NRIs are betting big on commercial real estate market of India

While the world order has been disturbed by the pandemic and the global economy has been shaken, it is times like these that distinguish the smart investors from the others and for the NRIs, opportunities back home are lucrative with the fall of the Indian rupee. Of late, NRI investors have become wary of the stock markets as the equity markets continue to fluctuate and this is the reason why they are betting big time on real estate.

Why real estate becomes the safest bet for the NRIs:

The year 2019 was one of the worst years for the banking sector and amidst the recent turmoil even the SBI, the country’s largest lender, has reduced interest rates on savings accounts and fixed deposits; this has made NRIs averse of trusting the banks.

Even Gold as an asset class has lost its sheen and is facing oscillation in its prices; this is mainly because of the oil price war, which has started after the pandemic. So if we compare banks and gold then real estate becomes a better investment asset class as the prices in real estate is at all-time low right now and can go nowhere but up from here onward.

The property appreciation and a decent rental yield is luring NRIs to own a property in their native country. NRIs from UAE, USA and Saudi Arabia are the frontrunners to invest in Indian realty. Earlier, only NRIs and foreigners with PIO card were permitted to invest in the real estate sector. Foreign investors other than NRIs were allowed to invest only in development of integrated townships and settlements, either through a wholly owned subsidiary or through a joint venture company along with a local partner. However, the reformation that took place couple of years back in this regard permits FDI in townships, housing, built-up infrastructure and construction-development projects. Also, NRIs are entitled to various tax benefits such as a deduction of INR 1 lakh under Section 80C under the Income Tax Act, 1961 If they sell their property within three years of purchase, the earnings from the sale are entirely taxable. If they sell their property after three years of purchase, they can recue capital gains tax by investing in another property.

Another pertinent aspect is that over the last couple of years, several amendments were brought to the REIT regulations in terms of taxation. REITs are now also allowed to raise funds by issuing debt instruments. 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.

How and why Commercial real estate has become the new favourite:

Demand for institutional and commercial properties is also set to rise over the next few years. With the emergence of newer micro markets and residential hubs, the concurrent need for malls, shopping complexes, multiplexes, commercial buildings, office complexes, co-working spaces, logistic and warehouse spaces will also be growing in tandem, and all this will be giving enough impetus for the NRI investors to invest in the commercial properties in India. This is the reason why NRI investors who have for long invested in residential real estate market are now gradually shifting gears toward much lucrative commercial asset class. This distinct shift of well-heeled NRI investors towards commercial properties is because of the satisfactory yields that they deliver. There has been a fairly consistent rise in demand for commercial spaces like Grade A offices, IT parks, malls, service apartments, etc. The funds are getting invested in world- class assets of large IT buildings, malls and warehousing. There is a regular reasonable demand for grade A assets and thus the funds are able to perform well and give good returns to the investors.

Gurgaon and Noida are the most popular investment destinations in Northern India, as these cities have maximum number of commercial spaces which include IT parks, shopping malls, service apartments, etc. Mumbai is another major attractive investment destination for NRIs; however, it does seem to be overpriced. Other metro cities like Bangalore, Chennai, Hyderabad and Pune, etc. also provides ample of options including different locations, facilities, prices and infrastructure.

“Mid-sized commercial assets (Rs 20-40 Lacs) such as office and retail spaces are emerging as the new favourites. Buyers and investors are betting big on such assets to hedge against future unpredictability. As the equity markets are staggering and financial markets are distressed, commercial real estate offers a compelling alternative. A grade-A quality commercial asset can render a Rental Yield up to 12 per cent. Even in cases when tenant finalization will take around 6 months, commercial assets can give high rental returns. As the overall commercial sector is robust for some time, elevated returns should continue without any possible compression.” explained Ajay Rakheja, National Head, Commercial Real Estate Vertical, 360 Realtors

Way forward for NRI investors:

In times of economic turmoil, security – not ROI – is the key metric for an investment. Despite the sluggish economic growth, commercial real estate in India has performed really well in the last year and even now the office commercial realty has faced the least wrath of the current scenario. The proven track record of the developers of finishing the projects on the set timelines is another add-on. For NRI investors it is suggested that they should rely on a credible real estate consultant/realtor who will guide them to the best opportunities and also help them seal the deal. This is especially important in times when most NRIs will be wary of travel in the immediate future, making personal site visits a challenge. For investors focused on the office space segment, the best projects are already pre-leased and offer guaranteed rental during construction and post-possession.

As worrisome as the current situation is, one should not forget that troubled times bring equal opportunities with it and the current scenario is a highly opportune time for NRIs to invest in Indian realty and leverage on the current currency depreciation and record low prices.