Investing in Indian Property

In the second of a series of articles on property investment in emerging economies, Ruban Selvanayagam explores India as a feasible destination.

India’s Economic Growth

Whilst open to various interpretations, the general consensus of the International Monetary Fund (IMF), Goldman Sachs and the Organisation for Economic Co-operation and Development (OECD) is that India will be in the top 5 global economies by the year 2020.

As one of the ‘BRICs’ – an acronym coined by Goldman Sachs as a country that has strong potential to be one of the four leading global powers by 2050 (along with Brazil, Russia and China) – evidence points to India’s GDP per capita quadrupling and its economy surpassing that of the United States by 2043.

From a general economic perspective, the main national income producer is its service sector followed by industry and agriculture – all of which are set to expand.  Like the other BRIC nations, the middle class population continues to grow (currently standing at over 350 million) and the proportion of its population with over US$ 1 million of investable assets has also risen by over 50 per cent in 2009.

As with most emerging economies, it is not without its risks – with both domestic and international commentators indicating the need to reign in recent inflationary pressures, control national borrowing levels, improve education, infrastructure and environmental policy as well as make the necessary progress in the diplomatic relationship with neighbouring Pakistan over the Kashmir region.

Buying Real Estate India

The growth of the economy has been complemented by a thriving housing sector which, whilst previously viewed as being restricted to solely the domestic market, has witnessed an increased amount of non-residents investors (NRIs) – particularly since the onset of the global economic downturn.  The main regions of foreign real estate interest are the larger metropolitan conurbations of Mumbai, Delhi, Bangalore, Kolkata and Chennai amongst others which are witnessing massive population influxes and gentrification due to rising employment opportunities.

Another of the main triggers for the rise in overseas investment was the Foreign Exchange Management Act of 1999 which permitted real estate acquisition for foreigners as well as providing that there is no limitation with regards to the amount of assets that can be acquired.  It should be noted, however, a formal request will need to be made to the Reserve Bank of India (RBI) should agricultural property be a purchasing intention.

The following essential (and non exclusive) rules should be noted:

• · Property can be purchased by a foreign investor using a Non Resident Ordinary Rupee Account (NRO), a Resident External Rupee Account (NRE) or Foreign Currency Non Resident account (FCNR);
• · A resident Indian must receive approval from the RBI prior to selling a property to a NRI;
• · NRIs can sell property to an Indian or another NRI;
• · A Person of Indian Origin (POI) may acquire a property from the country by means of inheritance, providing the asset was purchased under the realms of the foreign exchange law at the time of initial acquisition.

Indian mortgage finance for the overseas investor is also available (although many lenders often change their criteria in this regard) and you can expect to go under a strict underwriting procedure as well as pay above average rates of interest (approximately between 10 and 12 percent) with a 80 to 85 percent loan to value borrowing level.  There are also several international companies in operation in the country – including EDAW from the US, Keppel and Lee Kim Tah from Singapore –who offer foreign investment finance programmes.  Investors looking for more security often explore Real Estate Mutual Funds (REMFs) and/or Real Estate Investment Trusts (REITs) – examples of which include: the HDFC Real Estate Fund, Edelweiss Capital, the Kotak Mahindra Realty Fund and ICICI-Tishman Speyer to name a few.

Upon the decision to purchase physical real estate, investors can be assured that the Indian legal system protects overseas buyers in exactly the same way as an Indian resident.  It is highly advisable to employ an experienced lawyer with international experience (the UK Law Society has a list of approved Indian firms).  In any contract of purchase, the following needs to be place:

• · Full title certificate (professionally translated where necessary, although English is widely spoken and written in the real estate industry);
• · Full plans and specification of the property and surrounding land;
• · Location title document showing full information;
• · An allocated registration number.

As well as acquisition costs (registration, legal and administrative charges), income tax currently stands at 30 percent although there are various interesting mechanisms in which this can be offset.  Examples include deductions if the property is bought with borrowed money; benefits for owning more than one property and offsetting procedures if funds are placed in approved bank accounts.  Other taxes to be aware of are: stamp duty (varies according to the state invested in); a wealth tax (1 percent on the value of properties over 1.5 million Indian Rupees) and capital gains tax (currently standing at 22.66 percent, for which there are deductions should the funds be reinvested in India or placed in government bonds).  It should be noted that India and the UK have a double taxation relief agreement meaning no further obligations would be necessary when repatriating funds.  As with legal advice, it is strongly recommended to seek the services of a suitably qualified international accountant / tax specialist.

Ruban Selvanayagam, Property Investor / Developer

Linked In Profile: http://br.linkedin.com/in/rubanselva

Ruban has been involved in UK property since 2005 and has built a residential buy-to-let portfolio located in the East Midlands and London as well as co-developing PS Investor Services and its associated information sites (see the organisations’ regularly updated blog here: http://www.psinvestors.co.uk/blog/).

Since 2008 – with a strong desire to travel and diversify his business objectives – he has been making regular trips to Brazil to explore property and land opportunities in what is one of the world’s fastest growing economies.  Investors interested in finding out more about this country can access his free information site with detailed guides, hints, tips, strategies, statistics and more: http://www.brazilinvestmentguide.com/.

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