For NRI investors, commercial realty is the more lucrative option

It is likely to continue to offer better rental yield and capital appreciation as compared to residential property

Traditionally, real estate has been the preferred option for investors in the country. Despite the multiple policy changes and the numerous ups and downs that this industry has witnessed, it has not lost its sheen completely among investors. 

Non-resident Indians (NRIs) find this sector especially attractive. They consider less volatile physical assets such as real estate to be a safe bet, especially when the depreciating rupee comes into play. A weak rupee offers them more value for the funds they bring into the country. 

Whether an NRI should invest in residential or commercial real estate is a matter of individual requirement and preference. There are pros and cons to both options and the ideal choice should be made only after a thorough consideration of all aspects involved.

Most NRIs usually test the waters by investing in a couple of residential properties before experimenting with the commercial segment. There are several valid reasons for doing so, although they are mostly sentimental rather than financial.

Affordable segment offers steady returns

NRIs usually invest in this segment either for their parents or for their personal use in the future. Residential real estate offers the owner a source of steady income, although the rental yield generated by a house is very meagre — between 1 per cent and 5 per cent.

This segment provides financial stability due to the high demand for affordable accommodation, especially in metros and developing tier-II and tier-III cities that cater to a large number of students and young salaried employees. Capital appreciation in residential real estate, however, depends on the area in which the property is located.

NRI preference usually leans towards Grade A builders, primarily due to the credibility that they provide. Recent reports suggest there is now a surge in interest towards affordable housing as it is easy to rent out.

The presence of a conducive and reform-driven market environment, coupled with specific government sops, makes residential real estate a safer bet for NRI investors. After demonetisation, real estate has become an end-user’s market largely, as most investors have pulled out. This has resulted in a lot of unsold inventory. So, profitable options in the residential segment have been up for grabs for prospective NRI investors. 

Commercial segment requires more research

NRI investors who have tested the waters in the residential sector gradually become open to investing in the commercial segment as it guarantees robust returns on their investment. The rental yield generated by properties in this space lies between 8 per cent and 12 per cent. Also, the capital appreciation registered by commercial assets in prime locations is significantly higher than that of residential properties. 

Investment in commercial real estate requires a lot of research, especially considering that there are very few credible developers, and the market is highly unorganised. At present, it is also heavily broker-dominated. People prefer to invest either in small offices and shops or in IT hubs and commercial complexes.

Nevertheless, if market wisdom is followed, commercial real estate emerges as a more lucrative option, given the fact that assets are being bought for the sole purpose of investment. Naturally, the NRI will need to conduct meticulous research and maybe even pay a personal visit to carefully survey the area in which the commercial property is located to determine the potential profitability of the investment. Commercial sector investments are also less of a hassle for NRIs as tenant takes the responsibility of maintaining the property. 

Consequently, NRIs can easily invest in Grade A commercial properties that are often leased by large corporations with healthier finances. As urbanisation progresses, there is an increasing demand for Grade A offices, IT parks, and so on. The rental agreement in the commercial segment can be for as high as 10-15 years, with a minimum lock-in period of three years.

Investing is getting easier

The introduction of the Real Estate (Regulation and Development) Act (RERA) in 2016 has further boosted NRI investors’ confidence in real estate investment, as it has ushered in greater accountability and transparency in the industry.

Digital developments in the country have further enabled the rise of various Proptech platforms, which present NRI investors with safe and attractive investment options, protecting them from dubious builders.

With the introduction of new regulatory reforms, the engagement of NRI investors with the Indian real estate sector is expected to develop further. Two of the latest developments include the provision of 100 per cent foreign direct investment (FDI) in construction development and the recent rolling out of the first real estate investment trust (Reit) initial public offering (IPO) in India by Embassy Office Parks, a Bengaluru-based real estate developer. 

While it is true that the Reit model is less volatile, the novelty of the venture means there’s lack of historical data in the segment required to compare the performance of Embassy Office Parks’ Reit.

Regardless, commercial real estate presents itself as a promising option for NRIs to invest in. It has proved its profitability time and again and, based on current trends, will continue to do so in the foreseeable future. 

 

Regulations NRIs must follow

 

• NRIs are allowed to invest in residential or commercial property
• They are not allowed to invest in agricultural land, farmhouse, or plantation property, though they can inherit such property
• NRIs can sell residential or commercial property to an NRI, PIO or resident Indian
• If an NRI has to repatriate money, he should do so via the same route through which he got the money into India, after payment of taxes
• NRIs can repatriate a maximum of $1 million in each financial year from the NRO account

The writer is co-founder and CEO of NoBroker.com