India: India

Guide to the Risk and Opportunity Ratings

At the end of each country profile, we have given a risk rating and an opportunity rating. These ratings are a summary of our analysis indicating the levels of risk when investing in a market and the level of opportunity to profit from it.

The ratings themselves are simple. Both work on a scale of one to five. The opportunity rating is indicated by the $ symbol. A single $ equals a low opportunity whilst 5 of them ($ $ $ $ $) equals the highest opportunity ranking.

For risk we have used the * symbol. A ranking of * equals a low risk rating whilst * * * * * equals a high risk rating.

Introduction

India is undoubtedly an emerging market – with all the potential for capital appreciation which that entails. Yet it is also a market in which transactions take place in English, finance and banking is straightforward, and a growing middle class ensures a healthy rental market.

The rocketing population creates a constant demand for property, meaning that India unarguably presents an interesting prospect for real estate investors.

There is, however, a catch. The opportunity to buy is restricted to people with strong personal links to India, defined as either non-resident Indians (NRI) or persons of Indian origin (PIO). This means either Indian citizens living abroad or people who have held an Indian passport at some time, have a parent or grandparent with Indian citizenship or are married to an Indian citizen.

Technically foreign citizens of Indian origin also need agreement from the Reserve Bank, but a general permission to buy immoveable property has been granted.

If the buyer has status as an NRI or PIO the rule is as follows:

“An Indian citizen residing outside India (NRI) can acquire by way of purchase, any immovable property in India other than agricultural, plantation or farm house. He is allowed to transfer such kind of immovable property to a person resident outside India who is a citizen of India or to a person of Indian origin resident outside India or a person resident in India.”

Is this a good place to buy?

The growth of India’s middle classes is one of the big demographic stories of the past ten years. China might be forging ahead economically, with average GDP growth over the past decade of 9% compared to India’s 6%, but India is still growing at a rate double that achieved by the West during the Industrial Revolution.

India’s middle class is now growing by 15 – 20 million people every year and by 2025 half of the population will be categorised as middle class. This creates a new class of young relatively wealthy consumers who buy mobile phones and laptops and are moving into homes of their own.

India’s stability, the lack of a communist government, and the right to freehold property makes the real estate market here in many ways preferable to that in China. And it isn’t just economic growth which encourages people to buy: there is also ample room for the real estate industry to develop. The ratio between mortgages and GDP in India is still only 2% – compared to 52% in the US. Interest rates hover just above a reasonable 4%, having plummeted since 2001.

Net income in India has grown 100% over the last ten years and population growth is expected to help India take China’s place as the most populous country by 2040. Twenty million houses will be needed in the next five years if supply is to keep up with demand. Investors couldn’t ask for a better set of market fundamentals.

There are over twenty million non-resident Indians and they retain close links to the country. Remittances by overseas Indians are higher than for any other country in the world, according to recent World Bank Studies they now total US $21.7 billion a year; ahead of both China and Mexico.

Overseas and non-resident Indians often like to maintain a base in the country. Their wealth provides a constant boost to a property market which has been one of the strongest internationally over the past few years.

Price history

The property market in India first boomed and then crashed in the mid 1990s as over-optimistic developers released too much residential and commercial supply onto the market. Prices declined until an expansion of the mortgage market allowed prices to again expand. Prices have been rising since, as a growing middle class, falling interest rates and increased take up of mortgage lending help the property market to rise.

Buyers this market will appeal to

Eligible emerging market investors who might otherwise turn to China may prefer the greater degree of stability and ease of investing in India. The use of English during transactions, right to buy freehold property and greater transparency of government makes India a good alternative choice for those that have a right to buy here.

Hotspots

Those looking for a pure investment buy will probably be tempted to the cities. The property markets in Mumbai, Delhi, Bangalore and Chennai have all undergone radical growth in the last few years. Local experts now tip Mumbai and Bangalore as the best bet over the next six-twelve months. Locals believe that the best opportunity of all may be found in prime property in Mumbai.

For buyers looking to pick up a second home for holiday use or for the holiday market, the best letting opportunities are in Goa and Kerala in Southern India. Kerala has become increasingly popular as a holiday destination over the past few years. Modern four bedroom villas are likely to cost between £30,000 ($52,000) and £50,000 ($87,000) in Kerala. Apartments in Goa are advertised from £10,000, with three bedroom villas from £40,000 ($70,000). In both areas an apartment in a gated compound can be a good buy. A sub-tropical climate can have a harsh effect on buildings. Buy into a serviced apartment block and less can go wrong in your absence.

Wherever you choose to buy, you will find India well supplied with research resources. Indiaproperties.com for example, has a regional market section which gives up to date information on costs in different areas of major cities.

Type of property to invest in

Local property consultants tip prime property, apartments and villas of the highest standard and in the most central location available. Whereas property prices in the countryside or suburbs of different cities may remain static, prime property in every major city is tipped to continue on an upwards trajectory.

Key risks and opportunities

Prices have risen so fast in some urban areas that local experts are warning of a potential bubble. In 2005 prices in some Delhi suburbs began to fall after doubling in the space of a few months. The state of a particular local market can be checked by reading the property section in the local English language newspaper which can usually be found through a good search engine or local news websites.

Repatriation of funds can be a problem. In a circular dated January 2004 the Reserve Bank of India declared that up to $1 million can be repatriated in any calendar year, as long as the buyer can prove that funds were derived from a property sale. However, the property must have been paid for from a rupee account and repatriation of funds is only permitted up to the amount originally invested.

Unless investment laws are further liberalised, this suggests that returns have to be made from rental income rather than capital appreciation. Non-resident Indians are allowed to rent out property and to repatriate the income earned, subject to local taxation.

Buying process

After agreeing the purchase price, contracts are signed in the presence of a notary, who then registers the change of ownership. It is possible to buy using a power of attorney and funds should be paid out of a rupee account.

Mortgages

Non-resident Indians are able to obtain loans from Indian Banks at rates of interest close to 9%. At the beginning of 2006 interest rates are 8% (floating) and 9.5% (fixed). Loan terms are up to ten years and may be offered over fifteen years on an exceptional basis. Loans on new property will be offered up to 85% of agreement value while for resale property 80% is the maximum available.

Opportunity rating

The burgeoning Indian economy and a rapidly growing middle class make India an outstanding investment opportunity, albeit for a restricted market. The internationalisation of the economy and India’s emergence as an economic force should all add up to excellent long term performance in the real estate market.

Rating: $ $ $ $ $

Risk rating

India is not without its problems and corruption can still be an issue. However, the biggest risk for foreign investors is access to their profits although liberalisation is making this easier.

Rating: * * * *

© Vacation Work 2005

“Where to buy a property abroad – An investors guide”, First edition 2006 David Cox, Ray Withers, Kate Godfrey.

Reproduced with the permission of Property Frontiers.

Further information on this topic can be found in Supplied by ...

“Where to buy a property abroad – An investors guide” 1st edition, by David Cox, Ray Withers and Kate Godfrey.

This book is available from all good bookshops nationwide at a recommended retail price of £12.95 or can be ordered directly from www.aninvestorsguide.com for £10.95 including postage and handling (to UK addresses only).

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