There is often fierce debate about the validity and value of rental guarantees as an incentive for property investors. Some investors and developers steer clear of them all together believing them to be a misrepresentation of the product and a hoodwinking of customers while others cherish them as an element of security for buyers and as a result a strong sales incentive.
1. Rental Guarantees that are “Priced In” to the Property
For off-plan and resort projects, it is often the case that the rental guarantee is priced in to the property to some degree. Obviously this entirely negates its value to the investor. Investors should compare the prices of the property with a rental guarantee to other similar properties in the market to understand if its value has been priced in.
2. Rental Guarantees can Protect for Early Operation
A new opening of a resort or phase of properties can take some time to get operating properly. This is a high risk time for investors and operators. While there may be some uplift to the price in order to cover a portion of the rental guarantees
3. Rental Guarantees Can be Based on Previously Achieved Results
For projects already operating with an onsell, a rental guarantee can be based on actual results for the products specifically.
4. Rental Guarantees with No Underwriting
Depending upon the profile of who is offering the rental guarantee, a rental guarantee which is not underwritten by a bank or an insurer may not be worth the paper its written on. While the income achieved should be sufficient to pay the guarantee,
So, is a rental guarantee a good or a bad thing? If a rental guarantee is structured to genuinely reflect the rental opportunity of a property then it can be a valid tool. This way it should not have been ‘priced in’ to the property and acts as an incentive to the operator to achieve the needed yield but with a realistic parameter. Additionally, for new properties or resort operations, a rental guarantee in the early years