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  1. Go for property buying in developed markets, avoid investing in risky ones

Go for property buying in developed markets, avoid investing in risky ones

Real estate investments should be made in economies where GDP growth rates are expected to be higher as the realty prices grow in line with GDP growth rates.

By: | Published: February 9, 2015 10:12 AM
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Realty experts say that real estate investments should be made in economies where GDP growth rates are expected to be higher as the realty prices grow in line with GDP growth rates. (File photo)

Questions were asked and concerns were raised by individuals who were looking to buy property abroad after the Reserve Bank of India, in August 2013, decided to reduce the annual individual remittance limit under its liberalised remittance scheme (LRS) outside the country for various purposes from $2,00,000 to $75,000. The move followed from a sharp depreciation in rupee against the dollar in 2013 when it hit new lows and the central bank moved swiftly to curb outflow of forex exchange from the country in a bid to reduce pressure on rupee.
While the limit was revised upwards from $75,000 to $1,25,000 in June 2014 following stability in rupee and recovery in overall sentiments, in its monetary policy statement last week, the RBI Governor announced to raise the limit to $2,50,000. If on one hand the decision shows the growing confidence of the central bank on the state of the economy and its outlook on the external sector, it also brings back the flexibility and gives the option to individuals who got restrained in their decision to purchase a property abroad beyond a certain price value or were limited in their decision to invest in foreign equity and debt etc. Experts however point that buying property abroad solely from an investment point of view in an emerging market should be avoided and instead one should buy a property in a developed market that can be bought both from consumption and investment point of view.

Drop in limit saw drop in remittances
When the annual remittance limit for individuals under the LRS scheme was reduced from $2,00,000 (around Rs 1.2 crore) to $75,000 (around Rs 45 lakh) it impacted the individuals who were required to meet expenses in foreign currency terms on various accounts such as education, medical expense, maintenance of close relatives and also for making investments abroad (real estate, equity or debt).
In fact the data relating to LRS released by RBI on a monthly basis shows that the amount remitted by Indians for the purpose of purchase of immovable property fell 24 per cent from $77 million in 2012-13 to $58.7 million in the financial year 2013-14. The numbers further squeezed significantly in the first seven months of the ongoing financial year and stood at only $13.8 million.
Even the money remitted for investments into equity and debt fell 30 per cent from $237 million in the year 2012-13 to $165.5 million in 2013-14. Remittance under the head, maintenance of close relatives, that forms a noticeable amount within remittances under the LRS scheme, witnessed a slump of 23 per cent and the numbers declined from $227 million to $172 million in the same period. The fall in remittances while reflect a caution in remittances after prevailing weakness in rupee against the dollar, they also show a drop in their numbers as a result of reduction in the annual limit of remittances by individuals by RBI in 2013.

How does the increased limit help
With India having a comfortable position in terms of foreign exchange reserve and the rupee having emerged as one of the most stable currencies from among the emerging markets over the last six months, the RBI’s move shows the confidence and comfort it has. Now with the remittance limit revised to $2,50,000 million (around Rs 1.5 crore) per annum, it will raise the ability of Indians to buy immovable property abroad and also provide them with the option to invest a higher portion in global equities and other investment instruments.
“While only a small segment uses this, the reduction in the limit took away the option from the investors of going ahead with their decision to buy property abroad. The raise in limit provides the flexibility and the option to individuals and they can use it when they want,” said Surya Bhatia, a Delhi based certified financial planner.

What you need to keep in mind
Individuals looking to invest in property abroad and thereby utilise this limit must know that in the Budget last year the government withdrew the capital gains exemption on investment in residential housing property abroad. Under sub section (1) of section 54, if the assessee invests the capital gains arising from the transfer of a long-term capital asset into a residential house within a period of one year or constructs a residential house within three years then the amount of capital gains to the extent invested in the new residential house is not taxable under section 45 of the Act.

While this benefit earlier was also available for buying property abroad, the government proposed changes in the Budget this year and restricted its benefit to properties bought in India. “The benefit was intended for investment in one residential house within India. Accordingly, it is proposed to amend the aforesaid sub-section (1) of section 54 so as to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India,” said the Budget proposal adding that the amendments would take effect from April 1, 2015 and will accordingly apply in relation to assessment year 2015-16 and subsequent assessment years.
This means that while the limit of remittance for purchase of property abroad has been enhanced, home buyers will not get the capital gains benefit if they sell a property in India and invest its proceeds in a residential property abroad. So one has to keep this in mind.

How to invest
Realty experts say that real estate investments should be made in economies where GDP growth rates are expected to be higher as the realty prices grow in line with GDP growth rates. While emerging economies may promise good growth but they also pose some risks.

“When it comes to buying property only from an investment point of view, India is a good place to be. However if you are looking from both consumption and investment point of view then one must look at developed markets where one can utilise the property for the period that their kids study or for their own usage and then sell it at a later date,” said Gulam Zia, national director of research at Knight Frank India. He also added that developed markets offer easy liquidity and the investment is safe even though the capital appreciation may be limited to inflation levels.

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