Will Rupee Depreciation Bring NRI Real Estate Investors Home?

Dubai, touted to be the most popular destination and world class investment to be in the Middle East began to attend. A recovery in the property market after the financial crisis In 2012, real estate prices recovered for the first time, up 10% y / y, depending on the growth of Dubailand (DLD) authorities and refers to several regional media. Real estate transactions in Dubai rose by 8% to Dh154 million in 2012.

As expected, the recovery supported by massive investments by foreigners, particularly India. Non Resident Indians (NRIs) are easily among the five investors in the region. With their natural affinity for India and the depreciation of the Indian rupee against the dollar, real estate investment decisions NRI community is changing for the Indian market?

For the Indian real estate, the general perception among buyers / investors is that prices have risen significantly in recent years. ~ 40-42% on average in all major markets - immediately after the collapse of Lehman period, the Indian real estate prices rose significantly ( As per sources data- see table below) 

Even in cities like Mumbai, where the assets are already high, the yield is 66% over the same period. In this context, there is evidence DLD property prices in Dubai fell by 65% ​​in the four years before 2012, that the existence of a rally of 10% justifies in 2012, is actually the only thing that matters

More recently, the Indian rupee (INR) was 12.0% devaluation against the dollar since the beginning of May to June 2013, pushing down the value of all other currencies pegged to the U.S. dollar - including the United Arab Emirates Dirham (AED). As a result, the Indian rupee has also depreciated against the dollar by ~ 12.0% over the same period.

A return envelope calculation suggests that if an NRI based in Dubai invests AED 10 million in Indian real estate now (INR / AED 16.4), and assuming that the Conservatives property returns 15% in India in a short time would likely return the "investor back more than 27% under the assumption that the INR will return to the pre-14.8/AED can mean (see figure). 

Just add approximately 12.0% due to fluctuating exchange rates are comparable with the 10-12% expected DLD term investments in Dubai real return on total property. Similar performance can be expected additional investment of NRAs in other parts of the Middle East, where the local currency is mainly associated with the U.S. dollar (see Table 1). 

One could argue that the Indian expatriates are promoting Dubai in Indian real estate based on socio-economic and other. According to media sources, Indian investors buying property in Dubai, because it is a relative political stability, world class infrastructure, tax incentives, attractive prices and geographical proximity. Moreover took Dubai's economy over the past two years to complete, an increase of 4.4% and 3.4% in 2012 and 2011, respectively.

However, a recent study conducted by Sumansa Exhibitions, the organizers of the annual event called the success of the show in India UAE property a different picture. The survey shows that NRAs a higher intrinsic value of a property belonging to India or Dubai property can put elsewhere.

Aside from strict rules on visas in the Middle East, there are certain legal obstacles to buying real estate in the United Arab Emirates. Other important factors that can help to NRI interest in the Indian real estate market - of which:

The economic growth in India

Improving care infrastructure and policies concerning the conditions of new infrastructure initiatives

The growing demand for commercial space in the market (which leads to job creation)

Social infrastructure

The evolution of prices.

Putting these results in perspective, the recent decline in the Indian rupee act as the trigger for the NRI community to continue to focus on the property back in India. In the Middle East

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With Gold Prices Sinking, What Is The Future Of Residential Real Estate?

With gold prices currently on the descent, many investors are asking themselves if residential real estate prices will follow. Gold and real estate are the two primary investment routes for retail investors in India, so this is definitely a valid question to ask.

The performance of residential property as an asset class is doubtlessly dependent on the macro-economic factors that also dictate the performance of other asset classes, including gold. Nevertheless, the correlation between gold and real estate prices is not as distinct as one may at first assume.

Price movements in the real estate sector are the result of supply and demand. This is true for gold as well, but the demand drivers for real estate are not the same as for precious metals. Though, in investment terms, they technically fall under the category of asset classes, the demand for residential property stems from the desire for home ownership that is hard-wired into the Indian psyche. It is demand from end-users that dictates investors’ appetite for residential property.

In India, precious metals are an investment class that most people will consider after this basic desire is satisfied. Moreover, the prices of precious metals are not location-specific – they rise and fall uniformly. This is hardly the case with real estate, which performs differently at different times in different cities and micro-locations.

In a vast country like India, it stands to reason that various markets will display varying pricing dynamics. Real estate valuations also range from rational to irrational in different areas within the same cities, depending on the levels of supply, demand and investor activity. At the same time, other cities continue to remain uniformly rational because they are largely end-user driven.

How Good Is Residential Real Estate For Investment Today?

There is no one-size-fits-all formula for the viability of residential real estate as an asset class for investment. Different investors have different levels of expertise, experience, market knowledge and risk appetites when it comes to different asset classes. Those with insufficient expertise in stock trading are not likely to see satisfactory ROI from their activities on the stock market.

Likewise, investors who lack the requisite knowledge and research to make winning real estate investment decisions will not meet with much success in this vertical. Real Estate investors who have sufficient market knowledge or work with experienced real estate consultants will not fail to see lucrative returns on their investments.

Three parameters for successful investment in any asset class are when to invest, how much to invest and when to exit. In real estate, three additional variables are where to invest, into which size and configuration, and in which location.

Residential Real Estate Investment – Short-Term & Long-Term Outlook

In the short term, residential real estate prices in different cities will either remain steady see minor upward or downward fluctuations. In the long term, they will rise again. The fundamentals of the India real estate story are extremely strong. Even in this turbulent economic environment, India remains the cynosure of interest by global MNCs and investors who see the limitless potential of a young, growing economy, a wealth of highly trained workforces across the manufacturing, IT/ITeS and services industries. All this translates into assured job creation, and therefore demand on the residential real estate market.

However, Indian residential real estate is definitely not the best route for short-term investors. When it comes to opportunistic trading, gold is doubtlessly a far more suitable asset class – not least of all because one can purchase it in small or large amounts and liquefy it quickly. Turning a profit with gold is really only a matter of timing the market.

Of course, this applies for residential real estate, as well. However, thanks to a conservative banking system that makes ‘flipping’ extremely unattractive,residential property as an investment class is a very different ballgame in India. More and more regulations are being brought in to subdue the appetite for speculation in this sector. Also, the lowest entry point is definitely much higher than for gold. Finally, it requires a minimum ‘incubation’ period in order to bring ‘appreciable’ returns.

Even after one has satisfied all the basic investment criteria – good location, right size and configuration, right entry point and right entry price – one needs to stay invested for the mid-to-long term in order to garner the best possible returns. As a general yardstick, an investment horizon of 3-5 years is ideal.

So Where Does That Leave Gold? 

Exactly where it has always been – and where it will continue to be. Though gold prices are fluctuating rather wildly at the moment, gold is nevertheless an important component of a well-diversified long-term investment portfolio. It goes without saying that real estate – an asset class with rather different dynamics, is an equally important part of such a portfolio.

Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India

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