RBI's New Curbs on International Investment – What Next?

by Om Ahuja, Jones Lang LaSalle India

The new restrictions by RBI (Reserve Bank of India) with regards to Indians investing in international real estate under the Liberalized Remittance Scheme (LRS) have been introduced in an effort to stabilize the rupee. This move will have medium to long term implications.

Individuals who were planning to buy international real estate at attractive valuations & planning for their kids’ education & housing aboard will now see such plans challenged.

Now, the variety of options available on the international residential property market offer very attractive rental yield and valuations, making the proposition of investing in property abroad a potentially lucrative one.

However, the new restrictions will put a dampener on the sentiments of Indian investors who were considering this route.

Why This Happened..?

In uncertain times, preservation of capital becomes the key consideration for smart investors.

Currency volatility & sustained weakness in the recent times has led the capital controls by the banking regulator in India.

Over the last one month, 4 notifications specifically aimed at curbing the investor sentiment for gold & commodities have been issued.

Equity markets in India recently witnessed negative FII (Foriegn Institutional Investors) flows primarily because of the Indian rupee’s lack of stability, slowing economic growth & lack of central government initiatives with regard to reforms & resolving international taxation issues. The environment is becoming very complex for investors when it comes to making their investments work and yield good inflation-adjusted returns.

Over the past 5 years, equities have, on an average, yielded annualized returns of 5 % (Aug 16th 2008 to Aug 16th 2013), whereas gold has given annualized returns of 13 % (Aug 16th 2008 to Aug 16th 2013).

Returns from bank deposits & bonds have been in the range of 9 to 10 % annually.

Om Ahuja, JLL India

On the other hand, annualized returns on residential real estate in cities such Mumbai & Delhi have been in the range of 40 to 55 % (pre-tax and not inflation adjusted.)

If we benchmark these returns and make a quick comparison, it clearly reflects that real estate & gold have outperformed equities and bonds / or bank deposits. That said, many experts point out that the returns from real estate may not sustain at these growth rates going forward, considering that we are possibly at the mid or higher end of the growth cycle curve for this asset class.

Internationally, residential property displays a very different trend in terms of returns & growth. Rental yield can ranges from 4% to 7 % and annual growth in many parts of the world is about 4% to 5% annually.

Several Indians chose to diversify & increase their exposure to international real estate to ensure steady rental revenue streams for their families abroad, and / or provide accommodation for their own use during their foreign sojourn.

This became especially viable with the Liberalized Remittance Scheme (LRS) which was rolled out few years back. Considerable revenue outflows into destinations such as the Middle East, London and Singapore resulted. However, the recent policy change aimed at curbing of international real estate investment marks an abrupt moving away from the LRS scheme. The international property focus of such investors is now going to decrease drastically.

What Next For Investors?

Whenever excessive controls are exercised (as we have already seen in the case of gold & other precious commodities) investors receive confusing market signals that lead to increased uncertainty in terms of investment planning. In such scenarios, the most evident trend that emerges is that of investors looking for alternatives that can help them grow money and protect capital.

The new currency diversification curbs now imposed do not just limit international real estate investments - investors will not find remitting a mere USD 75,000 into any other asset classes on international shores attractive.

Such small amounts will attract sizable charges by the banks managing their portfolio, making the entire proposition non-viable and unattractive.

Indian investors still believe that real estate is the ideal investment asset class when it comes to safety, returns &  growth. In an environment where international real estate is no longer an option, we will see more money chasing attractive assets that offer good returns within the country.

There will now be an increased focus on lucrative residential real estate investment options in India. Because of the recent resolution of the political quagmire there, Hyderabad - specifically the IT  centric pockets there – will attract a lot of investor interest.

This Hyderabad city is now suddenly in a growth phase, and it presents the ideal investment scenario of relatively low entry points with extremely promising growth potential. Bangalore, Chennai & Pune also provide interesting investment options, as these cities have seen sustained inflows from NRIs.

About the author..

Om Ahuja CEO at Residential Services in Jones Lang LaSalle India

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