Why NRIs should look beyond India

The Reddys and their host Pillais ran out of topics to talk after an hour of catching up. To keep the conversation going, Mrs Reddy hesitatingly said that their NRI son was thinking of buying property in Hyderabad when he and his family visit during December holidays.

“There are many choices, and prices are negotiable. Plus, with the exchange rate fall, buying has become cheaper in US dollar terms,” she explained. Mr Pillai got up from his comfortable reclining chair to explain why he thought it was not a good idea.

Return risks

“You must advise him not to buy and I will tell you why. One, house prices in India have been on a weak wicket over the past five years with no hopes of recovery. House price change data, which typically tends to lag markets, show that price growth has been abysmally below inflation rates,” he said. He quickly checked his tablet and said that prices had increased annually by a mere 1.5 per cent on average in the last 10 years in Hyderabad, based on data from the National Housing Bank’s RESIDEX index.

“Two, he will invest in US dollars, and unless he plans to settle in India, would want the money in dollars when the house is sold. So, you must not focus on the returns earned in rupee terms, but the dollar returns, as currency movement can wipe out any gains,” he said.

He referred his tablet and continued. “The rupee is down about 17 per cent against the dollar in the last five years; 45 per cent in 10 years. But if you invested in, say, 2010, when a dollar was ₹44, to now, when it is ₹72.5, just the currency would have set you back by 65 per cent.”

Dollar returns

There was confusion on how there can be loss if house prices indeed went up. Mrs Pillai gave an example. “Say, I bought a house for ₹75 lakh in Bengaluru in November 2013. Prices have appreciated by about 6 per cent annually, if I remember the NHB Residex numbers correctly. So, the house would be worth around ₹1 crore now,” she said.

“An NRI would have paid $121,000 during purchase, at an exchange rate of ₹62 to a dollar. The current price of ₹1 crore is $138,000. The return in dollar terms is 3 per cent annually — only half of the rupee returns

“Returns are lower because exchange rate has cut 17 per cent of the gains over this period, which works to an average of about 3 per cent annually,” Mrs Pillai explained.

She noted that actual returns are likely to be still lower because the buying and the selling prices for currencies are not the same, and there are losses during foreign exchange transactions.

“Not just that, there are also property-related transaction costs — registration charges, stamp duty and any brokerage charges — that reduce returns.”

Mr Pillai thanked her and continued his points. “Three, property management is not easy for NRIs. Keeping the house locked is an option, but that would mean incurring monthly maintenance costs.” He added that there are also tax issues to consider with rental income, and repatriation of funds requires guidance from auditors — all adding to hassles for parents or others in India whom the NRIs may rely on.

“Four, buying may not be a good idea even if an NRI plans to move back in a few years, again due to lack of local price appreciation and currency fall. Say, you bought a house in Delhi for ₹75 lakh in 2013 and moved back in 2015. Prices fell about 4 per cent, based on the index value, and the currency fell about 7 per cent. Waiting and buying after you moved back, would have saved over 10 per cent,” he said.

Alternatives

Mr Reddy, who had been quiet so far, said that one must avoid taking a siloed view of things. “Unlike our days of limited choices, there are, quite literally, a world of investment opportunities available now, especially for USD holders,” he emphasised.

“For starters, they can buy a house in the US. Data from the US government’s house price index report for the second quarter of 2018 showed that prices rose in all 50 States and the district of Columbia in the last four quarters. Annual price increase in 2Q 2018 was as high as 18.8 per cent y-o-y in locations such as Las Vegas. Other data sources such as GOBankingRate show that cities such as Jacksonville, Florida, gave 6.8 per cent rental yield, and saw a price increase of 10.1 per cent in 2017,” Mr Reddy added.

“Or look beyond the US to, say, Australia. Knight Frank’s Global Wealth Report 2018 notes that luxury property prices rose 10.7 per cent in Sydney in 2017. Or you can consider commercial property in the UK — CBRE’s data show that UK commercial property returns for the three quarters in 2018 totalled 5.8 per cent.” South-East Asian markets such as Indonesia, Thailand and the Philippines are also property markets to consider, he added.

The writer is an independent investment consultant