Indian Real Estate- A popular option for NRI’s
Sushil Kumar, a Non-Resident Indian based in Austin, Texas bought a 1000 sq feet flat in New Delhi, India costing Rs. 35 Lakhs in 2004. At that time he was upset with the fact that he was over-paying for it but today he not only has the worth of the flat more than double, however in addition to this he is truly elated that this real estate investment is giving him such good return. This example very clearly sums up the Indian Real Estate Market of today. According to the recent trends, the Indian property market is not only flourishing, but growing by leaps and bounds. Research data estimates that the Indian Real Estate Market is expected to grow from the current 14 billion dollars to 102 billion dollars in the next 10 years.
After the September 11 incident in the US, investments in Indian markets have gained momentum. India has encouraged Non Resident Indians (NRI’s) and Foreign Investors by giving them tax incentives and relaxation of foreign direct investments (FDI) rules. The RBI has further relaxed the rules for NRI’s with respect to returning of foreign exchange in real estate investments. In addition to being one of the safest destinations, India now offers 15 to 25 per cent returns which are conceivably the highest in the world. Mumbai alone accounts for 30 percent of the Indian real estate business in India.
India’s market potential
1. It is the fifth largest economy in the world (above France, Italy, the United Kingdom, and Russia)
2. It has the third largest GDP in the entire continent of Asia.
3. It is also the second largest among emerging nations.
Indian Real Estate sector: Facts and Figures
The Indian real estate has a massive potential demand in almost every segment especially commercial, retail, residential, healthcare, hospitality etc.
Now let us take a look at some of the facts and figures about the retail industry in India.
1. The projected size of the organized Indian real estate sector is approximately USD 12 billion of India's USD 600 billion economy; which is just 2% less as compared to the mature economies of the world.
2. Relaxation of the FDI rules has brought about capital gains in almost every sector of Indian economy. The government is also making efforts in removing the strict guidelines of FDI so that the system becomes NRI friendly.
3. An estimated 30% growth has been observed in the retail sector last year, due to the relaxed FDI norms and the connected growth drivers. It has been estimated that by 2010 the Indian real estate sector would be between somewhere between USD 45-50 billion
4. Real estate sector has the potential to reach the target of USD 90 billion in 10 years.
5. The real estate prices these days are already on the upswing in all markets across sectors since the last two years.
Foreign Investment (FDI) in Real Estate Sectors in India
Initially only NRI's and PIO's were the only ones who were allowed to invest in housing and real estate sectors. Foreign investors except NRI’s were permitted to invest only in the improvement of integrated township projects and that too through a wholly-owned subsidiary or a joint venture company with a local partner.
In 2005 the Indian government fully opened the FDI in real estate. However, the rules framed later limited the minimum capitalization of $10 million for a wholly-owned subsidiary and that of $5 million for a joint venture company mandatory. In addition to this in March 2005, the Department of Industrial Policy and Promotion allowed FDI in real estate projects in a minimum area of 25 acres.
The finance ministry has also allowed external commercial borrowing (ECB) in real estate projects concerning townships spread in an area of 25 acres or 50,000 sq m. However, this has not yet been notified by the RBI. In the present situation, the government has allowed FDI in real estate, but does not sanction foreign institutional investment. Nevertheless, the government is going to remove the gap in the meanings of FII and FDI and is also planning to levy the same rules for both types of investments.
NRI’s can now purchase, rent and transfer residential/ immovable property in India. However, the set of laws do not permit the NRIs and PIO’s to attain property like agricultural land, cultivated area and farm houses in India. However they can take the rental income of the property situated in India.
The NRI/PIO can use their own funds to buy immovable property; excluding the option of availing home loans from banks for this purpose. The NRI's ‘own funds’ refer to the money received in India by way of private transfer of funds from abroad, out of the income earned there including the personal savings outside India. These funds can be transferred through Non-Resident External (NRE), Non-Resident Ordinary (NRO) or Non resident foreign currency bank accounts.
Moreover, they can dispatch earnings from sale outside India for a maximum of two properties held here without taking any permission from RBI. The transfer of funds for subsequent properties requires RBI's approval. In case the property is bought from an Indian account, the remittance depends entirely on the nature of the holding period of the property. The various sectors in which investments in the real are done are the following:
Residential (Housing): The mortgage rates lowered from 18% to 8% in the last 5 years.
Commercial (Office space): the leasing in IT space is booming with 12 million sq ft leasing in Bangalore, 7.7 million sq ft in the National Capital Region and 6 million sq ft in Mumbai in 2007.
Retail (Shopping): Organized retail, which constitutes 2 % of the USD 200 billion sector, is expected to grow from USD 4 billion to USD 15 billion by 2010.
Hospitality (Hotels): Domestic and International investors are planning to invest in 3 and 4 star category hotels as India will require 75,000 to 1, 00,000 rooms in the next 5 years. Doe to the Commonwealth Games coming up in 2008 there will be a greater need for top class hotels to cater to the urgent need of rooms to vacate the teams and the viewers. Many international hotel chains like Hilton, Clariges, Radisson, Le Meridian etc. are expanding their hotel business in India and are purchasing large areas of property to construct 5 star hotels.
Other areas where the real estate business is coming to India are in the building of resorts, hospitals, educational institutions, recreational facilities, Special Economic zones etc.
Conditions for Foreign Investment in Real Estate Sector in India
Foreign Direct Investment in some of the areas (not all) is subject to some conditions, some of which are stated as follows:
1. The development of a minimum land area of 10 hectares for housing plots, and a minimum developed area of 50,000 sq m in case of construction projects is necessary. ‘Built-up’ or ‘developed’ is not properly defined but FSI (Floor Space Index) or FAR (Floor Area Ratio) can be used as the source for the same.
2. To fulfill the minimum capitalization limit of $10 million for a wholly-owned subsidiary and $5 million for Joint Ventures is the mandatory requirement and these funds should be brought in India within six months of the initiation of business (as defined in the contract).
3. To complete 50% of the project work in the time period of five years from the date of receiving all clearances.
4. Not to sell undeveloped plots i.e. without any infrastructure, to provide proper facilities and to obtain a completion certificate from the local body concerned before clearance. But in reality this process takes a long time and the certificates are issued at a very later stage which leads to uncertainty and an excess expenditure on the construction.
5. The original investment should not be sent back before three years from the completion of minimum capitalization. If this process is to be quickened then the prior permission of the Foreign Investment and Promotion Board should be sought.
6. The investments should be done in confirmation with all applicable local and state laws, and all rules and regulations should be followed to the fullest possible extent.
Reasons for investing in India
There are various reasons for foreign investors to invest in the real estate in India. 5 main reasons have been discussed here.
1. Resilience
It has been 20 years since the reforms in the Indian economy have begun. There have been various developments and the main amongst them are; the opening up of the economy to investments abroad, amplification of the domestic financial system, validation of interest and exchange rates, liberal approach for imports, a more favorable atmosphere for investing in business, and the services for the community as a whole.
This buoyancy is clearly evident from the fact that the standard economic growth rates have moved up (8.2% in the financial year ending in March 2006) and India is emerging as one of the top budding economies in the world. The change in the government has also not blocked growth entirely; in fact this has boosted the economic growth further.
2. Improved focus on agriculture and infrastructure
In the present times there has been a constant focus on agriculture (which accounts for about 22% of the economy) and infrastructure. This focus on agriculture and other associated activities, which ropes approximately 65 percent our country’s population will provide a new drive for economic growth.
3. Benefits of foreign direct investment
Although currently the FDI investments have stagnated but its worth can never be lost. The FDI not only enhances domestic capital and supports increase in the prolific capacity of the economy; it also provides an exposure to the world class and top-quality equipment, services, processes, goods and jobs.
4. The global outsourcing boom
Each time one discusses about outsourcing, the Indian business process outsourcing companies strike our minds. Mostly the afterthought is that BPO is a call centre, but in reality there is a lot more to this industry. Opportunely, India is benefiting from this business on a large scale.
Some examples of the work coming to India in this sector is: research and improvement of a variety of products and services which include pharmaceuticals also, merchandizing of automobile parts and the entire IT networks. Due to the efficient services of the Indians in this field and the growth in the satisfaction levels of the clients there is a lot of work coming in this sector to India soon.
5. Well-synchronized and deep money markets
The Indian stock markets which include banks and mutual funds are well synchronized by the Securities and Exchange Board of India and the RBI. Although the procedure suffers from many irregularities e.g. the culprits of the 1992 and 2000 scams are still being traced, but on the whole the functioning has improved dramatically now.
To conclude we can say that, this is not going to be a cakewalk in any sense. It's not an easy task to do business in India; rather it’s really problematic finding appropriate associates who have alike long-term objectives, since most firms are small-scale and family run. Margins have already dropped and majority of the real estate finances are targeting returns between 25% and 30%, but they can go down to 20% any time. Therefore it is very important for the government to monitor and support the real estate market so that the shortcomings and the loopholes which are being observed in the present can be eliminated to the fullest possible extent.
In spite of all the above fears, all agree that the potential of India's real estate sector is colossal. It is one of the most sought after markets for two main reasons. One, with a population of over a billion, the openings are numerous; no other market is witnessing this sort of development both in business as well as housing markets. Two, the industry has an average rate of return of 30% and it will not be a surprise if the local developers achieve an IRR of as much as 50%. Clearly, India is one of the toppers in the list of competitors in real estate in the world.
After the September 11 incident in the US, investments in Indian markets have gained momentum. India has encouraged Non Resident Indians (NRI’s) and Foreign Investors by giving them tax incentives and relaxation of foreign direct investments (FDI) rules. The RBI has further relaxed the rules for NRI’s with respect to returning of foreign exchange in real estate investments. In addition to being one of the safest destinations, India now offers 15 to 25 per cent returns which are conceivably the highest in the world. Mumbai alone accounts for 30 percent of the Indian real estate business in India.
India’s market potential
1. It is the fifth largest economy in the world (above France, Italy, the United Kingdom, and Russia)
2. It has the third largest GDP in the entire continent of Asia.
3. It is also the second largest among emerging nations.
Indian Real Estate sector: Facts and Figures
The Indian real estate has a massive potential demand in almost every segment especially commercial, retail, residential, healthcare, hospitality etc.
Now let us take a look at some of the facts and figures about the retail industry in India.
1. The projected size of the organized Indian real estate sector is approximately USD 12 billion of India's USD 600 billion economy; which is just 2% less as compared to the mature economies of the world.
2. Relaxation of the FDI rules has brought about capital gains in almost every sector of Indian economy. The government is also making efforts in removing the strict guidelines of FDI so that the system becomes NRI friendly.
3. An estimated 30% growth has been observed in the retail sector last year, due to the relaxed FDI norms and the connected growth drivers. It has been estimated that by 2010 the Indian real estate sector would be between somewhere between USD 45-50 billion
4. Real estate sector has the potential to reach the target of USD 90 billion in 10 years.
5. The real estate prices these days are already on the upswing in all markets across sectors since the last two years.
Foreign Investment (FDI) in Real Estate Sectors in India
Initially only NRI's and PIO's were the only ones who were allowed to invest in housing and real estate sectors. Foreign investors except NRI’s were permitted to invest only in the improvement of integrated township projects and that too through a wholly-owned subsidiary or a joint venture company with a local partner.
In 2005 the Indian government fully opened the FDI in real estate. However, the rules framed later limited the minimum capitalization of $10 million for a wholly-owned subsidiary and that of $5 million for a joint venture company mandatory. In addition to this in March 2005, the Department of Industrial Policy and Promotion allowed FDI in real estate projects in a minimum area of 25 acres.
The finance ministry has also allowed external commercial borrowing (ECB) in real estate projects concerning townships spread in an area of 25 acres or 50,000 sq m. However, this has not yet been notified by the RBI. In the present situation, the government has allowed FDI in real estate, but does not sanction foreign institutional investment. Nevertheless, the government is going to remove the gap in the meanings of FII and FDI and is also planning to levy the same rules for both types of investments.
NRI’s can now purchase, rent and transfer residential/ immovable property in India. However, the set of laws do not permit the NRIs and PIO’s to attain property like agricultural land, cultivated area and farm houses in India. However they can take the rental income of the property situated in India.
The NRI/PIO can use their own funds to buy immovable property; excluding the option of availing home loans from banks for this purpose. The NRI's ‘own funds’ refer to the money received in India by way of private transfer of funds from abroad, out of the income earned there including the personal savings outside India. These funds can be transferred through Non-Resident External (NRE), Non-Resident Ordinary (NRO) or Non resident foreign currency bank accounts.
Moreover, they can dispatch earnings from sale outside India for a maximum of two properties held here without taking any permission from RBI. The transfer of funds for subsequent properties requires RBI's approval. In case the property is bought from an Indian account, the remittance depends entirely on the nature of the holding period of the property. The various sectors in which investments in the real are done are the following:
Residential (Housing): The mortgage rates lowered from 18% to 8% in the last 5 years.
Commercial (Office space): the leasing in IT space is booming with 12 million sq ft leasing in Bangalore, 7.7 million sq ft in the National Capital Region and 6 million sq ft in Mumbai in 2007.
Retail (Shopping): Organized retail, which constitutes 2 % of the USD 200 billion sector, is expected to grow from USD 4 billion to USD 15 billion by 2010.
Hospitality (Hotels): Domestic and International investors are planning to invest in 3 and 4 star category hotels as India will require 75,000 to 1, 00,000 rooms in the next 5 years. Doe to the Commonwealth Games coming up in 2008 there will be a greater need for top class hotels to cater to the urgent need of rooms to vacate the teams and the viewers. Many international hotel chains like Hilton, Clariges, Radisson, Le Meridian etc. are expanding their hotel business in India and are purchasing large areas of property to construct 5 star hotels.
Other areas where the real estate business is coming to India are in the building of resorts, hospitals, educational institutions, recreational facilities, Special Economic zones etc.
Conditions for Foreign Investment in Real Estate Sector in India
Foreign Direct Investment in some of the areas (not all) is subject to some conditions, some of which are stated as follows:
1. The development of a minimum land area of 10 hectares for housing plots, and a minimum developed area of 50,000 sq m in case of construction projects is necessary. ‘Built-up’ or ‘developed’ is not properly defined but FSI (Floor Space Index) or FAR (Floor Area Ratio) can be used as the source for the same.
2. To fulfill the minimum capitalization limit of $10 million for a wholly-owned subsidiary and $5 million for Joint Ventures is the mandatory requirement and these funds should be brought in India within six months of the initiation of business (as defined in the contract).
3. To complete 50% of the project work in the time period of five years from the date of receiving all clearances.
4. Not to sell undeveloped plots i.e. without any infrastructure, to provide proper facilities and to obtain a completion certificate from the local body concerned before clearance. But in reality this process takes a long time and the certificates are issued at a very later stage which leads to uncertainty and an excess expenditure on the construction.
5. The original investment should not be sent back before three years from the completion of minimum capitalization. If this process is to be quickened then the prior permission of the Foreign Investment and Promotion Board should be sought.
6. The investments should be done in confirmation with all applicable local and state laws, and all rules and regulations should be followed to the fullest possible extent.
Reasons for investing in India
There are various reasons for foreign investors to invest in the real estate in India. 5 main reasons have been discussed here.
1. Resilience
It has been 20 years since the reforms in the Indian economy have begun. There have been various developments and the main amongst them are; the opening up of the economy to investments abroad, amplification of the domestic financial system, validation of interest and exchange rates, liberal approach for imports, a more favorable atmosphere for investing in business, and the services for the community as a whole.
This buoyancy is clearly evident from the fact that the standard economic growth rates have moved up (8.2% in the financial year ending in March 2006) and India is emerging as one of the top budding economies in the world. The change in the government has also not blocked growth entirely; in fact this has boosted the economic growth further.
2. Improved focus on agriculture and infrastructure
In the present times there has been a constant focus on agriculture (which accounts for about 22% of the economy) and infrastructure. This focus on agriculture and other associated activities, which ropes approximately 65 percent our country’s population will provide a new drive for economic growth.
3. Benefits of foreign direct investment
Although currently the FDI investments have stagnated but its worth can never be lost. The FDI not only enhances domestic capital and supports increase in the prolific capacity of the economy; it also provides an exposure to the world class and top-quality equipment, services, processes, goods and jobs.
4. The global outsourcing boom
Each time one discusses about outsourcing, the Indian business process outsourcing companies strike our minds. Mostly the afterthought is that BPO is a call centre, but in reality there is a lot more to this industry. Opportunely, India is benefiting from this business on a large scale.
Some examples of the work coming to India in this sector is: research and improvement of a variety of products and services which include pharmaceuticals also, merchandizing of automobile parts and the entire IT networks. Due to the efficient services of the Indians in this field and the growth in the satisfaction levels of the clients there is a lot of work coming in this sector to India soon.
5. Well-synchronized and deep money markets
The Indian stock markets which include banks and mutual funds are well synchronized by the Securities and Exchange Board of India and the RBI. Although the procedure suffers from many irregularities e.g. the culprits of the 1992 and 2000 scams are still being traced, but on the whole the functioning has improved dramatically now.
To conclude we can say that, this is not going to be a cakewalk in any sense. It's not an easy task to do business in India; rather it’s really problematic finding appropriate associates who have alike long-term objectives, since most firms are small-scale and family run. Margins have already dropped and majority of the real estate finances are targeting returns between 25% and 30%, but they can go down to 20% any time. Therefore it is very important for the government to monitor and support the real estate market so that the shortcomings and the loopholes which are being observed in the present can be eliminated to the fullest possible extent.
In spite of all the above fears, all agree that the potential of India's real estate sector is colossal. It is one of the most sought after markets for two main reasons. One, with a population of over a billion, the openings are numerous; no other market is witnessing this sort of development both in business as well as housing markets. Two, the industry has an average rate of return of 30% and it will not be a surprise if the local developers achieve an IRR of as much as 50%. Clearly, India is one of the toppers in the list of competitors in real estate in the world.
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