An increasing number of Indians are investing abroad, giving into the lucrative deals and returns that some countries offer. Vikas Gupta gives the pros and cons of such investments.
The Chinese investors flooded the USA, UK, Canada acquiring $38 billion in commercial property and residential property in 2015. To give you a perspective, that’s a little less that India’s total taxes collected from individual tax payers. Learning about the deals, many elite Indians are also losing their virginity for investing abroad which often offers better overall package of deals and returns.
For example: In 2015 about 1200 Indians applied to USA in EB 5 program that directly gives green card and citizenship quickly.
Amit Kedia (name changed) an investor who has bought real estate in USA says, “I was sceptical at the beginning as we have less control over what is happening that far but the developed markets have rectified their mistakes of over speculation and caps the number of investors in a project. For example, the builder puts in the contracts that say out of 100 apartments, only 20% will go to investors and the remaining to actual users only. It is also matured in terms of what you see on paper is what you get kind of market.”
According to Anuj Puri, Chairman of Jones Lang LaSalle (JLL) India, “Last year, the RBI doubled the previous remittance limit of $125,000 to $250,000, effectively making it more than viable for Indians – especially married couples who can combine their remittances – to invest in properties abroad. Broadly, speaking, the profiles of people who are interested in investing in real estate in other countries are business entrepreneurs, real estate investors, the C suite company cadre and HNIs. A significant amount of interest comes from Indians who have offspring studying in foreign countries.”
|S no||Investing in India||Investing abroad|
|1||Sold on Super built up which is 45-75% higher than carpet||Sold at carpet rate|
|2||Less transparency, one sided contract||Transparent, fair agreements|
|3||Parking charges not included||Parking charges included|
|4||Judicial remedy takes 5-10 years||Judicial remedy takes 3-6 months|
|5||Delayed and stalled projects common||Less common|
|6||Use of black money common||No use of black money|
|7||High loan interest rates 9% pa||Low interest rates 3%-4%|
|9||Low quality of city infrastructure||High quality with public transport, parks, hospitals, universities, roads, libraries etc|
|10||Price have only corrected 10%-20% from peaks||Have corrected 25%-50% from peaks|
|11||Better capital appreciation but low rental yield||Better rental yields|
|12||N/A||Priority VISA and Provision for Citizenship|
|13||Service tax on rent 15%, Income tax 33%||Dubai no tax, USA 22%, UK 17%|
According to Rajanya Ravasia, Director at Adventum Wealth Management, “There are three components to wealth creation from real estate. 1. Capital appreciation 2. Rental yields 3. Rupee, which has been losing value every year because of inflation differential. Capital appreciation will not be much anywhere in the world from here on. So, when we invest in mature markets like USA and UK; we are sure that stable rental yields and dollarized income will certainly generate secured systematic wealth over long term. Every HNI must have some exposure in these markets in their portfolio. It also provides a natural hedge.”
To explain the positive yield and leveraging: if you invest Rs 100 paying Rs30 down payment and Rs 70 loan. You will earn Rs 5 as rent and minus – Rs 2.1 (3% on Rs 70 loan) and hence earn = Rs 2.9 on Rs 30 investment which is 9.6%. This return is excluding capital appreciation.
|Country||What can you buy for 1.5-2 cr||Rental yield p.a||Visa/ Citizenship|
|India||Small flat or 2bhk in suburbs||1-2%||NA|
|USA||Small flat in outlying areas||5%-6%||6.7 cr, Citizenship|
|UK||Small flat in selected parts of London||5%||17.8 cr – Tier 1|
|Singapore||Family flat in outlying areas||3.5%-4%||0.25 cr- Entre pass|
|Dubai||2 bedroom Luxury apartment||7%-8%||1.82 cr, 3 years visa|
|Spain||2/3 BHK apartment||5%-6%||3.75 cr, Citizenship|
So why is it lagging behind?
Indians are still opening up the idea of offshore investing as bad experience of Indians construction companies, fear of the unknown, paperwork required, non-consumption of black money and lack of information have laid a bad perception among investors. The Indians who do invest currently are either frequent traveller, or who have been educated in those cities or well travelled.
When asked about the safety and security of the investment Vimal Anand from IREX India said, “Investment abroad are more smoother and transparent process and most times we have government appointed person holding board of director position to oversee the operations and the entire amount goes in an escrow account. Additionally, after your investment, there are professional management services who take care of the property with an annual fee of 5% to 8% of rent accruals.”
He also added, “There are also many unique hybrid investment opportunities like Hotels and car parks where a management company will rent out the rooms and car parks and the revenue from those will be passed on to the owners after their management fees.” Having said that Mr Rajanya says, “Although those are innovative and juicy concepts, I do not recommend them as an investment as they cannot give you clear title to your property and have fluctuating returns.”
Many economists including Raghuram Rajan feels that prices of real estate in India is inflated and must correct. In the past 15 years Indian real estate asset has given the best return of all the assets but as Warren Buffet quotes, “an investor of today does not invest on yesterdays returns”. So, if an investor thinks that income levels do not justify property rates in India and capital appreciation from here on will be limited, the only sure-short return will be the cash flow from rent.
Where to start from?
Exhibitions: International Real Estate Expo, October, New Delhi
Dubai property show, December, Mumbai
Visits: Visit few properties around, while you are travelling to a foreign country it will give you a perspective on the quality, size, investment and overall confidence in that market.