Despite the slowdown, property investments can give them good returns over the long term
Around this time of the year, non-resident Indians (NRIs) visit India in droves. Many of them use their time to purchase real estate for self-use when they eventually return, or as an investment. With the realty sector witnessing a downturn, many of them are asking whether it makes sense to invest in what has been regarded a fail-proof investment in the past.
The case for investing
Experts are of the view that there is still a good case for investing in Indian real estate since it is a growing market with sound long-term prospects. According to Anshuman Magazine, CMD, CBRE South Asia, “Historically, the price escalation of real estate in India has been much higher than in most other countries. The market may have slowed down in the past two years, but the long-term appreciation that NRIs can get in India is likely to be much higher than in the country they live in.”
In the West, interest rates are lower, so NRIs can borrow money cheaply to invest in real estate. However, the price appreciation is likely to be higher in a growing market like India than in the matured markets of the West.
Real estate is a long-term, cyclical play. If NRIs invest now, they will have to wait out the period of slowdown. Having an investment horizon of at least seven years is a must in these conditions. However, the attractiveness of investing in a slow market is that you can get good valuations.
“Invest in an area where valuation is sensible and where you can expect to get good long-term returns due to the area’s growth prospects,” says Magazine.
Many of the restrictions that prevailed on NRI investments earlier have now been done away with. “Earlier, the process of exiting an investment and repatriating money was quite tedious for NRIs. But the government has made the process very smooth now,” says Magazine.
NRIs have to contend with currency risk when they invest in India. If the Indian currency depreciates sharply, their return on investment in dollar (or home currency) terms gets eroded. However, the rupee has been stable in the recent past due to India’s improving macro-economic fundamentals. If economic growth picks up, as appears likely, the currency is likely to remain stable in the future, too.
Strategy
NRIs should preferably invest in a city with which they have some connection. They should have relatives or friends living nearby, who can manage and keep a watch on the property on their behalf. If they invest in a city where they don’t know anybody, even carrying out minor repairs or paintwork could become an ordeal and they could be overcharged. Similarly, when they want to exit an investment, they will have to rely on brokers whom they don’t know. In today's slow market, there is the risk of being cheated out of whatever small price appreciation has occurred in the property by unscrupulous brokers.
If you are investing purely for returns, choose a micro-market where economic growth and job creation are likely to be high.
Pay attention to the demand-supply dynamics of the micro-market. “Markets where there is oversupply and where investors dominate will take longer to emerge from the current slump. Those where there is greater equilibrium between demand and supply, and which are more end-user driven, will recover faster,” says Sanjay Sharma, MD, Qubrex Realty, a Gurgaon-based real estate consultancy.
Choosing the right micro-market has become especially important today. Sharma says that even amidst this slowdown, there are pockets where prices have remained stable (that is, they have not corrected). “Usually these are areas which are well inhabited, where apartments are ready and easy to rent out, and which are at a comfortable distance from places of employment. Look for such pockets. As the market recovers, projects situated in such localities will witness reasonably good appreciation,” he advises.
Precautions
Due to the slowdown, developers are finding it hard to sell apartments and raise cash for initiating or completing construction of their projects. According to experts, this state of affairs may continue for some time, at least in markets like the National Capital Region. In such circumstances, the risk of project delays (even by big and reputed developers) has become very pronounces. One way that NRIs can circumvent this risk altogether is by investing in ready-to-move-in projects.
NRIs should also choose the right payment plan. In a down payment plan, you pay a high percentage of the total cost of the apartment (80-90 per cent) at the time of booking and 10-20 per cent after possession. In lieu of paying so much money upfront, the builder gives a discount of 10-15 per cent on the price of the house.
According to Sharma, “In today's slow market, avoid paying a high proportion of the cost upfront. If the builder delays the project by three-four years, the 10-15 per cent discount will not seem so attractive.” Go with either a construction-linked plan or a subvention scheme, where a small portion of the total cost is paid upfront and the bigger portion is deposited at the time of possession.
After investing in a project, an NRI should try to build a rapport with his co-investors in the project and monitor its progress. Form an online group. In case the project gets excessively delayed, you may have to get together with others to, first, make a representation to the builder, and if things come to the worst, to file a case in a consumer court.
Regulations that NRIs must observe
- NRIs cannot invest in agricultural land, farmhouse, or plantations. While they can inherit such property, they can’t receive it as gift
- NRIs can sell residential/commercial property to an NRI, PIO or resident Indian. But can sell restricted categories only to a resident Indian
- If an NRI brings funds for property purchase from abroad or pays out of NRE, FCNR account, he can repatriate money after sale via the same route
- If property is purchased using local funds, the money from sale goes into an NRO account. The same holds for inherited property and rental income
- Proceeds of only two residential properties can be repatriated
