NRI investment in the Indian real estate sector has been an evergreen topics. Over the years, builders have leveraged and have opften focussed on developing projects targeted exclusively at NRI audiences. NRIs espcially the ones residing in the US and the Gulf region are perceived as high potential clients. However, earlier, several incidents were reported where such buyers were repeatedly duped by fly-by-night operators with fake promises.
Nonetheless, since the implementaion of Real Estate Regulation and Development (RERA) in 2016, the NRI enthusiasm is back. Of late, a trend has been observed where this segment of buyers are increasingly shifting focus to the commercial real estate, as it is mostly backed by strong economic fundamentals. The inclination is mainly due to amplifying urbanisation, opening up of the FDI route for retail brands in India.
Earlier, NRIs heavily invested in the residential segment as it yielded heavy returns. But now, the scenario has moved to the commercial segment. The reason being good capital appreciation and rental yield on commercial assets owing to the increasing demand of Grade A offices, IT parks, logistics centres and now formation of REIT. All these have been successful in boosting the commercial real estate space and also attracting NRI investment attention. However, data reveals that the average ticket size of NRI investment has reduced to Rs. 51 lakh in 2018 from 70 lakh in 2016.
When it comes to locations, NCR is one of the most favoured destination for residential real estate investment. It is followed by Mumbai, Bengaluru, Hyderabad, Chennai and Pune. Growing economic environment, ease of doing business and improving infrastructure are the reasons that these cities are on the radar of NRIs. In the first quarter of 2019, the sale in NCR has increased by 8% and this is around the same for NRI investment also.
Improving economic reforms and increasing tranparency in policies have been augementing NRI investment. Since the time 100% FDI was allowed in the sector, the NRI investment has substantially increased. Investment-wise NRIs are more inclined towards commercial real estate, which happened after appreciation in residential came down and it got a recent boost with the coming up of REITs.
A good commercial real estate gives an average rental yield of 6%-10% and current rental yield from residential property is 1.5%-3.5%. Same holds true for capital appreciation also in the current market scenario. The upsurge in commercial office space started in 2017 and a further boost was provided with REITs in sight. As more liquidity will come in commercial property, developers will come up with more projects. In fact, tier II and tier III cities are witnessing a demand for commercial offices as prices in major cities are skyrocketing. Cities like Indore, Jaipur, Bhopal and Kochi are attracting investors in commercial spaces as they promise good capital appreciation.
A lot IT/ITeS companies are going for rationalisation of manpower and they are also likely to optimise their office real estate portfolios. These firms would consolidate offices across various locations and move to smaller cities. This will open up new avenues for investment in the commercial segment. Shift in focus of NRIs and HNIs towards commercial real estate has also led to this upsurge in interest. Last year witnessed a jump of 21% in new commercial supply as compared to 2017.
All in all, with the implementation of GST and RERA, interest of the NRI investor has strengthened and a trust is back in the developers. Many policy measures in last few months have started a revival time for the sector and with it NRI are again looking at this asset class.
The author is Managing Director at the Bhutani Group