It’s a familiar narrative: A non-resident Indian hears of a friend or relative who just had success investing in real estate back home. Eager to get a slice of the pie, the NRI begins researching how to invest in the Indian market from abroad, only to get lost in contradictory sources and complex regulations. Certain questions keep coming up, and finding answers can be far from easy.
This article aims to fix all that by answering common questions.
Why should an NRI invest in Indian real estate?
With savvy investors in Indian real estate earning more than 20 percent annual returns in recent years, any NRI should consider making room in his or her portfolio for property. It is a timeless truth that real estate investments offer a dependable way to grow one’s wealth—particularly when selected in a high-growth area and purchased at a discount. Today, this idea may be even more relevant vis-à-vis the Indian stock market, which many experts believe is overvalued.
India’s economic fundamentals are rock solid. With a GDP growth rate of 7.1 percent, India is arguably the most exciting growth story in the developing world. It is expected to become the world’s third largest economy by 2030. Alongside this growth is an equally enormous influx of people to the nation’s urban areas: By 2050, Indian cities will add 300 million new residents, with millions streaming in every year.
Because all these newcomers will require somewhere to live, growth projections for residential real estate are strong. Demand was nearly 750 million square feet in 2016 and is conservatively predicted to increase by nine percent each year through 2020. This growth potential has not gone unnoticed by institutional investors, who poured US $32 billion in private equity into the sector last year. With India’s reputation as an attractive real estate investment destination on the rise, more growth is sure to follow.
NRIs are uniquely positioned to take advantage of this boom. Approached correctly, Indian real estate offers NRIs access to a once-in-a-generation opportunity to grow their wealth.
Where is the best place in India to purchase property?
Not all Indian property markets are created equal. To get the best returns, an NRI needs to examine the fundamentals of a particular market. Specifically, one should be on the lookout for cities that possess the characteristics described below.
- Fast population growth: this ensures that there will be a continual influx of people, all of whom will need somewhere to live
- High white-collar salaries: elevated incomes make home ownership easier for the average professional, boosting demand
- Low property prices: affordable prices make it easier for the typical middle-class family to buy a home
Frequently, the tendency is towards the historical juggernauts among India’s cities, such as Mumbai and Delhi, and Kolkata. Historical prominence is no guarantee of real estate growth, though: Both Mumbai and Delhi display several red flags as real estate investment destinations, including slow growth and overpriced properties.
Conversely, India’s new-economy cities – such as Bangalore, Pune, and Hyderabad – rank highly in the above metrics. One city stands out above all: Bangalore. Known as the ‘Silicon Valley of India’, Bangalore has seen over four million people move to it in the past decade, many of them for high-paying white-collar jobs. With housing prices quite reasonable as well, it is no wonder Bangalore is the top destination for real estate investment in India. JLL recently ranked Bangalore at the top of its ‘Most Dynamic Cities’ list, while PwC named it the best real estate investment opportunity in the Asia-Pacific region. In short, an NRI looking for a high-potential property investment should consider Bangalore.
Shouldn’t NRIs invest where they have family?
It is understandable – if not ideal – to gravitate towards one’s place of origin when looking to invest in real estate; after all, there is both an emotional attachment and a sense of familiarity. Additionally, many NRIs will have relatives who can go and examine the property firsthand, vetting the project as best they can.
There are two reasons not to look immediately towards one’s hometown. Firstly, as just discussed, one’s home city or state may not be the most profitable investment destination (unless that city is Bangalore).
Secondly, new options for vetting projects have emerged. Often, a potential buyer will try to perform his own due diligence on a project, ensuring that the land title is in order, the craftsmanship is up to par, and so on. This information can be difficult and time-consuming to attain, and its scarcity is a major reason why investing in India real estate has a reputation of being a hassle. At times, an individual buyer who thinks all the bases are covered will be snared up by some document that has gone overlooked.
However, in the past several years, a new type of real estate firm has adopted an innovative model. Known as an aggregator, such a firm specializes in online transactions. India’s leading real estate aggregator, SmartOwner, is highly reputable, has a proven track record of transparency, and performs all due diligence for its clients – much more thoroughly than an individual can. The importance of this due diligence cannot be overstated, as it makes remote purchase of a property far safer than in the past. Because of this new approach, an NRI can tap into India’s most promising opportunities, regardless of personal or family connection to a particular city.
What is the best type of property in which to invest?
Often, the best returns can be found in projects in which construction has not yet begun. In this early stage, the developer may offer a substantial discount on the market rate, meaning that much of the profit on the property is locked in prior to a single unit being built. However, one must be able to negotiate a discounted rate – or go through an aggregator such as SmartOwner which has – to earn the highest returns. With a discounted rate, returns are driven both by appreciation of the real estate market and by the value added to the land during development and construction, and the results can be quite substantial. Again, proper due diligence is essential before investing.
A completed or nearly completed project can also be a worthwhile purchase if bought at a discount. Many buyers gravitate towards these projects, considering them to be safe investments. However, prices in this phase are usually at or near market rates, meaning that most (or all) returns from such a purchase will be driven by appreciation. When acquired at non-discounted rates, this is a purely speculative form of investment, and the unwary investor can find himself at the mercy of the market. If one can attain a substantial discount on a completed asset, though – for example, if one buys through an aggregator that has negotiated such a rate – it can be an exciting opportunity with limited risk.
How do taxes work? Is there double taxation?
Nobody likes the taxman, and the prospect of dealing with tax codes in two different countries – and potentially being taxed twice – is often enough to cause NRIs to keep their money in their country of residence. Thankfully, India has treaties with over 80 countries to avoid double taxation, so it is likely an NRI will have to pay tax on any profits from the sale of the property only once.
The rate of taxation in India is determined by the length of time for which the property was owned. Short-term gains are taxed at around 30 percent, while long-term gains (defined in the most recent Indian budget as property held for over two years) see a tax rate of approximately 20 percent.
How do returns get transferred abroad?
Indian law allows NRIs to repatriate up to US $1 million per year from an account held at an Indian bank. Once the account is established, earnings can be wired to anywhere in the world. The limit is calculated per person, so a married couple could repatriate US$ 2 million, and family of adults could transfer proportionately larger amounts.
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Figuring out how to profit from the Indian property market can seem daunting. However, it remains one of the world’s foremost investment opportunities, and NRIs are perfectly positioned to take advantage of it. With the right advice and guidance, investing in Indian real estate is well worth the effort.