THE NR EYE: Real estate investments beckon NRIs

The hike in interest rates by the Reserve Bank of India, the ongoing regulatory reforms by the government and enhanced liquidity place non-resident Indians in a very good position to park their excess funds in property back home।

These factors, coupled with the phenomenal growth pattern currently being experienced by the real estate market in India, have not gone unnoticed on the real estate companies which have high expectations of overseas Indians।

India’s FDI climbed to a record-breaking $11।2bn in 2006, a 155 per cent year-on-year increase. Reformed real estate investment regulations for Non-Resident Indians (NRIs) and more crucially foreign investors have provided the impetus to drive the value of the Indian real estate market towards $50bn by 2010.

In 2005, the Indian government announced that FDI in the real estate sector was permitted through the ‘automatic route’, in other words without requiring additional ministerial approvals, streamlining the investment process। Certain guidelines are in place regarding minimum land areas to be developed and minimum capitalisation requirements, but the net effect has been a massive inflow of foreign capital. It is estimated that capital worth $7bn will be pumped into development projects over the next year, much of that emanating from overseas.

The boom is not at all surprising, what with a population of 1।2 billion, growing annually by 1.4 per cent, a cost effective and educated work force and economic growth of eight per cent per annum. These conditions combined with competitive interest rates and a burgeoning IT industry, are driving the demand for not only residential but commercial space that is expected to reach 70 m square feet within three years, with retail developments taking up to an 11 per cent share.

The Indian government now has recognised the demands of NRIs and people of Indian origin to own pieces of property and over a period of time what we have seen is that the investment is both for them to come back and some form of speculation because India as a market now is giving good returns and the economy is booming so a lot of people are looking to come back.
The rules have been much simplified and it has become much easier to buy property for the NRIs। The new act FEMA (the Foreign Exchange Management Act) that is a vast difference from the regulation act (FERA) has made a tremendous difference in acquisition of property and sale of property and even repatriation of money if one has got property and he is selling it of. Overall things have improved for NRIs and it is a great time to be here.

The government of India has granted general permission for an NRI to buy property in India and he has to pay no taxes even while acquiring real estate India but however certain taxes have to be paid if he is selling this property। He would require a PAN card if he has rented out this property and he wants to repatriate that money but if it is going to be a sale of property depending on time or the duration of time he has held the property, the sale proceeds would be subject to capital gains tax and as of now if he has held the property for less than three years then he would be paying roughly about 30 per cent tax and if the property has been held for more than three years then 20 per cent as capital gains tax and that is what he will have to pay.

The list of incentives is quite comprehensive and, for example, allow an NRI to acquire property in India with exception to agricultural/plantation property or a farm house without formal permission। They are also entitled to transfer this property to any resident Indian without the prior permission of any government agency. An NRI can also inherit property of another NRI provided the property in question was bought in accordance with the provisions of the foreign exchange law in force at the time of acquisition.

However, a declaration form for acquisition of commercial property for carrying on any industrial, commercial or trading activity by their proprietary / partnership firm in India is required to be filed with RBI within 90 days from date of purchase।

Money can be repatriated abroad if bought with the foreign exchange earned abroad. That too, only in the sale of two residential properties but any number of commercial properties.
NRIs wanting to park their funds in India are taking the real estate market seriously enough to form informal groups to back select projects। Around 25 million NRIs are investing in immovable property in India, but unlike HNIs and financial institutions they are keen to invest in the housing segment, rather than commercial projects.

NRIs tend to invest in residential properties in India, preferably in their native towns or cities where their relatives and friends can supervise such projects। However, funds are now being put into some commercially viable projects as well, such as malls, hotels and office complexes. Around $600 million has poured in from such investments in the last one year, with a single investment from a group averaging between $10 to 15 million.

According to media reports, Law firms are receiving five to six enquiries every week from overseas Indians who club together and float a fund to build a property, stay on through the lock-in period, and sell it at a good profit।

Jaipur, Hyderabad, Vijaywada, Ahmedabad, Baroda and Surat have seen groups of NRIs making such investments in malls, office spaces and residential townships। These investments are generally routed through Mauritius to avail of tax benefits.

It is a win-win situation for both investors and real estate developers. The former earn handsome returns, while for the latter, it’s low-cost credit. Some projects in smaller cities have yielded as much as 50 per cent returns. The rise in interest rates is bound to bring real estate prices down in a few months’ time, and that would be the ideal time for NRIs to strike.