Evolving NRI Real Estate Investor Landscape
Advocate & Solicitor and Partner at IndusLaw, Vivek Daswaney, talks exclusively with Realty Plus about the factors that attracts NRIs to invest in Indian real estate and how NRI investment pattern has changed and evolved over the years. Excerpts…
Factors that attract NRIs to invest in Indian real estate:
There are a number of factors which play a role in NRIs being interested in investing in real estate in India. Some of the key factors include wanting a base in India as many of them would eventually like to settle in India or at least have an asset base or a security in India. Needless to say, real estate is also an investment and a mode of earning income. Moreover, the fact that the Indian markets were relatively less affected as opposed to other countries by recession and ease of investment regulations by NRIs, also prove beneficial to make investments in India.
Opening of FDI & REITs :
FDI in REITs is permissible upto 100% under the automatic route. Over the last couple of years, several amendments were brought to the REIT regulations, in terms of taxation as well, to facilitate growth in infrastructure. The earlier requirement of having to hold at least two projects has now been diluted to one project. REITs are now also allowed to raise funds by issuing debt instruments. The government has been taking steps to make investments in REITs more attractive and feasible. REITs should start gaining momentum now and we should expect more interest from NRIs in these investments. As REIT provides an opportunity to gain the benefits of investments in real estate without having the hassle of purchasing and maintaining properties, there is a strong probability of NRI investments in real estate in India being diverted to REITs.
Government policies, rules and regulations:
Foreign investment in real estate is prohibited. However, ‘real estate’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts, which has been liberalised to a 100% under the automatic route. It is now also clear that 100% foreign investment is allowed in real estate broking services under the automatic route. This coupled with the Real Estate Regulation Act, 2016 (RERA) coming in should really boost foreign investment coming in for real estate. This means that now international broking firms can set up their subsidiaries or invest in their Indian counterparts directly. REITs are also eligible to receive loans from foreign entities under the ECB Regulations.
Which are the key regional markets for NRI investments:
Mumbai is an attractive investment destination for NRIs as it offers several types of investment options such as residential flats, offices, houses, etc. However, it does seem to be overpriced compared to the surrounding infrastructure it provides. Other metro cities in India such as Bangalore, Delhi, Ahmedabad, Pune, etc. may also be considered by the NRIs for investment as these cities provide ample of options including different locations, facilities, prices, infrastructure, etc. While Tier 2 cities does seem attractive destinations, if the investments are made purely for returns, the returns often do not justify the investments.
Which asset classes are most favorable among NRI investors:
NRIs have an option of investing in almost all classes of properties, residential, commercial, under construction, etc. However, the Foreign Exchange Management Act, 1999 restricts NRIs from purchasing agricultural land, plantation, farm house in India. NRIs may acquire agricultural land, planation, farm house in India only by way of inheritance.
It is difficult to identify with certainty which would be the most favourable asset class for NRIs. This is also because many decisions are made not keeping market conditions in mind, but rather for emotional and personal reasons which is impossible to justify and categorise. Many NRIs have burnt their fingers in the past by investing in under construction properties. However, in places where the RERA machinery is working as per expectations, under construction projects may lead in being the most attractive asset class. Also Integrated Township projects are attracting a lot of traction.
What are the main challenges that are faced by the NRI investors:
In case of residential properties, the FEMA Regulations restrict repatriation of sale proceeds to not more than two such properties.
Further, there are not many specialised companies for managing properties in India and reliable brokers. Brokers are also an unregulated class leading to frauds and distrust.
Not having a uniform code and different personal laws of inheritance poses a further challenge at the time of inheritance.
Consolidated efforts is required from various departments to address these concerns.
The tax implications and other financial considerations:
A non-resident would be subject to tax in India on all income which is received or deemed to be received in India or if it accrues or arises or is deemed to accrue or arise to him in India. There are also certain incomes which are deemed to be sourced in India. All income arising directly or indirectly through or from any property in India or through or from any asset in India shall be deemed to arise in India. Therefore, any income from transfer of any property in India is subject to tax in India in the hands of a non-resident. If a DTAA exists between India and the country in which a person is resident and is subject to tax, the provisions of the Income Tax Act in India would apply only to the extent that they are more beneficial than the provisions of the applicable DTAA. There are also withholding tax obligations on the transferee of a property. Any NRI investing in India cannot avoid having a tax advisor constantly overlooking his investments.
How are developers promoting their projects among overseas buyers:
After the RERA came into force in May, 2017 the real estate developers across the country have started working in an organised way. RERA has brought financial discipline and transparency in the real estate sector. As RERA mandates the developers to register the projects without occupation certificate, before marketing or advertising them, the developers who have registered their projects with RERA, are marketing their registered projects by providing the RERA Registration Number. Persons interested in investing in a project can check the details of the developer, all the documents / permissions relating to the project along with the status of completion of the project on the RERA website of the state. Investors are now keen to invest in projects registered with RERA, as it shows the credibility of the developer, and provides security to the investors.
Most of the Developers market and advertise their projects on social media and also give early bird discounts to the initial investors.
Many developers collaborate with successful brands in the market for launching their branded residential properties, which makes it a high premium property compared to the non-branded luxury homes in the market. Developers are also launching township projects, providing all the facilities such as schools, hospitals, recreational areas, etc. within the same vicinity, which attracts the investors.
Developers also tie up with the banks for providing home loan facilities to the potential investors, which attracts the investors who are unable to arrange for monies in accordance with the law, for purchasing immovable properties.
Developers are now more active in participating in property exhibitions in India and abroad and having road shows to promote their projects for investments. Many are also tying up with investment bankers to achieve this end.