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Why India continues to be a safe real estate investment destination for NRIs

The factors that drive the sentiment amongst the Non-Resident Indians to invest in a property back home are many. The idea to have a base in the home country where one can return to is a prime reason that motivates the NRI buyer. Also, there are a growing number of NRI investors who look at India to get better appreciation on their investment.

According to Knight Frank's recent Global Price House Index, though markets worldwide have been struggling with growth, Asia continues to outperform all other world regions as prices here rose on average by 8.0% in the last 12 months.

The strength of the Indian real estate market makes it a safer bet of the lot.

NRIs guide to property received as gift

The set of tax and regulatory implications for properties received by NRIs as gift are vastly different from those received as inheritances. In this article, we see what those implications are.

Can an NRI receive property in India as a gift?

Yes, NRIs and PIOs can receive property as gifts from a person resident in India, from another NRI or from a PIO. However, the property can be only a commercial property or a residential property. Agricultural land, plantation property and farm house in India cannot be acquired by way of gift.

A foreign national of non-Indian origin cannot acquire property in India by way of gift.

What are the tax implications at the time of receiving the gift?

Gifts received from 'relatives' are not liable to tax. Relatives include:

> Spouse of the individual;
> Brother or sister of the individual;
> Brother or sister of the spouse of the individual;
> Brother or sister of either of the parents of the individual;
> Any lineal ascendant or descendant of the individual;
> Any lineal ascendant or descendant of the spouse of the individual; and
> Spouse of the person referred to in clauses (ii) to (vi)

Moreover, if the gift was received on the occasion of marriage or from a registered trust, it may be exempt from this tax.

Any gifts over Rs 50,000 received from people who are not relatives are taxed as income in the hands of the person receiving the gift. So you would need to add the fair market value of this property to your total income and pay tax thereof.

Also read : NRIs guide to renting out property in India

The property may also be subject to wealth tax. According to the Wealth Tax Act, tax is payable if the net value (market value minus any loans taken to finance the assets) of the assets of an individual exceeds Rs 30 lakh.

Now, there are certain exceptions to the definition of 'assets'.

i. Only one house

If you own only one residential house, you do not have to pay wealth tax. So after receiving the property as gift, if this is the only property that you own, you do not have to pay wealth tax on it.

The question arises as to whether this includes global properties. For instance, if an NRI owns a property in the US and gets one as a gift in India, will he be subject to wealth tax on the property in India?

Parizad Sirwalla, Executive Director - Tax at KPMG explains, "For an Indian citizen who qualifies as a 'Resident but Not Ordinary Resident (NOR)' or 'Non-Resident (NR)' of India (as per the Income Tax Act 1961) as well as for a foreign national, wealth tax is applicable only on the specified assets located in India. Specified assets located outside India are subject to wealth tax only in the case of Indian citizens who qualify as 'Ordinary Resident (OR)' of India as per the IT Act.

In the instant case, if the NRI qualifies as 'NOR' or 'NR' of India, the US house property will not be considered as a specified asset for wealth tax. Further, the house property in India may be considered as exempt under Section 5 of the Wealth Tax Act provided that's the only house he owns in India.

The US house property will be considered as specified asset for wealth tax, only if this NRI (assuming Indian citizen) qualifies as 'Ordinary Resident' of India for the relevant financial year. In such case, as one residential house property is exempt for wealth-tax, either of the property (US or India) can be considered as exempt (as per Section 5 of the WT Act) and the balance will be taxable. "

Why affordable homes are lucrative investments for NRIs

Out of the 30 million NRIs in 130 countries, a substantial number, particularly in the Association of Gulf Cooperation Council (AGCC) countries, are remitting their hard-earned savings back home.

n the Far East also there are countries such as Malaysia and Singapore where migrants from India are looking at investing in affordable homes in India. Owning a home while working away from home is in their priority as is evident from the encouraging response to several projects that are on display during property shows held abroad.

A favorable exchange rate, propensity to save and easing of remittance norms enable them to look at investments in property. A majority of NRIs in the Gulf are looking at affordable homes in the price range of around Rs 25 lakhs.

Even those in the higher income category are looking at affordable homes either as an investment option or in order to gift it to their relatives back home. A number of single bedroom apartments are clubbed together by serviced apartment operators due to demand for such units from corporate for executives on an extended stay in cities.

A survey by Cushman & Wakefield has estimated the housing demand to be over 2.3 million units across major cities in the next five years - between 2011 and 2015. While the supply level is estimated at one million units, the shortfall will be 1.3 million units. The report analyzed demand for the top seven cities - Bangalore, NCR, Mumbai, Chennai, Hyderabad, Pune and Kolkata.

Of the total demand in the top seven cities, the mid-ranged housing segment is expected to drive the maximum demand (45 percent). A majority of the developers in the top seven cities are concentrating on this segment which would help reduce the supply-demand gap.

According to the report, the anticipated demand is likely to exert an upward pressure on property prices, especially in markets such as Bangalore, NCR and Mumbai where the demand-supply gap is high. For instance, in Bangalore, while the supply level is estimated at 1.11 lakh units, demand is anticipated at 2.87 lakh units.

On the other hand, the Tier II cities such as Pune, Hyderabad etc are likely to see appreciation of capital values at a slower pace compared to the Tier I cities during this time period. This is because of the relatively low demand-supply gap anticipated between 2011 and 2015 in Tier II cities.

Good business sense drives NRIs to invest in property in India

Buying a dream house in India is no longer an idle pipe-dream for Indians abroad. Be it in one's cozy little hometown, in the peaceful countryside or in a bustling business centre, investing in an apartment is now making business sense to a large number of Non-Resident Indians (NRIs).

Indians settled abroad retain an emotional attachment for the country. Even after decades of living abroad, they never get over the feeling that 'Home' is a place called India. An urge to return sooner or later is integral to the Non Resident Indian's mental makeup.

For an Indian who has gone abroad and realized his dreams of making it big, there is also an urge to gift a beautiful and spacious home to his parents and siblings. It gives an NRI great satisfaction to know that his or her family is now living well back home.

And so, it makes emotional sense for an NRI to buy a dream house in India - usually in his city of origin, or close to it. Unlike typical old-fashioned builders, the recent crops of construction companies are building homes of extremely high quality, comparable to the ones that NRIs are living in abroad. The high quality of recent constructions allays the NRI's greatest worry - that when he returns home, his family will have to compromise on the quality of life that they have become used to. The superior quality of tiles and fixtures in the apartments themselves are doubtless compatible with global benchmarking, but more importantly , the quality of amenities - lifts, compounds, swimming pools, club houses etc - sets the NRI flat-purchaser's mind at ease.

Buying a flat in India isn't only about emotions; it's also good business sense that drives thousands of NRIs to put their money in Indian Real estate. Having sustained the ups and downs of several financial cycles - both Indian and global - Indian properties are a proven investment option .

Having decided to invest in an Indian property, the busy NRI sees a number of question-marks : How to work through the modalities? Who will guide him, organize site visits, tie up the finance? How will he transfer huge sums of money? How will he ensure that the legal paperwork is properly done to safeguard his interest and his family's peace of mind?

Earlier, cross-border transactions posed challenges, given the need to send money across countries, buy or sell currencies etc. However, all that is a thing of the past. Ebanking and ease of online money transfer is now motivating many Indians to truly exercise their choices.

For this reason, business-savvy NRIs who grow their net-worth trading in other markets book their profits, and then lock in the value by investing in spacious apartments for themselves and their parents, and also their growing children. With the advent of online portals offering such services, many NRIs can now conveniently access worthwhile properties, virtually 'feel' the houses and its amenities, and invest in their dream homes.

When the NRI customer reaches out across national borders and finds online service providers willing to reach out and hold his hands - that's when all challenges are overcome , and the promise of India is truly fulfilled.

Hot Indian property destinations for NRIs in 2012

The Non Resident Indian (NRI) might as well remember 2011 as the year of the 'lazy investor'. For NRIs have gained 18% since August 2011, simply by remitting money to India; no effort at all. But as we approach 2012, NRIs must take stock of how best to use their remittances. The traditional favorite has always been real estate. But in this volatile market, how great an investment is it? Is this a good time to buy property in India? What kind of property is a good bet? Let's try to find answers.

Commercial property

Is it a good time to invest in commercial property in India?

"Yes," says Sanjay Dutt, CEO - Business, Jones Lang LaSalle India. "There are a number of reasons that come to mind. Firstly, India's growth story remains intact with just some relatively minor turbulence in the short term. Secondly, for NRIs, right now there is the straight advantage of exchange rate. The rate will eventually stabilize with Government intervention. Thirdly, property valuations, especially in the commercial space, have come down and are currently undervalued by 15-30%. Fourth, some of the developers are significantly leveraged (paying 13% interest rate for construction and 15% to 21% for land from NBFCs and private lenders). As a result they now want to take some cash out and invest in mid or low market fast moving residential. In short, there is pressure on developers.

Lastly, vacancy rates in the office space are expected to be high. For instance, out of the 60 million square feet of supply that is expected to come in by the end of 2011, 25% is expected to be vacant. This will force developers to either lease cheap and/or sell cheap," he explains. "If you want sustainable yields and capital appreciation, this is the best time," Dutt concludes.

Having said that, Berinder Sahni Associate Director, Investment Services, India - Colliers International, advices that investors must stay invested in a property for at least the next 5 years to see a good return.

Which are the top cities for commercial real estate investment?

Sahni and Dutt, both list the following cities: Mumbai and Pune in the West, Delhi and NCR in the North and Bangalore, Chennai, and Hyderabad in the South.

What kind of commercial property should NRIs opt for? What are the potential yields?

There are 3 broad options in commercial property: front office space (like banks, MNCs), IT office space and high street retail space.

The kind of property that you choose would depend on your budget and risk profile. "In the case of office space, a good quality unit in Delhi and Mumbai would come at a budget of at least Rs 15-20 crore. In other cities like NCR, Pune, Bangalore, Chennai and to an extent in Hyderabad, you would have to put in at least Rs 10-15 crore. These properties would generate a rental yield of 10.5-11%," says Dutt.

Sahni adds, "The minimum size for a good commercial office space will be 2500 square feet. IT office space may come at a lower purchase price but the risk in IT spaces is higher right now. We believe that commercial office space can give you rental yield of 8-9% pre tax while IT spaces can generate slightly higher yields of 10-11% because of the inherent risk. Also, as you go closer to prime locations like Central Business District (CBD) areas, yields for all kinds of properties will drop to around 7%. Retail properties are slightly easier to handle because it's easier to find a tenant. Therefore, yields also tend to be lower at 6-7%. Moreover you can buy smaller spaces, as small as 500-600 square feet, in retail properties."

You can also choose the property based on your risk profile. For instance, you can buy a space in an under construction or new unit where you will be able to buy for cheap but you will also have to put in efforts to find a tenant and lease out the property. "We usually recommend our NRI clients to invest in 'pre-leased' properties, that is, those properties that already have a lease agreement in operation. You might have to pay a little more as compared to under construction or fresh properties but you are assured of lease rentals. Pre leased properties usually have a 3-5 year lock-in with a lease term of 9 years. Even smaller office spaces will have a 3 year lease term," explains Sahni.

With falling rupee, NRIs take keen interest in real estate in India

BANGALORE: Non-Resident Indians (NRIs) have started taking keen interest in the real estate sector back home following significant appreciation of the dollar vis-a-vis the rupee, a top official of housing finance company said today.

"NRIs have started taking keen interest due to the appreciation of the dollar. They have started converting the dollar into rupee", Director and CEO of LIC Housing Finance Ltd, Vijay Kumar Sharma, told reporters here.

NRI interest is "perceptible and visible", he said, adding LICHFL's Dubai and Kuwait offices (catering to NRIs investing back home) have "lot of enquiries and log-in" and "compared to last year, the growth (there) is 50-60 per cent".

Sharma also said the Bangalore metro rail project would transform the real estate sector in this city in three years, similar to what happened in Delhi.

"Metro completely transformed the entire (real estate) profile. This is going to happen in Bangalore also in the next three years. I am sure about it"", he added.

Referring to a just-released study, Sharma said the Bangalore real estate market is looking up again after two years, and demand has gone up.

LICHFL today kicked off a three-day property expo here, with participation of more than 50 builders who are showcasing more than 250 projects.

The maximum processing fee for the visitors at the exhibition - NIMMA MANE 2012 - is Rs 5,000 plus service tax, a "high rebate" as Sharma put it, adding, "normally, processing fee is one per cent of the total amount".

Rupee drop makes realty attractive for NRIs

BANGALORE: Many NRIs are teaming up with like-minded buyers on real estate group buying sites to shop for flats in India. The cheaper rupee and deep discounts offered by developers through these portals has triggered a substantial jump in property-related enquiries from NRIs in the US, UK and the Middle East in the last three months.

London-based Nayan Bhavishi has poured more money into the real estate market in the country than in any other geography or asset category . An avid real estate investor , Bhavishi snapped up two ready-to-move-in flats in Vaastu project in Thane for Rs 1.20 crore through real estate portal Groffr.com. "I was scouting for properties in India and stumbled upon this site offering good discounts. I got 25% discount on my property purchases and the exchange rate at Rs 84 to a pound was a big draw," he said. Bhavishi said he bought the property at Rs 4,200 per sq ft when the rates in neighboring properties were between Rs 5,800 and 6,000.

In an increasingly tough environment, developers are warming up to group housing portals. Sandesh Wadhwa, cofounder of group-buying portal groupbookings.in, said many people sitting on the fence have swung into action in the last three months. "There is more demand coming from NRIs for mid-sized housing projects in Gurgaon, Bangalore, Hyderabad and Chennai," he said.

Sandeep Reddy, co-founder of Groffr.com, said the website has seen a healthy sales conversion rate in the last two months primarily driven by NRIs. "The mood among NRI investors is buoyant as they now need to spend fewer dollars or pounds for the same property. The sub-Rs 60 lakh properties are most in demand ," he added.

Vaibhav Sharma, assistant professor of finance at Winthrop University in South Carolina, has booked two flats in Gurgaon through groupbookings .in. "If I were to invest in the US, the property value would fetch me a negative return. It's a good time to enter the Indian real estate market, where I think I can expect at least 6% annualized returns in the residential space," he said.

Sharma's purchase decision was also driven by the favorable exchange rate. He bought the flats last September when the rupee was close to 50 to a dollar. "I also received a 10% discount by signing up on the portal. I didn't have to haggle or make several house hunting trips," Sharma added.

NRI investments in property set to grow with better market conditions

An estimated 30 million NRIs, living in 130 countries, are sending remittances back home regularly. According to the World Bank, India continues to retain the top slot in remittances by expatriates from abroad. India will beat China in receiving the highest amount of remittances for five consecutive years.

For 2011, NRI remittances are likely to touch 4 58 billion against China's 4 57 billion. In 2010, India received 4 54 billion in foreign exchange remittances, three percent of India's GDP, beating China's 4 53 billion.

The rupee depreciation and West Asian currencies linked to dollar which is appreciating against the rupee are major driving forces that resulted in a surge in remittances to India. The remittances are mainly used for family needs and investments in stocks, property and term deposits. Real estate here is preferred because of a desire to create a higher lifestyle for the family and the price appreciation in the long term.

Though there was an interim sluggishness in NRI investments, industry experts feel the trend is going to pick up in the coming months due to the uncertainty prevailing in the global economy and the attractive investment opportunities offered here. There are opportunities opening up for developers in new markets such as Mauritius. This is ample proof of the surge in NRI investments in real estate.

Property shows are held regularly now in various countries such as US, UK, and West Asia due to the concentration of a large number of expatriates in particular areas. The organisers focus on the many options available in various localities here.

Since liberalization in the 1990s, investment norms have been simplified to enable NRIs and persons of Indian origin (PIO) to invest in real estate here. Realtors here have also set shop in some countries to interact directly with overseas Indians and extend effective after sales services. Moreover, housing finance companies and banks with their representative offices in various countries offer home loans to NRI investors.

An Indian citizen who resides outside India is permitted to acquire property in India other than agricultural, plantation property and farmhouse. NRIs get almost all the privileges that residents have while investing in real estate.

They can acquire, inherit, transfer and gift residential or commercial property. The purchase can be made through funds remitted to India through normal banking channels or funds held in certain types of accounts maintained in India. They can get home loans, mortgage loans and loans against future rental income.

While sale proceeds up to two residential properties can be repatriated after a lock-in period of three years, there is no restrictions on commercial property. Up to one million dollars per year from such a sale can be remitted outside India from a non-resident ordinary account. Rental income can be repatriated after payment of tax, wherever applicable.

A number of property management companies including MNCs have set up shop in major cities to extend property management services. This is a boon to NRIs and PIOs investing in India while living in other countries.

NRIs, while returning, can retain their foreign current assets acquired, held or owned while abroad, or inherited from a person who was a resident outside India even after return to India for permanent settlement. However, income earned from an overseas asset needs to be repatriated to India and credited to a resident foreign currency (RFC) account.

Documentation for NRI

The documentation required to be submitted by the NRIs are different from the Resident Indians as they are required to submit additional documents, like copy of the passport and a copy of the works contract, etc. And of course NRIs have to follow certain eligibility criteria in order to het Home Loans in India.

Another vital document required while processing an NRI home loan is the power of attorney (POA). The POA is important because, since the borrower is not based in India; the HFC would need a 'representative' 'in lieu of' the NRI to deal with and if needed. Although not obligatory, the POA is usually drawn on the NRI's parents/wife/children.

The documents needed for obtaining NRI home loans are:

• Passport and Visa
• A copy of the appointment letter and contract from the company employing the applicant.
• The labor card/identity card (translated in English and countersigned by the consulate) if the person is employed in the Middle East Salary certificate (in English) specifying name, date of joining, designation and salary details.
• Bank Statements for the last six months

List of Classified documents for Salaried and Self Employed NRI Applicants

Property Documents:

• Original title deeds tracing the title of the property for a minimum period of the last 13 years.
• Encumbrance Certificate for the last 13 years.
• Agreement of sale /construction, if any
• Receipts for payments made for purchase of the dwelling unit.
• Approved plan / license.
• ULC clearance /conversion order etc.
• Receipts for having invested the margin money through normal banking channels from the Non-Resident (External) account in India and / or the Non-Resident (Ordinary) account in India.
• Latest tax paid receipt.
• Allotment letter from the co-operative society / association of apartment owners.
• Agreement for sale / sale deed /detailed cost estimate from Architect / Engineer for property to be purchased / constructed /extended / improved.
• Copy of approved drawings of proposed construction/purchase/extension.

Additional documents to be submitted by Person of Indian Origin

Photocopy of PIO card.

If the PIO card is not available, photocopies of any of the following documents:

• The current passport, with birthplace as 'INDIA'
• The Indian passport, if held by the individual earlier.
• Parents/grandparents Indian passport/birth certificate/marriage certificate substantiating the individuals claim as a person of Indian origin.