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Real Estate Investment by NRIs (Non-Resident Indians) in India, is primarily driven by emotional quotient rather than economic sense. I meet a lot of people who quote the prices they bought a property at 10 years back, and what the “market rate” is today. Most of them do not however take into account the high rate of interest that they borrowed at and what they actually ended up paying for it in total. If you take that into account, the gains they are assuming would be reduced significantly. This is not even taking into account the price they will actually be able to receive, if they were to try and sell it today, compared to the “market rate” of the property in question.

Investment in the Indian real estate sector has to be considered in a holistic manner, the returns have to be assessed after duly considering mortgage interest rate trends, exchange rate fluctuations, tax regime on capital gains, rental yields etc., The perceived value of the investing in Indian real estate sector may be much lower than the actual realizable value of realty in India .

Understanding the underlying trend

For the financial year 2018, the NRI investment in Indian real estate sector was $13 billion, this is likely to grow to ~$26 billion by the year 2022. NRIs have been keen investors in properties in cities such as Mumbai, Delhi, Pune etc., sometimes in bulk through consortia. As per Independent market analyst, Liases Foras, NRIs have invested ~8%-10% of total real estate market in the country. The key countries accounting for these flows are UAE (20%), US (18%), UK (7%) and Canada (6%). The World Bank Report (2018) estimates that the NRI investment in Indian real estate sector could grow to 30% – 35% of total remittances to India by 2022. The Indian Government has introduced reforms pertaining to the real estate sector which makes the environment conducive to attract more investments from these counters. 

Stagnant market dynamics

Property prices in India have grown considerably over the past decade and at a crucial juncture, where the price appreciation has gradually moderated. Although, the demand continues to exist, the price appreciation does not seem to happen at a rapid pace. If today you try and sell your property in India, you will probably discover that it is a buyers’ market. This is primarily due to the undue rise in prices in the past, despite little or no change in the fundamentals of the sector or macros in the economy. . A comparison between the 5 -year growth rate and past year growth rate indicates the observation made above. Further, there are other markets around the world which provide better opportunities within this sector.

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Source: The Global Economy; The Global Property Guide

The market dynamics has seen a slight lull after the announcement of RERA (Real Estate Regulation and Development Act), the sector saw a brief downtrend also due to the demonetization initiative. However, the regulatory reforms and demonetization are in the past. The current challenge is the sluggish rate of property development on the backdrop of stringent statutory adherence, the slowing economy and muted rate of growth of employment in the country.

Rental yield trends

In the past decade, increasing demand for real estate has sent the prices skyrocketing to the extent that more properties are overpriced even today. Although, the market from the pricing perspective has seen a lull since 2013, most properties are still overpriced. The price appreciation has translated to abysmally low rental yields. Rental yield refers to the annual rental income derived from the property as a percentage of purchase price of the property. The rental yields in India is the lowest across the world. The average rental yield stands at 2.2% which indicates that this aspect should not be one of the key considerations to invest in a property.

Consider the interest rate on mortgage

NRIs are eligible for home loans from Indian banks, however, the process is far more stringent and the documentation is quite elaborate. Further, the tenure allowed on such mortgage is lower as compared to that of resident Indian and the interest rate is slightly higher. Despite all these hardships, it is interesting to note that the interest rate has hardened over the past few years, thereby making it dearer for the NRI to seek home loan in India. The home loans interest rates could range anywhere between 8.8% – 11.25% per annum for an NRI. This is much higher than the rental yields and the annual price appreciation of property. Further, when RBI reduces the interest rates, the benefits reflect in NRI home loans much later as compared to that of resident Indian’s home loan.

In fact, the difference between the mortgage interest rate and the rental yield is highest in India, indicative of the fact that the inbound rental income is at the lowest and the outflow of interest rate is at its highest. This makes the proposition of investing in Indian realty even more unattractive. 

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Source: The Global Economy; The Global Property Guide

Tax regime applicable for NRI investment in Indian realty

The returns earned by NRIs from real estate investment in Indian real estate can be in the form of rental income or short – term / long – term capital gains. All these means of returns are taxed. Below is a representation of the taxability of the gains derived –

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The taxation in India is considered high among other nations where the taxes are more conducive to the individual addition economic value. 

The tax foundation which releases the International Tax Competitiveness Index (ITCI) lists the top 35 countries which offer conducive investment / earnings environment from tax perspective. India has not made the cut , with the current regime, it may not make it to the list unless some major populist measures are undertaken. The political environment in India is indicative that no such major measure is likely over the next 5-year horizon. Many countries in Europe, Middle East, America are considered tax havens from investment perspective. 

Exchange rate fluctuations

The exchange rate fluctuations have favored the NRIs in the past 2 years, the weakening rupee has made the real estate market attractive for the NRIs. There is however, no evidence of tandem between the real estate market and foreign exchange. The extreme choppiness in the exchange rate fluctuations may not counter effect the long-term business cycle of real estate market. Studies by Addae-Dapaah & Wilfred, (2009) indicate that inclusion of exchange rate fluctuation into the analysis of international investment can substantially alter expected return and risk from real estate investment. Further, the returns gained by conducive exchange rate fluctuation is often lost by the reduced income generated from real estate investment at the destination country. For example, the weakening Indian Rupee is primarily on the backdrop of lower property price appreciation, lower rental yields, reduced supply and increased raw material costs. Hence, the gains from a conducive exchange rate environment is clearly outweighed by other aspects which are under extreme stress.

Need v/s Want

The ‘need’ to have a roof on one’s head is pertinent and availing a mortgage towards fulfillment of this need does not require any investment analysis. On the other hand, if an NRI ‘wants’ to invest in India realty, then it is necessary to evaluate other opportunities and various investment parameters to ensure that it makes economic sense.

This brief write-up is intended to give you a perspective of investing in Indian Real Estate while taking out a mortgage. There may be individual circumstances in which, it would make sense to take this route. However from a pure economic or investment standpoint, I would urge some caution while making a decision which involves a significant outlay for most people.

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