India – home to over 1.2 billion people according to its 2011 census, some 17 percent of the world’s population though occupying only 2.4 percent of the land mass. Despite huge growth in urbanisation in the past three decades, more than two-thirds of Indians continue to be rural dwellers. But even so, there are more than 20 cities with populations of over a million people.
In this overview, we take a look at the state of real estate investment across the sub-continent but especially with reference to three of the largest urban centres – Delhi, Kolkata and Mumbai. And we suggest that a key factor in real estate investment going into 2013 should be alignment with the IT-BPO sector.
But first we take a look at who can – and who can’t – buy real estate in India.
From the perspective of property investment, one key fact stands out. By and large, the only people who can buy Indian real estate are Indians. And in the case of agricultural land, permitted buyers must be resident citizens.
India is by no means the only country in the world which places restrictions on foreigners buying real estate, though it must surely be the largest to effectively limit the category of permitted buyers – foreign or resident – by dint of blood ties with the country.
But, Who Qualifies as Indian?
Though, a huge question is here begged – what is it to be ‘Indian’? In a country so populous, with over 1,600 discrete languages and dialects, and with hundreds of different clans and castes, can it be said that there is only one Indian people? And if so, how are the parameters of that people to be determined?
At least in terms of entitlement to invest directly in Indian real estate, the primacy of parentage over place of birth is central to the definition of that part of the ‘Indian diaspora’ – by some estimates around 30 million people world-wide – who along with resident citizens have the right to buy real property in the country. As regards the diaspora, there are two broad categories recognised in the Indian constitution – ‘NRIs’, meaning non-resident Indians, and ‘PIOs’, persons of Indian origin.
An NRI is a citizen of India who does not live in the country. Because the Indian constitution doesn’t recognise – indeed expressly forbids – dual citizenship, NRI status cannot be held by an Indian who has taken the citizenship of another country. Indian citizenship – and the passport – are forfeit in that event. But there are nevertheless millions of NRIs living either permanently or long-term in other countries, notably the United States and Canada, as well as countries of the Middle East. And an estimated 1.5 million British residents have either NRI or PIO status.
Millions more ethnic Indians who are both resident in and citizens of other countries have PIO status under the Indian constitution and related law. As the years pass, the numbers of PIOs is falling – since entitlement to the status effectively requires at least a grandparent to have been born in India – but they remain an influential part of the Indian diaspora. Many have become successful in their adopted countries and, despite having taken that country’s citizenship, have maintained close ties with – and investment interest in – their ancestral homeland.
Buying As A Company
As in other countries which impose restrictions on foreigners buying real estate, there is the possibility to do so via the mechanism of an Indian-incorporated company or a registered branch of a foreign company. But authoritative in-country advice on the advisability or practicality of going this route to an Indian property investment is surprisingly hard to find.
A bullish tone was taken in a commentary back in 2008 on the website goaholidayhomes.com which, as its name suggests, promotes investment – especially amongst Britons – in holiday property in and around the coastal city of Goa, long an ex-pat enclave in India. Dismissive of the clamp-down that year on foreigner buying, the commentary asserts that,
“Once you have a registered private limited company, you can buy your dream home and live in it; even run a small or big business if you like. And no law on registration can stop you.”
Whereas a rather different stance is adopted at buyassociation.co.uk. In its section on ‘Buying Property in India’, the website cautions against the use of a company, saying this:
Many also see the idea of setting up a company in India as a way of working around the property acquisition regulations. However, the authorities are more wise to this practice now, and are cracking the whip to enforce business regulations. … It appears the loophole of people setting up a company to acquire property to live in or rent is closing.
‘FEMA’ stands for the Foreign Exchange Management Act of 1999, the legislation which effectively imposes the restrictions on foreigner purchase of Indian real estate. Whilst a foreign-owned Indian company, or an Indian branch office of a foreign company, can buy commercial or residential real estate, it must be for a purpose ‘necessary for or incidental to’ the company’s business in India. This of course is the kind of criterion which a regulatory body – in this case the Indian Reserve Bank – can either enforce rigorously or turn a blind eye to. And officialdom’s approach to such controls can differ from place to place, which is at least in prospect in a country as large and diverse as India.
And there’s an additional control which ought be kept firmly in mind. Under FEMA, when a foreign company wishes to repatriate the proceeds of a sale of Indian real estate, seemingly it can do so only on a winding up of the relevant business and then only with the prior consent of the Reserve Bank.
We endeavoured to get an authoritative statement from knowledgeable people – real estate agents and lawyers – working with investors in Indian property on whether non-Indian investors are using the company route to effectively bypass the prohibition on foreigner (ie, non-Indian) purchase of commercial or residential property. It proved to be a thankless task, with no-one we approached being willing to go on the record. It seems the question is one of some sensitivity – one real estate agency, based in London but marketing upmarket housing projects in several Indian cities, referred our query to its PR agency which in turn ‘declined to comment’.
Whichever way one looks at it, the use of a corporate entity to circumvent the prohibition on foreigners buying real estate in India seems to carry undue risk. Critically, the investor will remain hostage to swings in sentiment towards and regulation of what is plainly a significant – and live – issue in India. Quite apart from the incidental need to comply with reporting and other regulatory requirements vis a vis companies, the company route seems best avoided.
Real Estate Market Overview
In a country as vast – in both geographic and demographic terms – as India, it is unrealistic to speak of a single real estate market. As noted earlier, whilst the country’s population is still heavily rural, there are more than 20 cities with over a million residents. Any one of them represents a discrete property market and indeed there are bound to be recognisable sub-markets within each city. And the rate of urbanisation – put earlier this year in a Morgan Stanley study at 2.8 percent annually over the past decade – means that new markets are evolving all the time.
Some pertinent observations of a general nature can nevertheless be made. The overarching factor in considering real estate markets – and this applies as much to India as to anywhere else in this globalised world – is the impact of the global financial crisis from 2008. India, despite its impressive economic growth over the preceding decade – with average GDP gains of around 14 percent annually, has not been spared. As easy credit dried up across the globe in the wake of the Lehmann Brothers collapse, Indian banks throttled back severely on their accommodation to the raft of developers which had emerged to service the demand for residential and commercial property in the major cities and their satellite conurbations.
The Stats Don’t Lie – Residex Index
Yet it seems that that demand – unlike in other overheated markets, notably in the United States – has at least to this point prevented the bursting of the Indian property bubble and indeed invited the conclusion that no bubble exists. In 2007, the state-owned National Housing Bank launched its Residex index, tracking house price movements in 15 major cities across the country from a base value of 100. Whilst all cities took a hit over 2008-09, most have since rebounded. Delhi, and the wider NCR – National Capital Region – which encompasses the satellite cities of Noida and Gurgaon, score 172 on the Residex index for the second quarter of 2012, the most recent reading available and up from 110 two years earlier.
In a feature piece in late October, entitled ‘New Builds, New Delhi’, the Financial Times’ Avantika Chilkoti focuses on the huge growth in recent years in Noida and Gurgaon and concludes with the observation that ‘… it now remains to be seen whether these peripheral settlements will actually pose a threat to Delhi over time, draining demand and activity out of India’s capital city.’ It seems highly unlikely, to be frank, and indeed the NHB’s Residex indicates that such ‘drainage’ is certainly not happening to this point. On the contrary, when the wider Delhi/NCR figures are broken down, it’s apparent that the post-crisis recovery has been markedly more robust in the capital itself than in the peripheral conurbations. ‘Zone C’, which includes Central and ‘New’ Delhi – the latter with an official population of just a quarter of a million people and the former embracing ultra-desirable quarters such as Karol Bagh, has a Residex value of 232 for Q2 2012, against just 123 for Zone D which incorporates Noida and Gurgaon.
A similar picture emerges in respect of Kolkata and Mumbai. For Q2 of 2012, they are neck and neck, at 196 and 197 respectively on the Residex, though the growth in real estate value has been more restrained than in the case of Delhi, up from 176 and 160 respectively from the same period in 2010. But as with Delhi and the NCR, the index values vary markedly from one to another district in both Kolkata and Mumbai. In the former, the central city quarter of Alipur scores the city-wide high of 272 while the low of just 121 occurs out in Madhyam Gram, well to the north of the centre though still with a Kolkata postal code. In Mumbai, the exclusive inner-city quarters straddling Mahim Bay – Mahim West, Matunga and Lower Parel – were in the second quarter of this year rated on Residex at 343, making their residential real estate nearly three and a half times more valuable than in 2007. But well to the north, in the Vasai Virar municipality, at an index score of 102 residential property values are currently just above the 2007 base value.
This broad picture – of winners and losers in Indian real estate since the onset of the 2007-08 financial crisis – is reflected across the Residex index. Winners appear to have been growth cities such as Chennai (Q2 of 2012 – 309) and Pune (200). Other cities in the survey are in negative territory – Hyderabad at 85 and Kochi the lowest of the survey group at just 73, representing a drop of over a quarter on 2007 property values.
What can readily be discerned in these statistics is conformity in the Indian real estate markets to the old adage that ‘money follows money’. In times of economic stress, such as that continuing across the globe as we write, the most desirable commodities suffer the least. Real estate is no exception and the pressures of a down-turning – and downsizing – market fall most sharply on its weakest elements. In the India context, this means the satellite conurbations with moth-balled developments and a glut of development land and the smaller or more remote cities with fewer enticements to offer would-be investors. Whereas the historic ‘hearts’ of urban India – in Delhi, Mumbai, Kolkata and other major cities – shrug off downturn and indeed capitalise on it.
Outsourcing – A Key Growth Driver
Much of the spectacular growth in India’s residential and commercial real estate pre-crisis was attributable to one industry – IT-BPO, the acronym for the closely-aligned information technology and business process outsourcing sectors. Pioneered by European airlines – notably British Airways – relocating back office functions to India in the early 1980s, IT-BPO has become a key contributor to the Indian economy over the ensuing three decades.
Its importance is highlighted in the 2012 ‘Strategic Review’ undertaken by NASSCOM – the industry’s umbrella trade organisation. Describing 2012 as a ‘landmark year’ – with aggregate revenues expected to pass the US$100 billion mark for the first time – the review notes that the combined IT and outsourcing industries directly employ nearly 2.8 million people and indirectly provide a further 8.9 million jobs across the sub-continent. Its share of national GDP has grown from 1.2 percent in 1998 to 7.5 percent in 2012, representing some 25 percent in value of Indian exports.
And despite recession across the globe – and especially in key client states for Indian outsourcing: the United States and EU countries in particular – NASSCOM is upbeat for 2013. In a statement released on 12 November, the association states that next year ‘the industry is expected to meet the lower-end of its growth guidance and at least achieve a double-digit growth’. NASSCOM chairman and CEO of industry giant Tata Consultancy Services, N. Chandrasekaran, attributes this growth prospect to ‘the sector’s ability to innovate and deliver in enabling growth of customer businesses in challenging times’.
Relationship With Real Estate
Given the cachet and credibility which IT-BPO has brought to many of India’s ‘tier 1’ cities over the past 30 or so years, it is surely self-evident that – first and foremost – an Indian real estate investment decision should be closely aligned with the industry’s fortunes going forward, as best as they can be judged. NASSCOM has physical offices in eight cities, primarily in the south and west of the sub-continent, where – critically – English is most widely spoken amongst citizens with tertiary education, along with Delhi and Kolkata. Of those eight cities, only Hyderabad stands out as a laggard in real estate terms.
It’s likely that the near future of Indian IT-BPO lies mainly in those key cities but as the costs of doing business in the likes of Delhi, Mumbai and Kolkata continue to escalate, the focus is shifting to ‘tier 2’ locations. From the ancient city of Ahmedabad in Gujarat province to Visakhapatnam – better known as Vizag – on the east coast, and in many other smaller cities across the country, municipal leaders are striving to create a welcoming environment for industry players seeking to lower their overhead. Picking the winners in that contest will go a long way towards identifying optimum locations for either a commercial or residential real estate investment.
For people who can bring themselves within the ‘Indian’ appellation, and for those who can’t but are willing to chance their arm on India’s company and fiscal regulatory regimes, a property investment in the world’s largest democracy presents in the latter part of 2012 as an intriguing prospect.
Applying the quite possibly over-utilised adage, ‘think globally but act locally’, the focus would tend to narrow to key cities – and we’ve suggested Delhi, Kolkata and Mumbai (here listed in purely alphabetical order) – where the travails of the past five years have been shrugged off by their property markets, through the sheer size of the demand though by no means on a city-wide basis. And we’ve also raised for consideration smaller conurbations which seem well-placed to attract a meaningful chunk of the IT-BPO industry in the years ahead.
Beyond those factors, personal preferences – and perhaps family ties – are likely to be influential. For some, it’s 200 sqm of new-build office space in Noida, a brand-new motorway drive from downtown Delhi, for others a mature villa nestled amongst the bougainvillea in old Goa.
Whatever your preference, there’s plenty in Indian real estate to get and keep you interested.