Residential or Commercial Property: Where are NRIs putting their money right now?

By: | Published: July 31, 2018 3:35 PM

While the typical NRI investors' earlier preferred option was high-end/luxury homes, multiple factors are now making them shy away from the segment.

real estate investment, real estate investment in India, property market, residential property, commercial property, nri investment in india real estate   The Indian law is also quite investor-friendly, thereby making it easier for the NRIs to invest in real estate.

NRIs (non-resident Indians) have traditionally remained invested in luxury homes in India. However, due to the slowdown in the residential segment, they are now looking to invest in commercial property.

Industry experts say that portfolio optimization, based on the market cycles and dynamics, has been largely dominating the NRI investor’s sentiment and decision making, more so in the last few years. The residential space, however, is not in the pink of its health and recovery is still some time away. Therefore, to an NRI living or working outside of India, a shift from tradition is becoming largely evident.

Office space, with all of its inherent advantages, plus the transaction-friendly ecosystem makes it a well-packaged option waiting to be taken. “While the typical NRI investors’ earlier preferred option was high-end/luxury homes, multiple factors are now making them shy away from the segment. Although the asset class was always known for its lower returns, capital appreciation, emotional gratification and feel good amongst NRIs were some of the reasons good enough to put in their hard-earned money. However, today with real estate taking newer forms and dimensions in India and more importantly with office space yielding anywhere between 6 and 10% (for good, rent yielding properties), the NRIs’ investment approach is evolving,” says Shaju Thomas, Director, Office Services, Colliers International India.

The Indian law is also quite investor-friendly, thereby making it easier for the NRIs to invest in real estate. While large, Grade A office property investments could get confined only to a certain segment of the NRIs, REITs is more like a rescue or an answer to the problem. The segment of investors widens simply because entry points no longer would be intimidating. However, one would wait for the regulator to have the same formalized. “Another aspect, the commercial space, is seeing pronounced interest is due to large developers with huge debts are looking at reducing their inventory. Therefore, office space, as an asset class, is expected to perform better in the coming years. With all the positive changes happening in the country, one can expect to see a lot more traction in terms of investment and growth,” says Thomas.

Developers say that in any real estate investment, there are two types of returns — rentals and capital appreciation. Statistically speaking, rentals for commercial properties in India, as per one study, was estimated to be about 5.5% of the property value. However, for residential, it is assumed to be about 1% – 1.8% of the property value.

“Capital appreciation is dependent on multiple factors, primarily being the demand. So, the higher the demand, the higher will be the capital appreciation. The demand is generated by a few factors, top of them being location, the kind of property you are working with, the services which are being provided and who your neighbours are. In that aspect, if we look at it, the capital appreciation tends to be more in commercial property viz-a-viz residential property. Further, reforms like RERA offer broader and safer investment options for NRIs ensuring more and more investment swing towards commercial,” says Ashish Arora, Director, Viridian Red.

Vineet Taing, President of Vatika Business Centre, says, “NRIs are preferring commercial properties compared to residential due to better returns from office assets and fixed income generated by such kind of investments. There has been a boost in the demand from corporates. Therefore, commercial office space vacancy has reduced by 50% over the past few years. Office space absorption is very strong and pre-leasing too is at an all-time high today which guarantees higher returns. This indicates sustained demand and occupiers’ interest in commercial spaces.”

Thus, investing in commercial property is considered more profitable today for NRIs as commercial investments yield higher rental values than residential and generate a source of fixed income, making it a viable option. “India’s emergence as a major investment destination is bringing big international players here. Also, NRIs’ major concern post-sales is the maintenance of property. So, commercial is a better option as it is leased for a long time and maintaining it is the other party’s prerogative. Further, reforms like RERA offer broader and safer investment options for NRIs, ensuring more and more investment swing towards commercial,” says Ravish Kapoor, Director, Elan Group.

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