finally, the buyer must consider whether the developer or their property management company in fact has the ability and resources to manage the property properly and sustain rental tenants for the property over the guaranteed period.

Look for an experienced property management operation, with past success in the local market.

If these elements are not present, developers may inflate the price of the property to factor in the rental guarantee as an added “cost” of selling their property.

“Hence, be sure to check the validity of the GRR agreement and the quality of the management team,’ says Yap, “and, if possible, see how the management company are arranging their finances.”

Finally, “keep in mind that new condominiums are easy to maintain - but in 5 years things will be different especially if the management company hasn’t set aside any money for maintenance.”

Liew confirms that “the developer’s credibility and presence in Cambodia is extremely important, as most GRR only kicks off after the development is complete. This makes upfront rebate on Guaranteed Rental Returns a more attractive option.”

“As the market matures,” continues Ea, “I hope to see developers put less emphasis on rental returns, and establish a good balance between local buyers who will reside in the property versus those who buy purely as an investment.” Looking at both sides of the Guaranteed Rental Returns debate, rental guarantee is important for investors who need immediate reassurance on their investment - however, the guarantee is only as good as the strength of the company offering it. 

Learn more about Learn more about Investing in Cambodia from realestate.com.kh now!

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