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Recently, the Reserve Bank of India reduced the permitted amount of annual remittances through the Liberalised Remittance Scheme (LRS) to $75,000 from $200,000 and also prohibited overseas property investments.
Data from RBI show that there was an outflow of $1.2 billion in fiscal 2012-13 under LRS and only six per cent ($78 million) was used for property purchase.
While this may not seem like a large amount, outflows have shot up 100 times, from around $10 million when the scheme was introduced in FY05.
So where is this Rs 533 crore that went towards home purchases abroad likely to flow now? Given that the Indian real estate market beat most overseas markets in the last few years, it may seem that the local market will benefit from this, but experts disagree.
No substitute
“Overseas investments are viewed as a geographical market diversification as well as a currency diversification,” says Ajay Bagga, Head - Private Wealth Management, Deutsche Bank India, “while domestic property investments are for personal end use or for investments”.
He recommended overseas mutual funds offered by leading fund houses to achieve currency and markets diversification.
Sumeeth Vaid, Founder and CEO of Ffreedom Financial Planners, agrees that domestic and overseas property purchases are not inter-changeable but believes that property should be viewed as a goal rather than as a part of asset allocation.
This way, one can take a broader view of the steps to be taken now to have a home abroad later, when the limitations are likely lifted.
Limited options
In addition to direct property purchase, indirect investments cannot be made. This means that private equity funds and hedge funds that invest in real estate are also disallowed. Shobhit Agarwal, Managing Director - Capital Markets, Jones Lang LaSalle India, stated that as investment in REIT (real estate investment trust) is done through purchasing shares of a foreign listed company, it may not be construed as property investment.
He however does not believe that there will be substantial interest in REITs abroad. “Returns from REITs are comparable to fixed deposit investment in India and is more complex as it involves foreign exchange,” he said.
The corporate investment route, preferred for its advantages such as tax benefits and the ability to get loans, is also hit by the new rules.
The RBI has capped overseas direct investment (ODI) by Indian companies to the net worth of the company, down from four times their net worth. While this does not completely stop investment, it is now more difficult for corporates to buy overseas assets.
Wait and watch
Agreeing that the options are limited, Mudassir Zaidi, National Director – Residential, Knight Frank India, said that the rules will not impact committed purchases and those under construction.
He observed that around 70 per cent of the purchases have been for end use rather than as an investment. In some cases, the purchase is used as a way to gain entry permit to a country.
“The limits are considered as a short duration measure and there are also slowdown concerns in the Indian market,” says Zaidi.
He therefore believes that money is likely to be in the sidelines and other avenues may likely be explored after a wait of at least six months.
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