NRI Investment in India: Key points to consider
The real estate market in India is facing liquidity issues and NRI funds are a good way to tackle this problem. However, NRIs are wary of investing in real estate because of several reasons, which have been classified as 4 Cs.
Cost Issues: Builders in India are not transparent enough, when it comes to costs associated with any project. Labor cost, regulatory cost and raw material cost are cited later as having escalated, and are arbitrarily added to the cost of the real estate development. Also, not all price parameters are quoted upfront – for example, parking area charges and development charges. This lack of transparency leads to an atmosphere of mistrust.
Commitment to Timeline: Project developers typically under-promise the time of completion of a project and end up delaying the project. This delay is often not addressed in the terms of the contract or by Indian laws.
Construction Quality: NRIs believe that the quality of construction material is not as promised by the builder. Third party certification would go a long way in building up trust in this regard.
Carpet area to sale-able area ratios: Indian regulatory authorities have not defined these parameters for the real estate market, and this ambiguity results in NRIs being wary of what is quoted by a developer.
If real estate developers can build trust in the NRI investor, he will be willing to invest in this sector. To understand the volume of funds that the real estate industry can tap into, what kind of NRI remittances are we looking at targeting here?
More than $71 billion! India is the top recipient of officially recorded remittances, followed by China and Philippines a distant third. In India, these remittances are larger than the earnings from IT exports, and long term studies have found that as the rupee falls against the US dollar, these remittances to India increase. NRIs found that India was an attractive option for investment, leading to them remitting about $71 billion back to India in 2013 (according to a World Bank report), up from around $15 billion in 2001.
Falling rupee against dollar
The Rupee’s sharp fall against the US Dollar over the last few years is the major influencing factor for this NRI remittance rise. From 2008 to 2014, the Rupee fell from approximately Rs.40 to approximately Rs.62, with a low of even Rs.69. The Rupee’s free fall was halted by the intervention of the Reserve Bank of India and the Finance Ministry. The situation made inflow of funds into India a viable option.
NRI Remittances
The bulk of NRI funds are streamlined into NRE/NRO bank accounts and FCNR accounts in India. Indians living abroad see this as a safe investment versus investments in the volatile stock market, risky entrepreneurial ventures, low-return bond market or the non-professional real estate market.
NRO Account is Non-Resident Ordinary Rupee Account and is opened in one of four forms: current, savings, recurring or fixed deposit accounts. The NRI is allowed to remit from the NRO account up to $ 1 million every year, which can include sale proceeds of immovable property. If a foreign national is visiting India, he too can open a NRO account and remit funds through the banking or foreign exchange routes. NRE or Non-Resident (External) Rupee Account is the other favorite investment location for the NRI. This has the added advantage of interest income and balances being exempt from Income tax and Wealth tax. FCNR (B) is Foreign Currency Non Resident (Bank) Account, which is a term deposit, with a maximum tenure of five years. FCNRs are similar to NRE accounts, and can even be used as security to avail loans up to Rs.1 crore. The added advantage is that even if the NRI becomes a resident of India, he can still continue to receive the same rate of interest he was getting earlier. The Reserve Bank of India creates schemes to make this form of investment tempting to the NRI.
In the light of all these options, the typical NRI prefers to invest his hard-earned money in safe, government-backed routes. The real estate sector should look at how to attract these funds so that its own liquidity pressure can be eased, as well as provide a good return on investment for the NRI.
