Buying property overseas more lucrative for Indians. Here is why?
When Salim Asghar (name changed) decided to pick up a studio apartment in Dubai, his family was sceptical. Asghar was looking at investing his money and his family wanted him to park it in a property in Mumbai or Pune. But the investment banker from Mumbai, who had done research on prime property markets across the country, knew that the Indian market offered little value-for-money and Dubai was the best “investment-friendly” option for him. “While a one-bedroom house in a prime location in Mumbai would set me back by Rs 1.5-Rs 3 crore, I could pick up a bigger apartment in that price in Dubai,” reasons Asghar. He finally bought a one-bedroom apartment in Dubai Silicon Oasis for Rs 1.05 crore in September this year and intends to rent it out soon. “I will easily earn a yearly rent of Rs 9-Rs 10 lakh from the house. That kind of return wouldn’t be possible in Mumbai,” the 47-year-old says. Asghar isn’t alone. Increasingly, more and more Indians, outside the category of high net worth individuals (HNI), are buying property outside of India.
Who are the buyers?
When global property consultancy firm Knight Frank released its report Looking Beyond Borders recently, it did not come as a surprise to property consultants. The report, prepared jointly with International Real Estate Expo (IREX), revealed that the quantum of investments in property abroad by Indians rose almost 59-fold—from $1.9 million in 2005-06 to $111.9 million in 2016-17. “The idea of home has clearly travelled beyond the native frontier of imagination synonymous with the concept. Today, resident Indians investing in residential properties overseas are making mostly sound investment decisions,” says Shishir Baijal, chairman and managing director, Knight Frank India. The report is based on the overall findings of 10 countries, including detailed analysis of the six most preferred markets.
The cost factor, coupled with the ease of picking up properties in foreign shores, makes the move an increasingly attractive option for many home buyers. An old villa in France or an apartment in Dubai may come at a cheaper price than a premium apartment in Mumbai or a bungalow in Delhi.
Besides investment, analysts say, as more Indians start moving out of the country for studies, work or even permanent residency, they are looking at owning properties far away from home. These reasons make overseas properties lucrative for other income categories too, and not just HNIs. “Our perceptions about buying international property have largely been confined to HNIs buying luxury housing at picturesque foreign locations. But our report looks beyond that stereotype and throws light on mainstream residential property purchased by resident Indians from other income groups,” says Samantak Das, chief economist and national director, research, Knight Frank India, adding, “From the countries under study, 68% of the buyers who invest in overseas properties are businessmen and 21% are self-employed or traders.”
Also, HNIs continue to grow in number, picking elite properties. As per the Asia-Pacific Wealth Report 2016, the increase in foreign spending limit and comparable valuations have paved the way for an increase in investments in foreign real estate by almost 50% for Indian HNIs, the highest in the world. London, Dubai, New York, Washington, San Francisco, Australia and Singapore are some of the favoured locations for real estate acquisitions by global Indians. “Indian investors remain our biggest group of overseas investors. Currently, one in 10 customers is an Indian. They have bought 4,500 properties or land plots, collectively worth over $2.5 billion, from Nakheel in the last three-five years,” says Sanjay Manchanda, CEO of Nakheel Properties, a leading real estate developer in Dubai. “They have bought luxury beachfront villas on Palm Jumeirah to studio apartments in our large-scale mixed-use communities,” he adds. The company offers apartments starting from $1,45,000 (`94 lakh).
Sotheby’s International Wealth Report, released in 2015, had estimated that in the next five years (after 2015), ultra high net worth individuals from India would be putting in as much as 1 billion pounds every year in UK real estate. Reports suggest that over 3,000 Indian families own some of the most luxurious properties in London’s prized locations.
Why are they buying?
Buying properties abroad is not a new phenomenon for non-resident Indians or HNIs who travel overseas frequently. What has changed now is the profile of the buyers, the reasons for picking up international properties and the new favourable destinations among Indians. With recent economic changes and the lack of incentivised benefits for investments in the real estate sector within the country, Indian investors are looking at alternate destinations. The purpose of each individual investing overseas may be different—investment; short-term capital appreciation; personal use of the property overseas; regular rental income, etc.
“The issues that investors in the Indian real estate market have faced in the past decade in terms of delays in development, lack of exit options and high ticket sizes are key reasons for outbound investments,” says Shobhit Agarwal, managing director, capital markets, JLL India, a global real estate services firm. It helped that in 2015, the Reserve Bank of India (RBI) doubled the annual overseas investment ceiling for individuals to $2,50,000 from $1,25,000, opening up overseas investment options for Indians. Lately, the strengthening of the Indian rupee against several global currencies has also made investments in overseas homes more affordable than, say, a year ago. Most resident Indian buyers intend to purchase property abroad for investment purposes, followed by the aspiration of having a second home. In the UK, children’s education and use of property as a second home are considered to be the primary reasons for picking up property. Around 79% of Indians preferred compact homes in the 1,500-sq-ft category in London and as many as 89% preferred properties in the ticket size of less than $1 million.
“We shouldn’t forget that the cultural link between the UK and India is huge. The UK is one of the few countries in the world where Indian investors feel at home. Not only are the schools exceptional, the place also offers great family life and the rule of law is strong. There is also a strong buying opportunity today with a better exchange rate, and some discounted properties in great locations,” says Alex Newall, managing director, Barnes Private Office, a real estate agent in London. International real estate agents handle properties internationally, from Paris to London, New York to Los Angeles, and Miami to Hong Kong. “There has been a constant increase of persons seeking our services. Since the RBI policy of allowing individuals from India to transfer $2,50,000 per year, a number of Indians have opened international accounts and have been transferring such amounts,” says Rahul Mehta, CEO, Residency Overseas, a consultancy firm specialising in offering real estate-related services for overseas properties, especially in Dubai and Cyprus. “Similarly, a number of Indians now have businesses overseas and have been generating incomes there, further fuelling the property market,” he adds.
Also, the domestic real estate market has been under pressure for quite some time now due to various policy changes. Post-demonetisation, the amount of black money in real estate has dwindled. Regulatory mechanisms, such as RERA, which have come into effect in many states, have led to developers abandoning projects or hiking prices, which have lead to sceptic consumers who would rather invest in equities than real estate in India. Transparency and minimal taxes also favour property-buying decisions. In Dubai, Indian investors can avail of tax-free returns of 8-10% and sound capital appreciation, as the dirham is pegged to the US dollar and unaffected by currency fluctuations. “There’s less than 5% tax that you pay in places like Malaysia on property, while in India, it is 13-14%,” says Das. No wonder then, consultants look forward to catering to Indian clients in international markets. “In my role as head of private client search, I always enjoy acting on behalf of Indians. They often want to buy more than one property, which gives them huge negotiating power and they are also very receptive to being introduced to new areas where prices are still on the rise,” says Louisa Brodie, head of search and acquisitions for Banda Property, a real estate consultancy based in London.
She cites the example of a buyer who bought a property 18 years back. “He quite wisely predicted where his money would be safer and has since seen a historic rise of nearly 50% per decade in the value of it. He is not concerned about short-term fluctuations in the market, but realises that his investment is a long-term play and not likely to be affected by possible short-term levelling of the market,” she adds.
Where are they buying?
As per the Knight Frank report, the preferred countries for Indians to own property are Australia, Sri Lanka, United Arab Emirates (UAE), Malaysia, Cyprus and the UK. These destinations top for their proximity to India, lifestyle benefits, a booming economy and tax-free incentives. In UAE, Dubai remains a popular destination for Indians. “Many Indians consider Dubai their home, or at least a second home. Dubai’s excellent transport system and social infrastructure, coupled with the strong demand for rental properties, makes it an attractive destination,” says Manchanda of Nakheel Properties. “As per our estimates, there has been a constant increase in the number of Indians buying property in Dubai. It could be to the tune of 10-15% per year,” says Mehta of Residency Overseas.
As per a report from Dubai Land Development, Indians bought property worth Rs 42,000 crore from January 2016 to June 2017, making them the top foreign property investors besides Chinese and Pakistani nationals. In 2014, the figure stood at Rs 30,000 crore. Today, almost 25% of foreign investment in Dubai real estate is contributed by Indians. “Indians can reap approximately 8-10% tax-free returns by investing in the Dubai real estate market, which is without a doubt extremely attractive capital appreciation and definitely much better than what they can currently expect in many cities in India,” says Agarwal of JLL India.
Last month, a three-day property show ‘Dubai Real Estate Expo’ was held in Mumbai that got together potential investors, developers and real estate agents under one roof. It was aimed at highlighting the scope of Dubai for residential property business, a popular destination for many Indians, including film stars. “The property regulations allow foreigners to buy freely, and strict policies ensure that disputes are settled quickly and fairly, making it a magnet for real estate investors,” says Manchanda, adding, “The event was the perfect opportunity for us to remind our existing investors of Dubai’s unrivalled real estate investment opportunities. It also allowed us to capture the attention of new customers wanting to become part of the Dubai real estate success story.”
And it’s not just Dubai that is on Indians’ minds. London is a prime location, as is Cyprus and Colombo. “We speak to Indian investors on a weekly basis and have travelled to India thrice in the past five years for extended trips,” says Newall of Barnes Private Office. “Indian buyers love quality and value-for-money. Areas in London like Mayfair and Knightsbridge are popular, both as value-for-money and quality locations,” he adds. “Around 22% of purchases in prime central London are now made by Indians, up from 5% two years ago. This amasses to one-third of the total spend on London property,” Brodie of Banda Property points out.
As per the Knight Frank Global Currency report released in August, luxury homes bought by Indians in London in the quarter ending March 2017 were significantly cheaper as compared to prices in the same period last year. This was due to the strengthening value of the rupee against the pound. The report highlighted that the weakening of pound was due to events such as Brexit, which made London 14.1% cheaper for rupee investors. Indian investors had the second-highest purchasing power for properties in London, behind only Russian investors. “I am seeing more interest in emerging areas such as Bayswater rather than Notting Hill or even Battersea instead of Chelsea, because you get more for your money in these areas and there are plenty of options as well,” Brodie says. It’s no surprise then that while Asghar looks for a tenant, some of his friends are planning to follow in his footsteps and buy a house in Dubai.