_Overseas homes now sound investment decisions for Indians

Funds sent abroad by resident Indians through the Reserve Bank of India’s Liberalised Remittances Scheme (LRS) has increased from USD 25 million in 2005-06 to USD 8 billion USD in 2016-17.

While the share of immovable property in that staggering volume of capital is just about 1% we must remember that purchasing of property through LRS is a recent phenomenon. This is perhaps just the tip of the iceberg.

With the LRS limit today at USD 250,000 per person or about USD 1 million for a family of four in a year there are a plethora of compact 1 to 3 BHK under construction apartments easily available for purchase.

Earlier decisions to buy an overseas home were largely driven by fascination for exotic location, need for a second home or perhaps as a safe shelter for our children studying abroad. But today Indians purchasing residential properties overseas are mostly sound investment decisions.

To make sound investment decisions the buyer must be well informed. Information regarding price trends, taxations and duty structure in those countries, repatriation of funds, currency movement etc. are extremely essential to make informed decisions. In fact, a recent Knight Frank analysis substantiated the growing propensity among Indians to acquire homes on foreign soil.

Two primary drivers that has catapult overseas homes among desirable investment options were the strengthening of the Indian Rupee and drop in property prices at foreign markets. London, for instance, saw a fall in property prices in the wake of Brexit. 

Our research shows that resident Indians buying homes in the United Kingdom, Cyprus, Malaysia and Dubai today (as on the June-ending quarter of 2017) would find it cheaper as compared to a year ago. This is despite property appreciation in residential markets at the three destinations.

Investments made in foreign property from a long-term perspective also reaped rich dividends for Indians. For instance, overseas homes bought at the end of quarter ending June 2012 and disposed of five years later gained from the investments in 4 out of the 5 most preferred international markets.

In our view residential property buyers in Dubai benefitted the most with an overall return of 49.3% followed by Australia at 38.7%. The Gulf destination offered dual returns as the Indian Rupee depreciated versus the local UAE currency and property prices appreciated during the period in question.

While price fluctuations and difference in currency value is not too difficult to decipher, understanding the taxation structure of a foreign country could be cumbersome. Tax related regulations are also dynamic in nature. Buyers must therefore seek expert advice to make informed decisions. 

Our recent assessment of six-odd preferred international markets for overseas homes showed that Australia had the highest tax incidence and overall cost. Dubai on the contrary offered the lowest tax incidence but the overall costs (including tax and non-tax cost) for property investments were lowest in Malaysia.

The residential market in India has been largely sluggish for some time. With a spate of new reforms in place it is unlikely to gain momentum in the immediate future. Property prices in select foreign markets on the other hand, have seen a stupendous growth. With global growth returning and inching slowly towards the pre-2008 levels, this appreciation in property prices is likely to continue.

Further rental yields abroad are much higher than in India. The rental yields in countries like the UAE, particularly in Dubai, are as high as 6–7% per annum compared to the rental yields of 1.5–2.5% in India. In a nutshell there is more than one reason to look up foreign homes as a robust investment options.