HNIs considering investment in property abroad

Real estate has always been a preferred investment avenue for Indians. The current sluggish domestic real estate market is prompting some investors, particularly high net worth individuals (HNIs), to invest in property abroad. The increase allowed in February by the Reserve Bank of India (RBI) in the annual ceiling allowed for individuals to do so abroad from $125,000 to $250,000 has provided an impetus to this.

According to RBI data on outward remittances, in July $7.4 million or Rs 48.8 crore against $0.8 million in July last year was remitted from India for buying immovable property. In 2014-15, the total remittance for purchase of property was $45.5 million.

Says Mudassir Zaidi, national director-residential agency, Knight Frank: “Lucrative valuations are available abroad, due to the economic slowdown. And, with foreign economies seeing signs of revival, there is expectation that property prices will also rise. It is with this expectation that buyers are interested in buying properties overseas.”

There are real estate options in many countries which offer better returns even in these times. Increasingly, the affluent class is investing in properties abroad, says George Mitra, chief executive, Avendus Wealth Management. “Additionally, the prospect of getting citizenship or residency benefits of the country invested in has added to this trend. More, real estate in certain pockets in India has become prohibitively expensive, diminishing the returns for investors. The minimal interest rates in other developed countries, coupled with transparency, is another attraction factor for investment in these markets.” According to Shashank Jain, leader, India real estate deals, PwC, the drivers for buying a property abroad are very different from those influencing a decision to invest in India. “There is a specific set of investor class which looks to invest overseas and largely include HNIs, businessmen, industrialists and professionals who have overseas touch points. That is, operating businesses overseas, children studying or planning to study abroad, future plans to settle overseas, etc,” he says.

Destinations

Most experts agree the popular real estate markets abroad include New York, London, Singapore and Dubai. “These locations are preferred destinations for Indians, owing to the business interests, lifestyle, culture, education facilities and good Indian population in these cities,” says Suraj Nangia, partner, Nangia and Company.

Dubai: Real estate activity has picked up substantially after the 2009-10 crisis. The Dubai land department says during the first half of 2015, Indians were the highest contributors (15 per cent amongst foreigners) on total investments in the sector, reveals Sanjay Dutt, managing director, India, Cushman & Wakefield. “The Dubai market has attained depth and maturity in the wake of rules and regulations put in place by authorities post the 2009-10 crisis. Additionally, the city’s proximity to India has contributed to the investment attractiveness. Dubai also has better transparency in deals and customer protection, compared to India. The city also offers huge investment opportunities in infrastructural development,” he says.

The UK (London): Capital values for the housing segment continue to see strong appreciation due to a demand-supply mismatch. Hence, the prices are expected to rise further.

The US (New York): Demand in the housing market has been robust, with the improvement in economic activity. Going forward, better growth prospects can be expected.

Conditions

While investing in real estate abroad, be certain about eligibility, tax structures there and the tax implications back in India, says Anuj Puri, country head, JLL India.

“One should ensure the actual location of choice has sufficient appreciation potential, establish the suitability of the neighborhood (even more important in a country whose social dynamics one is unfamiliar with) and ensure the property is free of litigation and has a clear title,” he adds.

Remember, too, that in Western countries, rental yields are higher but capital returns are lower, says Zaidi of Knight Frank. In London, for instance, annual rental yields are 4.5-5 per cent and capital appreciation is 2-5 per cent. In Dubai, rental yields can be 8-10 per cent. “Since timelines for completion of projects are smaller, you start getting rental income faster,” he says.

Determining the purpose of investment is important. This would help a buyer decide on the segment for investing, whether residential or commercial, and on size and location of the property, based on self-use or for rental income. Also, look at the country’s economy – factors such as economic growth, employment opportunities, inflation, etc. One must also calculate the interest rate arbitrage and the returns on investment. Also, check the exchange rate for any currency arbitrage, says Dutt of Cushman & Wakefield.

The holding period should be three to five years and annual return of 10-15 per cent can be expected in certain markets, says Mitra of Avendus.

Exchange laws, taxes

Since there is a limit of $250,000 for individuals to remit money abroad for these purposes, investors can consider a joint ownership in case the cost of a property exceeds the limit. “There might be regulations governing real estate ownership by foreign nationals, which could relate to residency or amount of investment or the category of property available for foreign nationals. All this would need to be examined before deciding the preferred overseas jurisdiction to make such an investment,” says Nangia.

One must also understand the country’s land laws. Ownership rights could be different for different nationalities. Check, too, the extent and form of foreign money that can be deployed for buying property, says Jain of PwC.

TAX TREATMENT
Under Indian tax laws, a resident and someone ordinarily resident of India is taxed on worldwide income

Rental income shall be taxed under the head ‘Income from house property’

Deduction towards payment of local taxes in a foreign country is there and a further flat deduction of 30 per cent can be claimed on rental income.

Further, a tax credit is available for taxes paid in a foreign country in a Double Taxation Avoidance Agreement with the country of investment

When a property is sold, the capital gains would be taxable in India. Long-term gains (property held for more than 36 months) are taxed at a flat rate of 20 per cent, after applying the indexation benefit

Short-term capital gains are taxed at normal slab rates. Tax exemption can be availed of by investing the amount of long-term capital gain in another house property in India or in specified NHAI/REC bonds

If the capital gains are taxable in the other country as well, the relevant tax treaty can be examined to avoid double taxation or avail of a credit on foreign taxes against the Indian tax liability, subject to maintenance of documentation.

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