RBI kills real estate dreams abroad, but will local property benefit?

Looking for a holiday home in Dubai or a duplex flat in London for investment or leisure? You will now have to rethink your plans as the Reserve Bank of Indiahas barred Indian residents from using local funds to buy immovable property abroad as part of its efforts to curb outflows of foreign exchange.

Despite a weakening rupee,Indians have still been purchasing property abroad due to better valuations and to offset the risks arising out of domestic political and economic uncertainty.

According to data provided by the National Association of Realtors, of the $68.5 billion that foreigners spent on buying homes in the US, Indian buyers accounted for nearly $3.5 billion, making it to fifth spot on the list of top 10 property buyers in the US.This is because an Indian seeking to buy a property in New York, London or Singapore can avail himself of considerably lower interest rates from local banks in those countries. Moreover, many foreign property markets are transparent, which enables investors to get ‘clean’ deals much faster and easier.

Most overseas markets also offer higher rental yields on capital values compared to the average of 2 percent in India now. In the UK, Dubai and Singapore, rental yields are over 5 percent, adding to investors’ cash flow.

However,RBI, seeking to support the battered rupee, on Wednesday announced several measures to reduce foreign exchange outflows. Remittances by resident individuals during a financial year under the Liberalised Remittance Scheme have been reduced from $200,000 to $75,000 and resident Indians have been banned from purchasingproperty overseas.

“The new restrictions have been introduced in an effort to stabilise the rupee. This move will have medium to long-term implications,” JLL (Jones Lang LaSalle) chief executive officer (residential services) Om Ahuja said on Thursday.

Usually, those who are employed or have business interests abroad prefer investing in properties abroad. A recent wealth report by Kotak Securities had said that the trend of Indians purchasing property abroad is set to grow as the number of high net worth individuals (HNIs) who can afford it and want a vacation pad abroad for friends and family is increasing exponentially.

The broad profile of Indians who are looking at buying properties abroad would include business owners, professional property investors, mid-to-top level company managers, HNIs and individuals whose children study in those countries.

In fact, the Kotak Wealth report points out that valuations in cities like Delhi and Mumbai are now comparable to property prices in the US such as those in Los Angeles and Miami, and European cities such as Rome and Istanbul. Rather than investing in Indian property, HNIs often prefer investing abroad because they get better infrastructure, a cleaner environment, and better health and sanitation for the same price.

Singapore, Malaysia, New York, Dubai and various cities in the UK (but predominantly London) are the preferred destinations for Indian property buyers.“Now individuals who were planning to buy international real estate at attractive valuations and planning for their kids’ education and housing abroad will now see such plans challenged,” said JLL’s Ahuja.

“Currently, the variety of options available on the international property market offers very attractive rental yields and valuations. This is now becoming restricted, and will make planning difficult.The new restrictions will be a dampener for Indian investors who were considering this route,” Ahuja said.

However, a legal expert pointed out that a few Indian residents can still come together and set up a Joint venture company abroad, the funds of which can be collectively utilised to buy property overseas but only for a business purpose, i.e. the property should not be let out and used should be used for business use.

Indian nationals invested the most money in the Dubai property market during the first half of this year, spending more than Dh8 billion in 499 transactions, according to Dubai Land Department figures released this month. However, according to Pankaj Kapoor, MD at property consulting firm Liases Foras, “Indians investing abroad are a very small portion of property buyers, in fact just about one percent. Hence, rather than impacting them, it is more likely to impact those countries that rely on Indians buying holiday homes abroad,” he said.

But what about those Indians who have already bought property via a bank loan there and are currently paying their EMIs?

There is still ambiguity over this issue as the RBI announcement does not make it clear as to what will happen to the partially completed overseas property transactions where part payments for the property has been already made, Anuj Nangpal, Managing Director, Investor Services, DTZ India, told_Firstpost_.

But does curbing flight of capital abroad imply more investment in Indian realty?

“The ban is certainly good news for Indian real estate as the capital which otherwise would have been diverted abroad will now stay in the country. In recent times, there has been a surge in Indians buying properties in countries such as Dubai, Singapore, Malaysia and the suburbs of London. Investors interested in real estate will now be restricted to considering properties only within the country. This is likely to give some boost to real estate demand in the country, especially in the premium and luxury segment, as these investors are majorly HNIs, says Nangpal.

Kapoor doesn’t agree. “Investment in India needs to match one’s needs and a trust factor must be considered. Secondly, real estate abroad gives you a reasonable rental yield; in India there is a vast difference between the capital one has to spend on a property and the rental yield received on that property.”

He believes curbing investment abroad will not necessary improve Indian real estate conditions as the fundamentals driving sales here are completely different. But he does expect a shift in portfolio allocations of HNIs in India.