Wednesday, 31 December 2014

HOME LAND - How to invest in Swadesh

NRIs wishing to benefit from the appreciation in Indian realty should exercise due diligence in their quest.

As the winter holidays begin, a large number of non-resident Indians (NRIs) visit India--some to meet their relatives and others to find grooms or brides for their grown-up children.

Nowadays, another important objective they have in mind during their trip is to buy real estate in India. Here, we look at some of the crucial points NRIs must pay heed while making such purchase.

Why NRIs Invest in India:
Many NRIs, especially those living in the Middle East, don't intend to retire there. They plan to return to India and settle down in their home country after retirement.With this objective in mind, many of them invest in residential real estate in India while still working abroad.

Many NRIs have relatives--old parents or brothers and sisters--in India. Sometimes they buy residential real estate for their use.

Nowadays, a growing reason for buying real estate is that they want to invest in Indian realty. The high returns from real estate in the previous decade though not in the past couple of years-has attracted many to invest in destinations like Gurgaon, Bangalore, Pune, etc.

Finally, Indians - both resident and non-resident are comfortable investing in physical assets and real estate ranks high in their list of preferred investments.

A large portion of the NRI population comes from states like Punjab and Kerala, where land has traditionally been a much-coveted investment option.

Will Returns be High?
Over the last 10 years, the returns from real estate have been significantly higher than the average over the past 30-40 years. The theory of mean reversion applies as much to real estate as to any other asset class.

According to this theory, the long-term returns of all asset classes converge towards a mean or average level. Hence, asset classes that have done well in the past are unlikely to give as high returns in the future.

Going by this theory, the returns from real estate may not be as high in the near to medium term as they have been in the past 10 years or so.

A study done by real estate consultancy Liases Foras found that the level of inventory available in most of the top cities of the country is very high now. The consultancy concluded that prices may not move up rapidly in most of the country's top cities for at least a year and a half due to this.

At the same time, one must keep in mind that India is urbanizing rapidly. Every year lakhs of people move from villages to cities, creating demand for real estate in urban centers.

Therefore, the returns from real estate will not be all that poor either. However, NRI investors will have to be patient and have an investment horizon of 5 years or more.

Exchange-Rate Risk:
NRIs should also be aware that the movement of the exchange rate will have a bearing on their ultimate investment return. Suppose that a US-based NRI invests in India and in 5 years the value of his property appreciates by 30%. But if over this period the Indian rupee depreciates in value against the dollar, it could significantly erode the NRI's gains.

Understand the Laws:
NRIs investing in India should understand the laws that govern their investments in India. There are, for instance, restrictions on how soon the profits from a real estate transaction can be repatriated.

NRIs also need to understand the taxation framework. In case of some countries, there could be double taxation of gains. “Only those with the wherewithal to tackle these ground-level issues should invest in Indian real estate. Those who don't have relatives or friends in India to run errands for them may find the entire experience difficult to manage,“ says Vishal Dhawan, chief financial planner at Mumbai-based firm.

The NRI should also check how many banks are lending to buyers in the project. At least 4-5 banks should be lending. If all these banks have done their due diligence, all the papers and permissions of the builder are likely to be in place.

Finally, NRIs should not get swayed by what has been said on the builder's website. “Many small and mid-level builders have developed glossy websites where they make exaggerated claims. The pictures posted on these websites are not real. The NRI should get the builder's claims verified by either visiting the site or getting someone to do it for them,“ Sharma says.

Fast Fact: High returns from real estate in the previous decade though not in the past couple of years has attracted many to invest in destinations like Gurgaon, Bangalore, Pune, etc.

High Point:
1.) Many NRIs, especially those in Middle East, don't plan to retire there.0
2.) They intend to return and settle down in India after retirement; so many of them invest in residential real estate here.

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