Sep 3rd 2014
The rupee fall may be an opportunity for new investors in property but is also a problem for those already invested. NRI investors who had put in money in Indian real estate due to the high returns are suddenly finding the returns eroded. NRIs who hold premium properties are getting jittery and many have started selling.
Though property prices in prime areas have been rising consistently, the problem is that after the fall in the rupee, their returns have fallen to 10-15 per cent or less. As returns decline, with extent and time horizon uncertain, some of these investors look to shift to safer zones.
Mudassir Zaidi, Regional Head, North, Knight Frank, says after the rupee’s sharp fall NRI investors were in two minds, “whether to stick around or exit.” He believes as NRIs are unsure how long the rupee would continue to fall, they are evaluating options. “After the rupee broke the psychological barrier of 60, there is a clear uncertainty on whether it will fall to 65-70 or more and how long it will continue to languish at these levels,” says Zaidi.
Moreover, Indian property market is over heated to the extent that in the past five years since the 2008 peak, prices have gone up about 18 per cent in Hyderabad, 74 per cent in Bombay, 46 per cent in Bangalore, 38 per cent in Chennai, 54 per cent in Kolkata and 43 per cent in Pune. Added to it, there is a clear demand-supply mismatch as the most preferred range of homes is in the Rs 40-60 lakh category. However, there seems to be oversupply in the luxury market in cities such as Mumbai, Delhi-NCR and many other cities.
In order to attract them developers are leaving no stone unturned. Many seminars and expos are being organized in different parts of the world to woo NRI customers by these developers. However, NRIs do not completely rely on such marketing shows to decide on buying the right house. The agents of the developers in the past have been exposed to provide incorrect and misleading information regarding the true value and prospects of the property that they try to sell. They have often tried to palm off projects that failed to take off in domestic market. So, NRIs nowadays prefer careful research to select the right house to buy in India to get a really great investment idea.
In this mad rush to tap the NRI buyers the developers also fail to understand that the NRI customers are not enough to buy out all the properties nor their investment can be the project driver. Despite the developers’ efforts, the visitor turnout at the property show abroad has been low and as one of the developers, requesting anonymity, says they could make only two bookings at the India Property Fest at the UAE recently.
The reason why the NRI investment can not be panacea to the perils of developers also lies in the fact that in the Mumbai Metropolitan Region and the National Capital Region, the secondary market is appearing very attractive. Investors are exiting these markets and prices are expected to be corrected up to 20-25 per cent in some of the cities.
Analysts assert an efficient market maintains 8-10 months of inventory. A longer time means that units are not selling at current price and a price correction may happen. Today, as per the data available, Mumbai and Delhi-NCR carry 44 months of inventory on an average while Bangalore carries 12 months. So, this is another aspect that deters an NRI.
So, many of them believe opting for secondary properties might be a good option at this point. Buying secondary properties has its own advantages. Apart from being well priced, there is no execution risk as the property is already completed. Further, there is no service tax so NRIs can save on that as well. So, while there are buying opportunities in the current market, experts suggest that NRIs tread with caution.
Clearly, NRIs are no fools either. They prefer predictable outcomes, not hurdles. Real estate is in dire needs of reforms and accountability, without which more investment may just remain a distant dream. Their investment into the Indian real estate is guided by a combination of cost-benefit factors like rental yield (very poor) to policy clarity (ambiguous) and market movement (flat market expected to correct) to ROI (relatively high). So, while the developers are riding on the high ROI to tap the NRIs, smart investors’ cost-benefit analysis may go against the Indian realty due to the three other key evaluation criterion.