Property Sales Slump as NRI's lose faith - Our analysis and recommendations

We picked off on the same subject line which Economic Times came out with on July 16th 2012 about a nose dive in property investments by Keralites who are NRIs.  You can read the full article here: http://articles.economictimes.indiatimes.com/2012-07-16/news/32698366_1_property-sales-property-prices-nri-investment.

We also post our analysis and recommendations on the basis of the article below.

ARTICLE SUMMARY (Source: Economic Times)

1. NRI's account for 70% of the investments in real estate in the State and this has come down by 40% in the last three quarters.

2. Sahara, DLF, Unitech, SRK have delayed their projects or cancelled their launches.

3. Key reasons for lack of interest is pointed out to be long delays and as per the article a staggering 70% of the projects in 2700 to 4000 square feet bracket are delayed by upto 2 years. There are 10,000 such properties.

4. People are investing in projects which are nearing completion to remain safe with their investments. There is also an example of an NRI investor who put in 70 Lakh in 2005 and is still awaiting possession.

5. Wait and watch strategy by NRIs in the hope that property prices would come down or investment in asset's which give return of 8-9% and are relatively safer. 

6. Small builders are more affected due to working capital requirements not being met

OUR ANALYSIS

A careful second look at the article and a root cause analysis will give you little more insights into what is the real cause behind the problem. We take up one at a time.

Lower Investments
A drop in investments in the last three quarters in the real estate sector is not just typical of the Kerala market. A global economic down turn and less money in the global system and even people losing jobs in markets like Abu Dabhi & Dubai are reason for the same. A sceptical personal future outlook means people want to stick on to their money than invest in real estate. However if you look at the broader picture of the boom - bust cycle, investments tend to work cyclically and you might see most of the world at a peak again  in the next 4 to 5 years. Kerala and Trivandrum are particularly ranked as highly competitive and good cities to invest in by most real estate surveys which were done this year and in 2011. Hence the opportunity is still quite good to invest in real estate as the fundamentals of the Indian economy are still good although GDP growth rates have slowed from 8% to about 5%.

Delays by Larger Builders
Delays and cancellations by larger builders are not just typical of Kerala. There have been huge drops especially by large builders in cities like Mumbai and Delhi. Please read more here on an article published in July 5 on Hindu Business Line. House sales slump in Mumbai due to oversupply. The article mentions that developers have been more open to negotiation in the premium segment, reducing prices upto a maximum of 25 per cent. What we would like to highlight are the fact, that as mentioned by us already real estate is a high leverage business. Groups like Brigade could take loans of upto 300 crore for a Villa project from banks at the prevailing interest rate. When supply overtakes demand, developers tend to slow down on the construction to keep the costs low, since they would want to sell their unsold units. This is particularly evident in the highly valued segment. Often larger builders take up larger projects or announce them in advance to garner market attention or even for share price escalation. However when their earlier projects in cities like Mumbai or Delhi get stuck due to lack of demand, they are bound to cancel their existing plans or put them on hold. We believe the reason for cancellations are also due to undercurrents across India and not just due to a lack of demand in Kerala. Larger builders having a stake in projects across the country will take a look at their working capital as a whole before committing to new projects.

Premium and Luxury properties
The point to note here is that 10,000 properties mentioned here are premium or luxury properties since a typical 3BHK house does not exceed 2000 SQ. FT. in any apartment. A 2700 to 4000 bracket indirectly refers to the Villas segment or the 4BHK or Duplex or Penthouses which usually come in that range. In most villa projects especially by smaller builders the number of units are less and hence cost per property and eventually the risk of completion per property is higher. Thus delays could predominantly be attributed to the premium or high value segment above 1crore, since a 70 Lakh investment in 2005 is equivalent to a 1.2 crore rupee investment in today's time. The real delays have not been reported in the budget or larger chunk of the market which is under 60 lakhs range.

Wait and Watch Strategy
In the world of economics wait and watch has never really worked. Warren Buffet invested and bought 5% share in Gold man Sachs when the market was in a bust. Facebook become a 100billion IPO after the bust cycle and Google came out after the 2001 bust. So investors who prudently invest always tend to make more money than others who wait. However investment has to be done with caution and awareness especially since what you want to do is multiply your investment and get a handsome ROI in 5 to 6 years or longer. We believe that since real demand is there in certain sections of real estate in Kerala, investing prudently with sound advice will not leave you in a state of worry.

Small Builders
As advised in our earlier few articles in this blog, you really need to watch out for the builder and take care of a few factors for new launched properties which deter buyers. For small builders their leverage, track history, ownership and other financial commitments need to be looked at before deciding on a property. Sound advice usually would deter you from a faulty investment and keep you away from fraud.

Our recommendation from the above analysis, is not to feel disgruntled but to really build awareness about what you are putting your money into before making the decision. Builders can easily do marketing events or road shows or boast of things on the internet, but it is for the investor to come to a decision on what he or she wants to buy.

If you are interested in buying a property in the premium or luxury segment above 1crore, there are special advisory services which cater to your need ensuring you can be rest assured of a safe investment. Without proper advice and by just going by hear say, you always run the huge risk of your money stacked up in a real estate investment with zero returns.

Common questions for NRIs investing in real estate in Trivandrum

Q) Do non-resident Indian citizens require permission of Reserve to acquire residential/commercial properly in India?

A) No.

Q) In what manner the purchase consideration for the residential immovable property should be paid by foreign citizens of Indian origin under the general permission?

A) The purchase consideration should be met either out of inward remittances in foreign exchange through normal banking channels or out of funds from NTE/FCNR accounts maintained with banks in India.

Q) Do foreign citizens of Indian origin require permission of Reserve Bank to purchase immovable property in India for their residential use?

A) Yes. However, Reserve Bank has granted general permission to foreign citizens of Indian origin, whether resident in India or abroad, to purchase immovable property in India for their bona fide residential purpose. They are, therefore, not required to obtain separate permission of Reserve Bank.

Q) What are the formalities required to be completed by foreign citizens of Indian origin for purchasing residential immovable property in India under the general permission.?

A) They are required to file a declaration in form IPI 7 with the Central Office of Reserve Bank at Mumbai within a period of 90 days from the date of purchase of immovable property or final payment of purchase consideration along with a certified copy of the document evidencing the transaction and bank certificate regarding the consideration paid.

Q) Can such property be sold without the permission of Reserve Bank?

A) Yes. Reserve Bank has granted general permission for sale of such property. However, where the property is purchased by another foreign citizen of Indian origin, funds towards the purchase consideration should either be remitted to India or paid out of balances in NRE/FCNR accounts.

Q) Can sale proceeds of such property if and when sold be remitted out of India?

A) In respect of residential properties purchased on or after 26th May,1993, Reserve Bank considers applications for repatriation of sale proceeds up to the consideration amount remitted in foreign exchange for the acquisition of the property for two such properties. The balance amount of sale proceeds if any or sale proceeds in respect of properties purchased prior to 26th May, 1993, will have to be credited to the ordinary non-resident rupee account of the owner of the property.

Q) Are any conditions required to be fulfilled if repatriation of sale proceeds is desired?

A) Applications for repatriation of sale proceeds are considered provided the sale takes place after three years from the date of final purchase deed or from the date of payment of final installment of consideration amount, whichever is later.

Q) What is the procedure for seeking such repatriation?

A) Applications for necessary permission for remittance of sale proceeds should be made in form IPI 8 to the Central Office of Reserve Bank at Mumbai within 90 days of the sale of the property.

Q) Can foreign citizens of Indian origin acquire or dispose of residential property by way of gift?

A) Yes. Reserve Bank has granted general permission to foreign citizens of Indian origin to acquire or dispose of properties up to two houses by way of gift from or to a relative who may be an Indian citizen or a person of Indian origin whether resident in India or not,provided gift tax has been paid.

Q) Can foreign citizens of Indian origin acquire commercial properties in India?

A) Yes. Under the general permission granted by Reserve Bank properties other than agricultural land/farm house/plantation property can be acquired by foreign citizens of Indian origin provided the purchase consideration is met either out of inward remittances in foreign exchange through normal banking channels or out of funds from the purchasers NRE/FCNR accounts maintained with banks in India and a declaration is submitted to the Central Office of Reserve Bank in form IPI 7 within a period of 90 days from the date of purchase of the property/final payment of purchase consideration.

Q) Can they dispose of such properties?
A) Yes.

Q) Can sale proceeds of such property be remitted out of India?

A) Yes. Repatriation of original investment in respect of properties purchased by foreign citizens of Indian origin on or after 26th May 1993 will be allowed to be remitted up to the consideration amount originally remitted from abroad provided the property is sold after a period of three years from the date of the final purchase deed or from the date of payment of final installment of consideration amount, whichever is later. Applications for the purpose are required to be made to the Central Office of Reserve Bank within 90 days of the sale of property in form IPI 8.

Q) Can the properties (residential/commercial) be given on rent if not required for immediate use?

A) Yes. Reserve Bank has granted general permission for letting out of any immovable property in India. The rental income or proceeds of any investment of such income has to be credited to NRO account.

Q) Can NRIs obtain loans for acquisition of a house/flat for residential purpose from financial institutions providing housing finance?

A) Reserve Bank has granted general permission to certain financial institutions providing housing finance e.g. HDFC,LIC Housing Finance Ltd.,etc. to grant housing loans to non-resident Indian nationals for acquisition of houses/flats for self-occupation subject to certain conditions.

Q) Can authorized dealer grant loans to NRIs for acquisition of a flat/house for residential purposes?

A) Authorized dealers have been granted permission to grant loans up to non-resident Indian nationals for acquisition of house/flat for self-occupation on their return to India subject to certain conditions. Repayment of the loan should be made within a period not exceeding 15 years out of inward remittance through banking channels or out of funds held in the investments NRE/FCNR accounts.

Q) Can Indian companies grant loans to their NRI staff?

A) Reserve Bank permits Indian firms/companies to grant housing loans to their employees deputed abroad and holding Indian passport subject to certain conditions.

Source: Reserve Bank of India

Q) What are the options available for obtaining guarantors while applying for a HDFC/LIC loan?

A) One will need a guarantor for a loan mainly for collateral security. The guarantor will have to demonstrate appropriate net worth to cover for the loan. Usually one can have a guarantor in any city where the loan issuer has a branch. Talk to loan issuers they will work something out for NRIs and foreign banks.

Q) While purchasing real estate most developers demand a Power of Attorney in their favor, is there a way to avoid it?

A) One can choose not to grant the Power of Attorney (POA) to the developers. However this will mandate the mailing of all documents to your foreign residence and associated time delays. A good compromise is to grant the POA to the builder only for specific necessary items.  

For further questions, please contact Nandanam Consultants at www.nandanamconsultants.in

Why buying property in Trivandrum is profitable for NRIs?

Does it make sense for NRIs to purchase property in Trivandrum? 

Let's assume that some one is working in the United States and earning USD 7,000 per month. Let's assume that he can save about USD 2,000 per month and he wants to invest this money safely but not in the stock markets which tend to be volatile. Since the interest rates in the US being low a good idea is to invest in a secured asset in India.

The two basic options available for an NRI are either to go in for an under-construction property or for a built-up property.In case of a under-construction property, it is advisable to go in for an upcoming area, where there is higher potential for price appreciation. In case of a built-up or a ready to occupy property, one should look for a developed area, as the individual can start getting immediate rental income. 

A typical 2 bedroom apartment in Trivandrum costs about 45 Lacs and a 3 bedroom costs about Rs.60 Lacs. Lets assume that the individual has about Rs 30 lakhs in his NRE account in India. If the property is ready to occupy then once needs to arrange the balance Rs 30 lakhs for a 3BHK, plus another Rs 10 lakhs for registration, wardrobes, electrical fittings and any other necessary fixtures.

The Reserve Bank of India (RBI) regulations permit paying off the Rs.30 Lacs from the NRE account. For the balance Rs. 30 Lakhs the individual can apply for a home loan with any banks.

The bank verification would include  the current job profile, past experience, period for which he will continue to be abroad for the loan tenure, chances of servicing the loan in case of return to India, local income etc. The margin money required is usually 20% so in this case it would be Rs. 6 lacs for the home loan.

Property documents for a home loan include:

Original title deeds tracing the title of the property

Encumbrance certificate Agreement of sale or construction

Approved plan 

Once the property is purchased, a power of attorney can be given by the individual to his or her parents or spouse or another relative to deal with the property. Repayment of the home loan for a NRI is permissible through specific sources, such as remittances from abroad through banks, from any deposit accounts maintained in India or through a specified close relative. Tax deduction benefits on home loan repayments cannot be availed unless the returns are filed in India.

ROI Calculation:

Typical Interest paid per annum on a loan of Rs.30 Lacs - Rs.30,000 per month i.e. Rs. 3,60,000 per annum

Rental income (assume) - Rs. 12,000 per month i.e Rs. 2,40,000 per annum

Less : Property Tax plus annual maintenance - Rs. 30,000 per anum

Net: Rs. 2, 10,000 per annum

Housing deduction: Rs. 3,60,000 per annum

Net outflow : Rs. 1,50,000 per annum i.e. about Rs. 12,500 per month.

So, considering the rental income the EMIs are self-financed to a great extent.The actual cost for the property over a period of 20 years is about Rs. 30 Lacs. 

At an annual appreciation of about 20% CAGR, the value of the property would be over Rs. 1.5 crore  after 20 years and the net gain for the investor would be about Rs. 1 crore and 20 lacs.