Real estate remains one of the keys draws for those with some weight notwithstanding the stock markets’ stratospheric ascent or the development of cryptocurrencies as a new “asset class.” It could be a result of our long history of relying on the land to supply us with food, shelter, and security.
The conventional wisdom that you can never lose money in real estate is another justification for investing in the sector. Even if the profits are not high, you will still have an actual item that is safe and secure as a fallback. Real estate prices that are out of this world and tales of people going from poverty to riches prove this point.
For whatever reason, non-resident Indians (NRIs) are similarly fascinated by the potential rewards of real estate investing. However, an increasing preference among native Indians and NRIs to invest in commercial properties rather than residences, farms, or agricultural land is one trend that is gaining favor.
Let’s examine the causes of this increase, the risks associated with buying commercial real estate in India, and the financial and legal concerns an NRI should take into account in this article.
Factors driving the increase in NRI investments in commercial real estate
Growing Organized Sector
Growing Organized Sector As the need for office space rises along with the expansion of organized and corporatized enterprises, investment in premier commercial buildings is taking off. Warehouses, training facilities, information technology support offices, data farms, fulfillment centers, industrial buildings, and office spaces are the main consumers of NRI commercial real estate in India.
Superior Returns
In India, owners of commercial buildings typically receive 4 to 8 percent more in rental revenue than those of residential properties. In actuality, the rental revenue of commercial properties naturally rises by 5 to 10 percent each year, except for a small number of areas in the immediate aftermath of the COVID-19 limitations.
Increasing Fractional Ownership
The emergence of fractional ownership platforms is another element driving the increase of such CRE investment by NRIs. Only extremely wealthy people (those with net worths over $50 crores) had access to the capital necessary to invest in the most desirable commercial properties in metro areas until a few years ago. For the majority of individuals, CRE meant working with dubious developers or randomly purchasing stores.
However, the doors to the biggest and swankiest prime commercial and office buildings are now within reach thanks to the growth of the fractional ownership idea in the CRE sector. Properties like Times Square (Andheri, Mumbai), Maker Maxity (BKC, Mumbai), or a Warehouse in Hosur, Tamil Nadu are now accessible for your investments thanks to startup & tech platforms like Assetmonk. Similar to how mutual funds made the equities markets accessible to regular investors, they opened the CRE sector. You may now purchase a portion of these properties for as little as Rs. 25 lakhs and start making money from them.
Numerous Commercial Real Estate Investment Possibilities in India
Commercial real estate is not just about posh offices and Grade A structures with top-notch facilities. There is no denying that Grade A buildings have excellent tenants, greater occupancy rates, and better exposure. However, they also frequently draw additional investors, driving up their prices and lowering yields.
On the other hand, investments in Grade B and C buildings or Tier II or Tier III cities outside of metro areas may be more affordable and provide higher returns.
Similar to how a warehouse outside of the suburbs would draw more tenants, CRE in the city core would. But as we all know, these traits will all continue to coexist, and demand will only increase.
Additional factors that support NRI investment in commercial real estate in India
- NRIs receive an unfair advantage due to the INR’s depreciation versus the USD and other important currencies.
- Lowering down payment requirements and making loans more readily available.
- FEMA rules, FDI standards, and automatic route investments are being relaxed.
- Endless demand for managed CRE results from the services sector’s growing impact on the Indian economy and exports.
- In an otherwise unfair relationship, there is a powerful regulator in the form of the RERA (Real Estate Regulatory Authority).
- Tax advantages.
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Important NRI Considerations investing in Indian commercial real estate
Commercial vs. Residential Real Estate
The present administration’s initiatives, including demonetization, banning cash transactions, establishing RERA, and stepping up vigilance, have encouraged legal real estate purchases. The residential real estate industry, which was mostly fueled by cash and illicit funds, has been crushed and is now only a shell of what it once was.
Regulation
An NRI must obtain RBI approval if they want to invest in farms, tea or rubber plantations, or other types of real estate. In every other situation, NRIs can invest immediately through the automated method in any type of property, whether residential or commercial. The investment in such properties is unrestricted.
NRI Commercial Property Investments Are Taxed
NRI investments in CRE are regarded the same as RI investments. A long-term capital gains (LTCG) tax of 20% is applied after the indexation benefit if a property is sold after being held for two years or longer. According to your income tax bracket, a Short-term Capital Gains (STCG) tax is applied if the property is sold before this period. Additional fees, such as surcharges and cess, may be assessed.
Any losses from the sale of business property may be carried forward. The loss may be deducted from earnings on the sale of other assets in the upcoming fiscal years.
Remittance of Profits
There are two ways that NRIs can profit from a business property:
- Rental or lease income
- Sales revenue (at a profit or loss)
Returning the Sales Proceeds
When NRIs desire to repatriate the selling proceeds of commercial property in India, there are specific requirements that must be followed.
You can only repatriate up to USD 1 million per year if the property was obtained when they were RIs, inherited, bought with money from the NRO bank account, or was purchased with those monies. The entire purchase price is returnable if it was paid for with money from an NRE or FCNR account. The sum is only limited to the purchase price of the property, including any significant capital outlays for remodeling, extending, or renovating it.
Note: Even if they were paid from NRE or FCNR accounts, only the profits of the sale of up to two residential properties may be repatriated in a fiscal year. Commercial properties are not subject to this restriction, which adds to their appeal.
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Things NRIs Should Think About Before Investing in Commercial Real Estate
There are several things to think about before investing in a CRE, whether you are a RI or an NRI. Due to the greater investment ticket size, the inability to swiftly and easily liquidate the assets, and the at best hazy market knowledge or analysis, the considerations are even more serious.
Legal Title:
You may minimize your legal risks by having a clear legal title, a no-dues certificate (bank release), and an occupancy certificate from the local government. In this case, you shouldn’t depend solely on the details offered by the landlord, agents, or real estate websites. Always independently examine the legal situation with a lawyer.
Location:
The CRE’s location will have a significant impact on its rental yields, occupancy, foot traffic, accessibility, and pricing. On commercial properties in areas with low prospects, many banks might not provide loans.
Facilities and security:
The bare minimum features you should look for include parking, communal rooms, cafeterias, lobbies, networking opportunities, and lights. Every CRE now considers drainage and physical security to be essential, as well as fire and water safety.
Investing in residential properties differs from investing in commercial properties. In the former situation, there is no emotional significance associated. Therefore, you should only purchase a property if it aligns with your overall investing philosophy, you are willing to assume the risks involved, and you can lock away a sizable portion of your investable surplus in an asset that is illiquid.
