Why curbs on overseas investment will boost domestic realty

By Om Ahuja

In uncertain times, preservation of capital becomes the key consideration for smart investors. Currency volatility and sustained weakness in the recent times have led the banking regulator to bring about capital controls in India. Over the last one month, there have been four notifications specifically aimed at curbing investor penchant for gold and commodities.

Equity markets in India recently witnessed negative FII flows primarily because of an unstable rupee, slowing economic growth and lack of government initiatives to bring about reforms and resolve issues in taxation. It is a complex situation for investors as theyare finding it difficult to get good inflation adjusted returns.

[caption id=“attachment_1044111” align=“alignleft” width=“380”] In an environment where international real estate is no longer an option, we will see more money chasing attractive assets that offer good returns within the country. Reuters[/caption]

Over the last five years, equities have, on an average, yielded annualised returns of 5 percent (16 August 2008 to 16 August 2013), whereas gold has given annualised returns of 13 percent (16 August 2008 to 16 August 2013). Returns from bank deposits and bonds have been in the range of 9-10 percent annually. On the other hand, annualised returns on real estate in cities such as Mumbai and Delhi have been in the range of 40-55 percent (pre-tax and not inflation-adjusted.)

If we benchmark these returns and make a quick comparison, it clearly reflects that real estate and gold have outperformed equities, bonds and bank deposits. Having said that many experts point out that the returns from real estate may not sustain at these growth rates going forward, considering that we are possibly at the mid or higher end of the growth cycle curve for this asset class.

Internationally, real estate displays a very different trend in terms of returns and growth. Rental yield is in the 4-7 percent range and annual growth in many parts of the world is approximately 4-5 percent annually. Many Indians chose to diversify and increase their exposure to international real estate to ensure steady rental revenue streams for their families abroad, and / or provide accommodation for their own use during their foreign sojourn.

This became especially viable with the Liberalised Remittance Scheme (LRS) which was rolled out a few years back. Considerable revenue outflows into destinations such as the Middle East, London and Singapore resulted. However, the recent policy change aimed at curbing of international real estate investment marks an abrupt moving away from the LRS scheme. The international property focus of such investors is now going to decrease drastically.

Whenever excessive controls are exercised (as we have already seen in the case of gold and other precious commodities) investors receive confusing market signals that lead to increased uncertainty in terms of investment planning. In such scenarios, the most evident trend that emerges is of investors looking for alternatives that can help them grow money and protect capital.

Limiting the overseas direct investment to $75,000,will curb Indians’ investment innot onlyinternational real estate, but in all other asset classes.Such small amounts will attract sizeable charges by the banks managing their portfolio, making the entire proposition non-viable and unattractive.

Indian Investors still believe that real estate is an ideal investment avenue when it comes to safety, returns and growth. In an environment where international real estate is no longer an option, we will see more money chasing attractive assets that offer good returns within the country.

There will now be an increased focus on lucrative residential real estate investment options in India. Hyderabad, especially the IT pockets in the city, will attract a lot of investor interest as the Telengana question has been answered once and for all. The city is now suddenly in a growth phase, and it presents the ideal investment scenario of relatively low entry points with extremely promising growth potential. Bangalore, Chennai and Pune also provide interesting investment options, as these cities have seen sustained inflows from NRIs.

Om Ahuja is CEO - Residential Services, Jones Lang LaSalle India