Own a house away from home

There are opportunities for property investments beyond the borders

A house in a foreign country was something only the uber rich could aspire to in the past.

But with lacklustre property market in India and good growth abroad, there is interest in buying property outside India.

Data show that Indians bought property worth $111.9 million in 2016-17.

Why buy

There are a few reasons why buying a property abroad may be more beneficial than purchasing one locally or investing in other instruments. For one, the property market in India is sobering, and capital appreciation has lagged inflation.

Also, rental yields are low and hence, ongoing income potential is not high. Better potential for price appreciation and rental yield are making investors look at other markets.

For example, the average annual gross rental yield in the US was 9.2 per cent in 2017, based on data from 449 counties (districts) in the country, according to data available on real estate properties.

Data also show that rental yields in cities such as Cleveland and Pittsburgh in the US were over 12 per cent, making them attractive opportunities.

Also, since the start of 2018, the rupee has weakened from 63.5 to 68.5. This increases the returns in rupee terms for anyone who have invested earlier.

Price appreciation has also been quite high in many countries. For example, an investor who bought Australian property in 2012 would, on an average, have gained 51.6 per cent by Q2 2017.

The overall gain in rupee terms would have been 38.7 per cent as the rupee strengthened against the Australian dollar. In the case of investment in Dubai, currency movement would have helped increase gains — from 37.5 per cent in local currency to 49.3 per cent in rupee terms.

Beyond investment gains, there are other reasons, too, to invest. Countries such as Cyprus grant citizenship to those who invest over €2 million in real estate.

With the citizenship, you get the right to live, work and study in all the EU member nations.

You have a choice of wide price points in property. There are houses in towns such as Detroit, US, which are available for $35,000 (₹24 lakh) — way below the prices in many Indian metros. Prices in Ho Chi Minh City, Vietnam, average ₹75 lakh. House prices in Stratford, London, average ₹3.5 crore.

You must also factor in other costs such as brokerage fees and registration charges. In Dubai, for example, 4 per cent of the property value is charged as transfer fee. There may also be escrow fees, title fees and various other charges. While you can seek a loan, most buyers typically fund their purchase through own funds or loans taken in India.

You must also be aware of FEMA (Foreign Exchange Management Act) rules. A resident Indian can purchase property and remit payment within the limit of $250,000 (₹1.7 crore) per year, as set by the Liberalised Remittance Scheme (LRS). The limit includes payments for all transactions including travel, education and medical treatment.

What to check

One consideration is the exchange rate. The Indian rupee has been strengthening against several other currencies and this makes investments in overseas homes more affordable. But a stronger rupee will lower your return, if you plan to repatriate the money. So, be aware of the currency effect when evaluating potential return.

Be aware that some countries have restrictions on foreigners. For example, in Singapore, foreigners can buy only flats or condominiums and not land.

There may be restrictions on inheritance of the property, too, based on the rules of that country. Countries such as the Republic of Ireland, the UK, and the US charge an inheritance tax. So, it helps to engage someone who understands the legal and tax issues in owning a property in the country where you plan to buy.

Get an estimate on the ongoing costs in property maintenance. This includes regular upkeep costs, maintenance fees to associations and various local taxes. In Singapore, for example, the tax rate for houses not occupied by the owner is 10-20 per cent of the annual rent (on a progressive scale).

Likewise, you may have to engage property maintenance services, which may cost 8-12 per cent of the rent.

Broker fees in countries such as the US typically run to about 6 per cent of the sale price, paid by the seller. You must budget for these costs. There is also the risk that some markets are not liquid, and properties may take a few months to sell.

Check how long properties have stayed in the market — in high and low cycles — to get an estimate.

The writer is co-founder, RaNa Investment Advisors.

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