For the past couple of days, most leading newspapers have been carrying the advertisement of a real estate firm, and it is regarding ROI homes. The advertisement claims that it is a ‘now or never’ offer. It says studio apartments are available in Chennai from a starting price of ₹26.09 lakh but the effective price is ₹6 lakh only. One is curious to know how an apartment with a price tag of ₹26.09 lakh will cost only ₹6 lakh only.

On enquiry it is revealed that the terminology ROI stands for return of investment. The scheme works like this: Once the apartment is booked, the real estate firm will arrange for assurance from some reputed banks (or its subsidiaries) for return of ₹20 lakh at the end of loan tenure. Here the loan tenure means 20 years. For this payment of ₹20 lakh, the real estate firm will be incurring some amount now and the exact details of such payment are not in public domain. But when we analyse the method, we can understand the following features of the scheme.

First, equating ₹20 lakh of today with ₹20 lakh one is going to get after 20 years is highly misleading. Money has got a time value. Yesterday’s ₹100, today’s ₹100 and tomorrow’s ₹100 are not the same. The time value of money is the concept that a sum of money is worth more now than it will be at a future date due to its earnings potential in the interim. 

Let us work out how this ₹20 lakh can be arranged to be payable after 20 years.

If someone invests ₹2,07,333 now at the interest rate of 12 per cent per annum the maturity proceeds will be ₹20 lakh after 20 years. When we analyse the Sensex return since 1979, the compounded annual growth rate is approximately 16.39 per cent. If someone invests ₹1 lakh today for 20 years, at a CAGR of 16.16 per cent the maturity amount will be ₹20 lakh.

Hence what the real estate firm must be doing is to part with just ₹1 lakh with some banks under wealth management scheme to ensure around ₹20 lakh return to the buyer of the property. Moreover, from the fine print it can be understood that it may be indicative return, which may differ from the actual return.

When the apartment price is ₹26.09 lakh, this investment of ₹1 lakh is hardly below 4 per cent. Hence what actually the buyer of the real estate is getting is a discount of 4 per cent and nothing else. Rest is just hype created based on distorted facts.

The guidelines

There are some guidelines under the Real Estate (Regulation and Development) Act, 2016 (RERA) with regard to advertisements by real estate firms. As per these guidelines “Advertisements published for inviting buyers for the purchase of apartment/plot, shall be truthful and based on the facts as have been revealed to the authority with strictly no exaggeration or misinterpretation which may create a biased impression in the minds of the buyers about the property they are interested to buy.”

Even the Advertising Standards Council of India (ASCI) is committed to the cause of self-regulation in advertising, ensuring the protection of the interest of consumers and the ASCI seeks to ensure that advertisements conform to its Code for Self-Regulation, which requires advertisements to be legal, decent, honest and truthful, and not harmful while observing fairness in competition. 

One expects the authorities to initiate steps to avoid such misleading advertisements in the interest of consumers.

The writer is a retired banker