All about NRI investments in Indian real estate
Kunal Mokthan, Dec 7 2017, 19:14 IST
The real estate sector, which has largely remained unaware of technological developments, is going through a phase of metamorphism and has been lately coming under the scope of cutting-edge technology. In fact, technology has made it easier to invest in property and helps many non-resident Indians (NRI) invest in the country with relatively lesser inconveniences.
India has a rent-generating commercial real estate inventory of 537 million square feet, which is estimated to be worth more than $70 billion. This investment avenue offers favourable growth prospects to NRIs. Indians settled in the US and Europe often invest in Indian real estate to earn loftier returns as developed countries offer low returns on investment, usually under five percent.
The ones in the Middle East are also disposed to invest in Indian real estate because they have comparatively fewer investment options available to them within the region due to the legal framework that restricts expat investment in real estate. Furthermore, commercial properties offer constant returns through rent-generating offices tenanted by blue-chip companies.
The commercial real estate provides relatively greater security to investors as they are leased for nine to 15 years with a minimum lock-in period of three to five years. The contracted yearly rent appreciation of five percent in the lease agreement also negates inflation providing inflation-adjusted returns. This is drawing larger numbers of NRI investors to the Indian real estate market. But while they recognise that property gives the best post-tax returns in India, there are other factors at play that keep them at bay.
Typically, investors stay away from the real estate sector since it requires considerable domain knowledge along with a significant investment of personal time. This is over and above the capital required to step into the commercial real estate in any meaningful manner. Commercial properties have ticket sizes of anywhere between five crore to 40 crores (INR). Primarily, the huge ticket size screens out a majority of potential investors with relatively smaller savings.
Further, this ticket size also makes the investment too big of a risk to take, as it's highly concentrated with no room for diversification. An investor has to additionally conduct extensive research to analyse the future potential of the property, take part in successive negotiations, and initiate sales calls to liquidate the asset later.
Being geographically isolated from the property also makes them quite concerned about how it's managed, what the tenants are up to, and whether the tax and maintenance dues are being cleared on time. Most investors, therefore, incline towards investing in riskier under-construction or early-stage properties. Constant involvement of third-party players such as brokerage firms and independent real estate agents magnify the difficulty drastically when the focus shifts towards commercial properties. It gets more complicated for foreign investors when they need to be present in the country to fulfil the procedural requirements.
Tech comes handy
Technology has a very basic characteristic: it has the power to transform anything. A few tech-driven platforms are coming to the fore to eliminate the prevailing challenges and extend a seamless investment experience to NRIs. These tech platforms are using big data, machine learning, data analytics and pattern recognition together with fundamental 'boots-on-the-ground' research to bring the most favourable investment options to investors.
For instance, companies today have a unique fragmented-ownership investment model that enables its investors to partially invest in a tenanted commercial property for a minimum investment of Rs 10 lakh. Individual investors can also sell their share at any time on the proprietary resale platform, providing them with instant liquidity should they need to sell their share.
The listed properties are typically rent-generating offices housing blue-chip companies and extend around seven to eight per cent rental yield in addition to the capital appreciation of 10-15%. Such new-age platforms, moreover, have an end-to-end digital process, making it easier for NRI investors to buy and manage their investment portfolio. This is enabling investors in making safe and secure commercial real estate investments while maximising their returns by tapping into this technology.
India is one of the fastest growing economies with very strong present and future growth prospects. This has made the country a promising investment destination for MNCs, who are either increasing their presence in the country through business expansion or foraying into the Indian market to establish it. The last quarter has closed with foreign direct investment (FDI) worth $85.79 billion - the highest-ever FDI in a single quarter.
These snowballing investments reflect a rapidly booming business landscape in India that's having a positive impact on the commercial real estate sector. Thankfully, technology-driven platforms are keeping an eye on every trend and market development that's affecting your real estate investments.
(The author is co-founder and CIO, PropertyShare.IN)