India currently has some 600 million sq ft of commercial real estate inventory worth over $70 billion and it opens up a huge investment opportunity for non-resident Indians living all around the world.
In the next 6 to 8 quarters, the primary focus of this investor community will be on the commercial space as home prices are expected to remain stagnant for another couple of years, say industry trackers.
As per Colliers Research, traditionally, NRIs have mostly invested in high-end, luxury residential homes in India. However, post-demonetisation, NRIs started looking at mid-end and affordable housing projects. With the government pushing the agenda of affordable housing and offering various incentives and schemes to promote the same, affordable housing sector is emerging as a lucrative space for NRIs, says Surabhi Arora, senior associate director, research at Colliers International India.
“Lately, NRIs are showing more interest in commercial properties in the country as the space offers better returns and stable income over many years,” adds Arora.
Commercial realty offers constant returns through rent-generating properties that are tenanted by blue-chip companies. They also have relatively greater security, since they are booked for a lease period of 9 to 15 months with a minimum 3 years of lock in.
The contracted annual appreciation of 5 per cent in the lease agreement also factors in the inflation and keeps profits afloat. Also, NRIs are entitled to most of the tax benefits that an Indian resident enjoys on purchase of the property. These are the positives that are drawing NRI investors to Indian realty, say market observers.
The NRI interest is also driven by long-term fundamentals such as emotional connect, safeguarding retirement plans, better returns and yield on investments, and depreciation in the rupee’s value, notes Anuj Puri, chairman of Anarock Property Consultants.
From year 2000 to 2014, NRI investments in Indian real estate reached substantial levels ranging between 10-18 per cent annually. However, there was a market slowdown starting from 2015. A slew of reforms and policy changes such as demonetisation, Rera and GST have heavily reduced NRI interest in the residential sector, says a report from Anarock.
“Now we see a visible shift in NRI investors’ focus towards commercial properties, and this is likely to continue until the residential sector gets into a clear revival mode,” comments Puri.
Confirming the trend is Naredco vice chairman Parveen Jain, who says, “We now see an increase in NRI investments into Indian commercial realty sector. A new simplified investment norm and Indian builders’ ability to offer world class office spaces and homes have helped to rekindle NRI interest in their home country.”
As per CBRE, the recent policy reforms, ease in processes, a drop in mortgage rates for housing coupled with developers’ willingness to cater to the global taste of NRI investors are adding momentum to the market.
A S Sivaramakrishnan, head, residential services at CBRE South Asia, said, “What we see is that luxury/premium villas and branded residences see more interest from the NRI segment. Green buildings too are gaining ground with this profile of investor. Property in India continues to provide better returns on investment than anywhere else in the world. For NRIs, buying a home in their native place is also a way of keeping to their roots.”
NRIs invest in real estate in India to earn superior returns since returns in developed countries are always below five per cent. Moreover, NRIs living in West Asia have fewer investment options as they cannot invest in property in those countries (vs those in the US or Europe).
Just a month after the demonetisation, prices of luxury, condominium properties have come down in the 25 to 30 per cent range in Mumbai, Delhi, Bangalore and Chennai making it attractive for NRIs investors.
“Currently, 40 per cent of our NRI clients are investing in Indian commercial real estate through fractional investment and during 2016, it was 17 per cent,” says Kunal Moktan, co-founder and CIO of propertyshare.in, a realty advisory platform.
NRIs also understand that real estate provides the best post-tax returns in India but certain level of hesitance, to invest, still exists as it requires personal attention and extra caution.
“Being geographically away from where the asset is located makes them anxious about how the property is being managed, what tenants are up to, whether the taxes/maintenance are paid on time etc. Most investors, therefore, gravitate towards investing in under-construction or early-stage projects managed by developers, even though the risks are higher,” says Moktan.
It is true that some NRIs have had bitter experiences with realty players in India.
Sudhakar Natarajan, a 65-year-old retired engineer settled in California, USA, invested almost Rs 3 crore to buy a luxury flat from a big brand builder in India. He made multiple international visits to Bangalore and Mumbai to tie-up the deal. His pick was a corner flat in the ninth floor of a 21-storey building that came with a lake view.
“I thought it was a good deal for a branded property. Some 17 months later I made another visit to Bangalore to see my flat. To my shock I have realised the builder has arbitrarily changed my flat to the middle of 13th floor, from 9th floor corner. The builder took undue advantage of the trust I put in a “trusted brand” and my local absence added to it,” narrates Natarajan.
Finally, with great difficulty, he was able to recover his money. “The builder enjoyed my money for over three years and he returned it without even compensating me with a decent interest. I had to make two additional visits and several Bangalore-Mumbai trips to recover it. So my net recovery was down by 30 per cent,” says a livid Natarajan.
In 2012, NRI investments in Indian residential real estate were around $7.5 billion while NRI investments, in commercial and homes, are expected to reach $11.5 billion in 2017.
Profile of NRI/PIOs investors in realty
Investment into Indian realty is led by NRIs from UAE, the US, Europe and Saudi Arabia. These NRI investors come under four categories:
NRIs from US and North America are mostly senior professionals in technology or BFSI; those from West Asia are senior professionals in the oil and gas, technology and BFSI; NRIs from South-east and East Asia, are mostly professionals in financial services while residents from Europe are senior professionals in the technology or BFSI.