Investing in Indian Real Estate
A recent report by the Chamber of Indian Industries pointed out that globally real estate is and should always be considered as an income-generating asset.
Analysis of Real Estate as an investment opportunity
The key evaluation criteria for investment in residential/ commercial property in India are analyzed as below:
- Typically, leasing residential and commercial property in metros could fetch a pre-tax return of 6-9% and 8-11% respectively. Capital appreciation, if any, would provide additional return on investment.
- Investment in real estate in India typically carries an entry load of 10-15% towards stamp duty, registration, brokerage etc.
- Real estate as an asset is not as liquid as investment in stock market, bank deposits etc.
- A power of attorney to a trusted friend/ relative/ professional would obviate the need of physical presence for legal formalities.
- Loans can be raised conveniently in India and abroad for investment in property.
- Loans can be raised in India by the owner and third parties against the security of the property for any bonafide purpose.
- Tax benefit is available on interest on housing loan raised in India.
- Tax exemption is available on re-investment of sale proceeds of property in eligible avenues.
The key considerations (from the perspective of real estate as an investment) to be borne in mind while selecting a specific property are:
- The prevailing lease rentals and scope for capital appreciation in the area where the property is located.
- Scope for infrastructure development around the property under consideration.
- Location and proximity to schools, hospitals, markets, public transportation etc.
- Actual property taxes to be paid.
Permissible investments for NRIs
As per the provisions of Foreign Exchange Management Act (FEMA), NRIs can freely invest in real estate as follows:
- Up to 100% in an Indian company in the business of real estate development with full repatriation benefits i.e. both the business profits and sale proceeds of original investment can be repatriated. Real estate development means construction of residential and/or commercial properties, office complexes, etc. Mere trading in properties is not permitted. Further construction of farmhouses is not permitted.
- Acquire residential/ commercial properties in India by way of purchase/ gift/ inheritance from a resident Indian or a NRI. Agricultural land, plantation and farmhouse cannot be acquired by a NRI except by way of inheritance. There are no restrictions on letting out of properties and repatriation of income thereon after payment of taxes.
The provisions relating to repatriation of sale proceeds are as follows:
- Sale proceeds of property acquired by way of inheritance can be repatriated without any lock in period up to USD 1 million per calendar year.
- Sale proceeds of property acquired out of Rupee resources is permitted to the extent of USD 1 million per calendar year subject to the condition that the property/ sale proceeds of property should have been held in India cumulatively for a period of 10 years.
- Sale proceeds of immoveable property acquired out of forex resources can be repatriated without any lock in period to the extent of equivalent oreign exchange originally invested. The profits can be repatriated to the extent of USD 1 million per calendar year. In case of residential properties, repatriation is restricted to two such properties.
The limit of USD 1 million per calendar year is a consolidated limit.
As one of the fastest growing country in the world, India gives you enough exposure and insight on where to invest your hard earned Money.
The most lucrative option by far for making a quick buck is the Stock Market, where one can enter and exit quickly without having too much to do and with Banking and Transactions being on Line with Information technology to its best, one can sit in a Taxi in New York and buy stock in India. The invasion and the tax lucrative mutual funds have come in a big way but buying real estate has not deterred an individual or an NRI in India as every one need the basic necessity of life and one of them is called "Home".
Residential Investment - Average Returns 5-8%
Investing in Residential Property has always been a good investment for every Indian as it gives a sense of security to one and gives that much required status in the society.
There are usually 2 types of Investments in Residential Investments.
1. Self Occupied - A self occupied property generally yields returns after you sell the same and the returns depend upon various factors like when you bought the property and when you sold it.
2. To be leased out - In leasing typically the returns vary from 5% - 7% annually only on the basis of rent received per year. The property escalation factors are not attributed here. With a lot of Multinational Companies, Foreigners, Banks etc in the market it is very easy to buy an apartment and lease the same out.
(In a combination of 2.00L Deposit and 18000 rent) The Rate of interest on a 2.00Lacs is generally calculated at 12% p.a and the banks of course give a lesser rate of interest. Hence, the calculation is notional and depending on the deployment of funds in a return based instrument which could be ranging from a private placement, mutual funds, private business placement etc.
A license period can vary from 11 months to 33 months.
The incidental costs for leasing out the apartment are:
Stamp Duty and Registration for a Period of 33 Months – Rs.10,200/- (Usually this is shared between the Licensor and the Licensee) Any upgrades to the apartment as such.
Brokerage Fees of 1 months rent and 1% on the Security Deposit.
Usually you can get a client with in 10-30 days from the time you put your property up for Licensing.
Typical Agreements are Leave & License agreements.
Commercial Investment - Average Returns 11-14%
Investments in Commercial Properties leased out to Multinational Companies can be money spinners in a span of 6 Years.
You can lease a property to an MNC or a Bank or any other corporate house for a period of 99 months giving you a constant return over your investment.
With Rent Discounting you can utilize the amounts recovered to spin of another property investment or pay of an existing loan against an existing property and within no time you will find yourself becoming a landlord of a few properties.
Retail Investment - Average Returns 11-14%
Nearly every Metro City in India has experienced the New Retail Invasion of a new concept of Malls, Multiplexes and top it up with the Every Friendly Indians who love eating out….
In India, Malls and Multiplexes have changed the culture of going out on a Sunday or a Saturday evening, instead of going to a Park (which are actually very few) or a Beach people have started going to these Malls where you can if you choose to spend 2 hours in the air-conditioned and the scented environment seeing the latest trends and the New Showrooms opening up, which just lure you to get in them…
This will further boost the retail companies which usually have there presence in all the Malls across the city as they look at the volumes at the end of the day..
Given below is a self explanatory comparison on different instruments available for Investments today.
|Type of Investments
|Bank Deposits and Govt of India Bonds
||4 to 5.5%
||Banks offer liquidity but if you place your funds in the Bonds you can be locked in for the term applied for.
|Stock Markets & Mutual Funds
||Your Principle amount can double or shrink in a matter of days.
||Offers great liquidity, but you have to be constantly monitoring the same.
|Commercial Real Estate
||Returns of 8 to 11% P.A., along with a steady income flow to plan your future investments.
||Long term investment, coupled with benefits on enhancing liquidity through rent discounting, planning your future income inflows. Escalations in the prices in the market can make your asset grow notionally.
|Residential Real Estate
||Returns of 4 to 6% p.a.
||Mostly bought for future self usage, good chances of growth in the price of the real estate over a period of time, safest investment as per the Indian mind set.