Reviews on NRI's Indian Real Estate Investment Portfolio Future

Imagine a non-resident Indian (NRI) who shifted money to India two years back when the exchange rate was Rs.44 to a dollar. The Indian rupee has depreciated to Rs.59 per dollar now, leading to a staggering loss of 34%. On the other hand, in the last two years, equity markets have been almost flat, fixed income investment would have grown by 20%, while real estate investments may have appreciated around 25%. The net result is negative return on the investment in almost each asset class. So should NRIs invest in India now? To examine this issue better, we should break the problem into four parts. How is the long-term scenario of the Indian rupee vis-à-vis other currencies? Which are the asset classes that an NRI should invest in? What kind of tax regime is there in the source country? And finally, what is the time horizon for investments?

The currency aspect

The long-term depreciation of the Indian rupee vis-à-vis the dollar has been quite consistent, except for 2000-2009. Because of the differential in interest rates and inflation, the Indian rupee has been consistently depreciating against the dollar. Therefore, assuming that this differential may persist even in the future, one may assume a 2-3% annual depreciation of the Indian rupee over the long term. Of course, the current scenario is more volatile and uncertain because of the global volatility. The dollar has been appreciating against all emerging market currencies. The Indian rupee has been punished more because of the fragile state of our current account deficit. With the possibility of an end of monetary easing or QE3, the dollar may strengthen considering that funds could move out of emerging markets into the US, where interest rates are likely to harden. Therefore, it could make commercial sense to wait for 12 months or so before committing fresh funds to India.

Future prospects of assets

Real estate: As an asset class, real estate has been immensely popular with NRIs in the last few years and rightly so. On an average, a 10-year investment has multiplied the money 6-10 times, irrespective of which part of the country you invested. The market is still holding on to the prices and also seeing moderate appreciation. However, it is highly unlikely that it would generate similar returns in the next 10 years. With the kind of supply that has been built over the past few years combined with astronomical price levels, a significant correction in the near future is highly probable. Therefore, unless one comes across a property or an area that is extremely attractive, real estate is an avoidable asset class.
Fixed income: This asset class has done exceptionally well in the last 2-3 years. With interest rates having reduced a bit, long-term debt funds have given healthy double-digit returns. In order to attract NRI remittance, the government has also removed tax on non-resident external or NRE fixed deposits, making them attractive for conservative NRI investors.

Equities: 

For an investment horizon of 8-10 years, equity markets look to be the best investment destination currently. The Indian stock markets have been almost flat for the last six years after the peak of January 2008. The macro picture of the country has also taken a beating with slowing growth rates and corporate performance. However, experts believe that the gross domestic product or GDP growth rate should bottom out in the next 12 month or so and then start inching upwards. With elections due next year, there could be accelerated policy action from the government so that it leaves behind a positive legacy. Global uncertainty should also even out in the next few years. It has been historically proven that the best time to invest in stock markets is when there is confusion and uncertainty all around. Unfortunately or fortunately, Indian stock markets are getting battered because of both local and global factors. There is high probability that the markets may rally significantly in the next 10 years. To put simply, the earnings growth of the companies comprising Sensex or Nifty is going to be at least above 12%.

Taxation for NRIs play a very important role. For US-based NRIs, investing directly in the stock market or through portfolio management service or PMS is more tax efficient than going through mutual funds (MFs). For NRIs in West Asia, who enjoy tax-free income, MFs are the best choice because of long-term capital gains benefit.

To sum up, one should be wary of exchange rates in the immediate future as the global scenario is volatile. But long-term investment scenario in India is promising.

Source: http://www.livemint.com/Money/bIquLLaUzzCwwY7dekFXCM/Longterm-investment-prospects-still-bright-for-NRIs.html