Rupee fall triggers NRI rush to Indian realty

K Ramanathan

Dubai is touted as the world-class property investment destination in the Middle East. In 2012, real estate prices witnessed a 10% growth y-o-y, as per the Dubai Land Development (DLD) authority’s data. 

Also, the real estate transactions increased by eight per cent to UAE dirham (AED) 154 million. Interestingly, this recovery is backed by huge investments by expatriates, particularly from India as Non Resident Indians (NRIs) are amongst the top five investors in the Middle East. 

However, with the natural affinity towards home-biasness for India, and against the recent depreciation of the Indian rupee (INR) against the US dollar (USD), could the real estate investment decisions of the NRI community be changed in favour of India?

Indian real estate prices have increased dramatically over the last few years. Immediately following the global financial crisis (GFC), Indian property prices witnessed a significant rise averaging 40–42% across all major markets, as per the database of the leading real estate intelligence services Jones Lang LaSalle. 

Even in cities like Mumbai, where capital values were already high, returns recorded at 66 per cent during the corresponding period. Contrary to this, DLD’s data for Dubai suggests property prices witnessed a 65% slump in the four-year period before 2012, thereby enabling us to suspiciously ask whether a 10% rally in 2012 is all that startling.

More recently, the Rupee has witnessed a significant 12% depreciation against USD since the start of May 2013 until the end of June 2013, thereby forcing its value down against all other currencies that are pegged to USD, including the AED. As a consequence, INR has also depreciated against the AED by 12% during the same period. 

A simple back-of-envelope calculation suggests that for instance, if a Dubai-based NRI invests AED 10 million in the Indian real estate now (INR/AED at 16.4), and assuming only a conservative 15% returns from the Indian real estate in the near term for key markets, he could expect repatriated returns of over 27% (15% of returns from real estate market plus 12% of currency appreciation), assuming that the INR returns to its pre-May price of 14.8/AED.

Merely the incremental return of 12%, owing to exchange rate fluctuation, is comparable to the 10–12% of total returns expected by DLD in the near term from the investment in Dubai realty sector. Similarly, returns can be expected from investments made by NRIs from other parts of the Middle East where the local currency is mostly pegged to USD.

It could be true that NRIs may favour Dubai over their home real estate on the basis of socio-economic and other factors. According to sources, Indian investors were buying properties in Dubai as it offers political stability, tax benefits, world-class infrastructure, geographical proximity and attractive prices.

However, a study conducted by Sumansa Exhibitions, organiser of several India property show in UAE, portrays a different picture. The study reveals that NRIs consider buying property in India is more profitable that owning a house in Dubai or elsewhere. 

Apart from strict visa rules along with regulatory obstacles in buying a property in the Emirates, what is triggering NRI population to invest in India are India’s economic growth, new infrastructure initiatives, rising demand for commercial space, price trends and social infrastructure. 

Putting these things into consideration, the recent fall of Indian currency could act as a trigger amongst the NRIs in the Middle East to switch their focus towards the properties in India.