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Buying a Property in India

Why India?

India is a country of so many superlatives and with such huge potential in a global scheme that on the surface of things it is a little strange that the country has not seen an explosion of activity on the overseas property market. The second most-populous country in the world is home to the largest company in the world by number of employees and has the advantage of combining historic sites and monuments with amazing beaches and deserted idylls.

India is more than landscape and history though, instead of trying to compete with the First world economies, business in India has carved its own niche catering for the IT and customer services industries that have seen it become the fifth fastest growing economy in the world. India is one of the four countries referred to as the BRIC countries (along with Brazil, Russia and China) that are expected to be the next economic powerhouses driving the global economy.

With all of this going for it, why has India not burst onto the market as the hot new investment destination for the overseas property investor? Mostly, this is due to the restrictive laws governing the buying and ownership of property by foreigners, while the former British colony is still struggling with high levels of poverty among the population, which has resulted in huge internal and international migration in the search for more money.

Popular property buying locations in India

It is something of an understatement to say that India is huge. Often referred to as the sub-continent, the country encompasses a long coastline of over 7,000 km onto the Indian Ocean, severe mountainous regions, extremes of weather and huge differences in the fortunes of its population. Having been formed as a country that occupied the whole of the sub-continent, it split with Pakistan as the Muslim nation sought independence following the independence of India from British rule in 1947. Even today, India is so large it is subject to continuing deep divisions with different parts of the country, in particular in Kashmir. The tensions in this part of the country have eased since 2002, but the development of the country is tempered by the need for economic, political, social and environmental reform.

For the purposes of property investment, the market splits into two parts – investment buyers are more attracted by the returns offered by properties in cities across the country that are growing to accommodate the new business they are taking on, while leisure buyers are able to stick to the resort destinations and the more picturesque coastal areas of the country.

India has undergone a huge boom in building in its cities, and with the improvements that are continuing to the infrastructure of these cities, the country can boast some of the most modern urban landscapes in the world. While the construction has not quite been on the scale of Dubai's property market, the fact that existing cities are being completely transformed in fulfilling the needs of the new industries that have come to India is an equally impressive achievement.

New Delhi was the initial focus of this new development, but as in many other emerging markets, as time goes on the so-called ‘second tier’ cities become the more popular choice with investors. New apartment blocks are therefore rising across the country in cities like Bangalore, Chennai, Jaipur, Hyderabad and Mumbai, ready to be occupied by the thousands upon thousands of workers needed in the customer services, IT and support industries that are based across the country.

Part of the reason for Delhi beginning to lose out to the second level cities is that rent in the city is capped to ten per cent of the value of the land and the construction cost of the property – this is based upon the historical costs, and not on the current market value of the property. This has left some apartments in Delhi attracting as little as three per cent rental yield, while other cites have no such rent restriction.

Apartment blocks for these new workers are a step above anything that has been available to ordinary Indian employees ever before, and the added luxury the new developments bring is being snapped up as rentals by the increasing number of Indians now earning what are locally high wages of $20,000 p.a. The number of earners in this category is growing at some 20 per cent per year, along with GDP growth that is currently above 9 per cent annually.

By 2015 it is predicted that a further 2.9 million Indians will be employed in the IT services sector, the majority of whom should earning a wage above the average for the country. Many of these employees will have come into the cities from elsewhere in the country, and this internal migration is another reason for the huge boost in regional building in India.

For the leisure buyer, the focus of the property market in India is still the coastal resort of Goa. This is almost the complete opposite of the investment properties that are available in the cities, as high-rise building is very much discouraged, and the trend is towards low-density developments that make maximum use of the natural beauty of the region. The vast majority of property in Goa is new-build as older properties tend to be family-owned and are kept for future generations to use.

Prices are growing rapidly in some parts of the country at the moment, and in others are almost static as the supply of property waits for the demand to catch up. In Delhi, new one-bedroom apartments can be found from around £25,000, while a four-bedroom villa in Goa is from £75,000 upwards.

Legal issues

It is here that we come upon the stumbling block for the overseas property market in India – for most British buyers it is impossible to buy ‘immovable’ property in India. The FEMA (Foreign Exchange Management Act), 1999 governs the acquisition and transfer of property. It states that persons not resident of India and not of Indian origin cannot own property in India.

The rights to buy property in India are reserved for certain groups that qualify, but for a foreign national is it illegal to own property unless they satisfy the residency requirement of 183 days in a financial year. Tourist visas last for 180 days, so it is also impossible to buy a property on a tourist visa.

The groups of people who are allowed to buy in India without being residents of the country are known as NRIs and PIOs. NRIs are Non-Resident Indians, or those people who hold an Indian passport and nationality, but are not resident in the country. This includes those people who have emigrated from India to live in another country, but still wish to have an investment interest in their country.

This allowance for the ownership of property for non-residents was extended to allow other people not resident in India, but of Indian descent up to four generations removed, to buy property in India. The PIO, or Person of Indian Origin, status has served to open up the property investment market to a huge number more foreign investors, which has been fuelling the current boom in property in India. In recent years, the government has introduced the Overseas Citizenship of India (OCI) scheme to allow a limited form of dual nationality to NRIs and PIOs. It is thought that the government plans to phase out PIO status in favour of OCI in years to come.

Moreover, it is not possible for people who do not fall into the above categories to become property owners either jointly with another person who does qualify, or through the operations of an Indian-registered company. These routes have been specifically blocked in law, so the only way for many foreign nationals to buy in India is to become resident.

The rules for leasing property are also different in India, and these have been used in order to ‘sell’ property to foreign nationals across the country, and particularly in Goa. ‘Non-eligible’ foreigners, i.e., those not listed in the groups permitted to buy property, are allowed to lease property in India for a period of no more than 5 years without the permission of the RBI. Many foreigners are have been tempted to buy in Goa particularly, where leases are cheap and plentiful, with the idea that they will gain resident status at some point in the five-year period. While most people who have done this fully intend to settle and gain resident status, the rules regarding the tourist visa have recently been more keenly enforced, meaning that after the 180-day limit on the visa expires, the authorities are no longer turning a blind eye to those who renew without leaving the country.

Many unscrupulous agents and individuals offer to help buyers to circumvent the laws and find a way around the rules regarding property purchase in India. This is not only a dangerous way to buy or lease a property in any country, but it will come back to haunt you at some point in the future. As the economy and the property buying process in India develops, the authorities are cracking down on sharp practice, and buyers who think they own a property legally now face having to give it up.

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. While it is legal for a company set up within the FEMA regulations to acquire and own property in India, but it must be 'necessary for or incidental to carrying on...business'. It appear the loophole of people setting up a company to acquire property to live in or rent is closing.

More pages

Page 1: Why India?
Page 2: The property buying process
Page 3: Investment potential

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