Research Uk - India Cross Border Residential Investments 2008

8/8/2019 Research Uk - India Cross Border Residential Investments 2008

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UK-India cross-borderresidential investment,

August 2008

advance


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Introduction and Executive Summary .................................................................................................03

The Indian Phenomenon ...................................................................................................................04

Past, present and future

Wealth creation

Indians investing in the UK ................................................................................................................08Financial matters

Why invest in the UK?

What and where to buy?

Non Resident Indians investing in India .............................................................................................14

Financial matters

Why invest in India?

What and where to buy?

Contents


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The emergence of the worlds second m ost popul ous nation as an economic force has already had a profoun dglobal impact.

With Indias economy forecast to grow strong ly in t he medium-term, we expect individual wealth to balloon.This will not only be seen in greater numbers of High Net Worth Individuals (HNWIs) but also, and perhaps moresignificantly, in the explosion of Indias middle-classes. The implications for residential investment bot h in the UKand in India are potentially huge.

In this report we chart Indias recent progr ession and explore its pr ospects. We also examine the benefits ofinvesting in residential property and look at what ty pes of properties can be bought both in the UK and in India.

Indias grow th India is the second largest country by population. TheIndianauthorities,however,restrictcapitaloutowsto

US$ 200,000 per person per year for resident Indians. The Indian economy has expanded by 8.6% pa during

the past five years. It is now the fourth largest economy in the world, up from

tenth in 1992. Indian GDP growth is forecast to rise by 7.3% pa over

the next ten years, more than double the global average. By 2013 India is destined to become the third largest

world economy. By 2050 Indias population is predicted to be the largest

in the world at 1.6 billion, higher than China.

Residential investment in the UK The UK imposes no restrictions on Indians investing in

UK residential property. The Indian authorities, however, restrict capital outflows

to US$ 200,000 a year for resident Indians. To date Indian buying has been mainly in London and in

the 0.6 to 1.2 million price range.

There are many reasons that support strong house pricegrowth in the UK following the current period of uncertainty. We forecast that Indian investment in UK housing could

exceed 1015 billion over the next 10 years.

Wealth in India The number of HNWIs in India is growing at a faster

pace than any other nation. In 10 years there are forecast to be over 400,000

HNWIs, four times the number today. There are expected to be 1.9 million semi-HNWIs by 2017. The number of middle-class Indians with the potential to

invest in UK residential property is expected to rise to583 million by 2025.

The number of Indians with wealth exceeding

US$ 100,000 is forecast to be 29 million by 2017.

Residential investment in India Only Persons of Indian Origin, based in India or

elsewhere, are permitted to buy residential propertyin India.

The Indian authorities, however, restrict capital outflowsto US$ 200,000 per person per year for resident Indians.

Strong economic and population growth will generateincreasing demand for more and better quality housing.

Indias developing demographic profile of young,aspirational and mobile individuals will boost demand for

housing in many locations. Indians are already seeking better and alternative residentialgrowth opportunities outside of Tier I cities.

Introduction

Executive Summary

3COPYRIGHT JONES LANG LASALLE IP, INC. 2008. All rights reserved.


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Fig 2: National GDP growth

Source: Jones Lang LaSalle, Experian

Fig 1: India the worlds second most populous country

Source: Jones Lang LaSalle, Experian

Current facts Indias 10 largest cities each have a population above 3 million. 1.13 billion population. 2nd most populous nation. 17% of world population. Density 329 people per sq km. 7th largest country by area. Largest democracy in the world. 32% of the population is under 15 years of age, 60% are

less than 30 years with just 25% older than 40 years. Mumbai is the second most populous city in the world

with 21.1 million people.

Economy is worth approximately US$ 3.4 trillion pa,

4th largest in the world. GDP per capita is circa US$ 3,000 pa, significantly

below the UK at US$ 35,000 pa. Accounts for 4.6% of global GDP. Labour force of 516 million, second highest in world. 60% of workforce employed in agriculture, 12% in

industry and 28% in services. Agriculture represents 18% of national GDP, industry

29% and services 53%.

The Indian Phenomenon

Past, present, future

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4 COPYRIGHT JONES LANG LASALLE IP, INC. 2008. All rights reserved.

UK-India cross-border residential investment August 2008


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Fig 3: % share of world GDP

Source: Jones Lang LaSalle, IMF

1992 2007 2013

Rank Country% o fGDP



1 United States 22.8 1 United States 21.4 1 United States 19.2

2 Japan 9.2 2 China 10.8 2 China 14.7

3 Germany 5.9 3 Japan 6.6 3 India 5.6

4 China 4.3 4 India 4.6 4 Japan 5.6

5 Russia 4.2 5 Germany 4.3 5 Germany 3.7

6 France 4.0 6 United Kingdom 3.3 6 Russia 3.4

7 Italy 3.8 7 Russia 3.2 7 United Kingdom 3.0

8 United Kingdom 3.6 8 France 3.2 8 France 2.8

9 Brazil 3.0 9 Brazil 2.8 9 Brazil 2.710 India 2.9 10 Italy 2.8 10 Italy 2.3

Recent journey The Indian economy has increased by 6.7% pa during the

past 15 years compared to average world growth of 3.7% pa. During the past 5 years the Indian economy has grown

by 8.6% pa. In 1992 India accounted for 2.9% of global GDP, by 2007

this had risen to 4.6%. India has risen from the worlds 10th largest economy in

1992 to the 4th largest in 2007. In the past 15 years Indias population has increased by

272 million, a growth rate of 1.9% pa. Output from the service sector has increased by 150%,

averaging 9.4% pa, over the past 10 years.

Future travels Indian GDP is forecast to grow by 7.3% pa over the next

10 years. GDP growth is expected to increase three times as fast as

the UK and twice as fast as world GDP in the next 10 years. By 2013 it will be contributing around 5.6% of

global GDP. The population is forecast to rise by around 320 million

between 2007 and 2025 to 1.45 billion. By 2050 India is predicted to be the most populous in the

world with 1.6 billion people, overtaking Chinas 1.4 billion. The number of cities with a population over 1 million is

expected to double to 70 by 2025.



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The Indian Phenomenon

Wealth creation

Number of global US$ billionaires

110

1120

2150

51100

101250

250+

Global US$ billionaires 1997

Source: Jones Lang LaSalle; Forbes

The impact of wealth emanating out of India in recent yearshas already been high profile, Lakshmi Mittal being the most

notable. However, this is likely to be dwarfed by its influenceand breadth over the next 1020 years.

Not only will there be a significant increase in Ultra HNWIsand ordinary HNWIs based both in India and overseas, butthe Indian middle class is set to balloon.

Bill ionaires Lakshmi Mittal, who resides in the UK, is the most

wealthy Indian in the 2008 Forbes List. With assets ofaround US$ 45 billion, he is the fourth richest person inthe world.

Indians account for 4 of the 10 most wealthy individuals. There are now 53 Indian US$ billionaires with a

combined wealth of US$ 341 billion. Also in the top 10 are brothers Mukesh and Anil Ambani

both worth around US$ 43 billion.

HNWIs India currently has approximately 123,000 HNWIs. The number of Indian HNWIs escalated by 23% during

2007, the highest rate of any nation, narrowly outpacingChina and Brazil (see Fig 5).

By 2017 there are expected to be over 400,000 HNWIsin India.

The total wealth of Indian HNWIs is predicted to rise toUS$ 1.7 trillion by 2017.

Global wealth of all HNWIs is expected to grow by7.7% pa to US$ 59 trillion over the next 5 years. In theAsia-Pacific region growth is forecast to be slightlyhigher at 7.9% pa, with India likely to be higher still.

Definitions:

HNWI High Net Worth Individual, person with financial assets over US$ 1 millionexcluding their primary residence

UltraHNWIpersonwithnancialassetsoverUS$30millionexcludingtheirprimaryresidence

SemiHNWIpersonwithnancialassetsoverUS$500,000excludingtheirprimaryresidence

Middle class person with annual income equivalent US$ 23,500 to US$ 118,000

Sources:

Barclays Wealth Insights, Volume 5 Evolving Fortunes 2008Capgemini / Merrill Lynch, World Wealth Report 2008

McKinsey Global Institute, The Rise of Indias Consumer Market 2007

Forbes, The Worlds Billionaires 2008




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Middle classes The number of middle class Indians is forecast to rise to

583 million (41% of the population) by 2025, up from just50 million (5% of population) now.

The number of households with wealth overUS$ 500,000, semi-HNWIs, is expected to rise fromvirtually zero today to 1.9 million by 2017.

2.1 million households had wealth of over US$ 100,000in 2007. This is expected to rise to 29 million householdsin the next 10 years.

Miscellaneous The Indian stockmarket, The Bombay Sensex Index,

has increased six-fold in the past 5 years and hassignificantly aided wealth generation.

Around 25% of Indian billionaires have made theirfortunes through Initial Public Offerings (IPOs) on theIndian stockmarket.

Property accounts for around 43% of all householdwealth in India.

Fig 5: Growth in number of HNWIs 20032007

Source: Jones Lang LaSalle, Capgemini

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ofHNWIs

Number of global US$ billionaires

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2150

51100

101250

250+

Fig 4: Numbers of HNWIs 2007

Source: Jones Lang LaSalle, Capgemini

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3500

US

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any

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China

Braz

il

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fHNWIs(000s

)

Global US$ billionaires 2007

Source: Jones Lang LaSalle; Forbes



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In this section we consider UK residential property activity byIndians either based outside the UK or who qualify as non-domiciles in the UK. Property investment by Persons of IndianOrigin (POI) who are resident in the UK are not included.

The UK residential property headlines have been grabbedby the purchases of Ultra HNWIs like Lakshmi Mittal whohas bought a number of homes in the past couple of years(see page 13). However, there has also been a growingtide of lower-profile purchases by Indians. To date thebulk have been in London and have been typically in the 0.6 to 1.2 million price range but we expect this range tobroaden over the next few years, both up and down.

Investment restriction s The UK does not impose any restrictions on overseas

investment in the UK meaning that any Indian is free tobuy residential property in the UK.

However, the Reserve Bank of India (RBI) imposes arestriction on capital outflows from India of US$ 200,000

per financial year. In February 2004 the restriction wasincreased from US$ 25,000 to its current level andthere is also some pressure on the RBI to further relaxthis restriction.

Financing opti onsThe capital outflow restriction of US$ 200,000 per financialyear is a constraint on potential investment in UK residentialproperty as this equates to only around 100,000. Thisis well below the average house price in the UK, around 175,000 and significantly lower than Londons averagehouse price of circa 350,000. There are, however, a

number of ways to help negate this constraint.

Join forces with other family members, colleagues orbusiness partners. If five individuals clubbed togetherthe potential spend in any financial year would beUS$ 1m, the equivalent of around 500,000.

Part-finance the property purchase via a mortgage.This can be done as an individual or as a family/groupif the property is held in joint names. Finance must beobtained in the UK or via an offshore mortgage lender.

Borrowing can be purely based on purchase but canalso be taken out based on rental guarantees if theproperty is intended to be let to tenants.

The options are greater still if an off-plan purchase ofa new property is considered. In this case, a deposit ofup to US$ 200,000 can be made in year one, perhapsbefore construction starts, up to US$ 200,000 in thefollowing year, perhaps during construction, with up

to US$ 200,000 on completion. This option is alsoattractive for UK housebuilders as deposits beforecompletion are typically only 10% from UK buyers.

Tax i mplicationsTax liabilities are highly dependent on individual circumstancesandhowpropertyispurchasedandnanced.However,theguidelines below are broadly appropriate for most investors butit is strongly recommended that personal tax advice is soughtbefore considering residential investment in the UK.

In the UK Non UK residents are not liable for UK capital gains tax (CGT). For resident non-domiciles, if the UK property is the main

residence of the owner no CGT will be due on sale. If theproperty is not the owners main residence CGT, currently18%, on the chargeable gain will be liable upon sale.

If the property is let as an investment UK income tax will be due. If a property is let as an investment and the owner is not

based in the UK it is preferable for them to register underthe Non Resident Landlord Scheme which enables themto receive their rents gross of tax and to obtain relieffrom allowable property expenditure, via the submissionof an annual tax return. If the owner does not register

for this scheme, basic rate income tax on rental incomeis withheld by their letting agent or tenant and no reliefis given for property expenses and mortgage costs. Thecurrent basic rate of income tax in the UK is 20%.

In India Persons who are resident in India for Indian tax purposes

are liable to tax on global income and global capital gains inIndia, including capital gains on UK residential property. This,however, is subject to the provision of the double taxationrelief agreement between the governments of India and UK.

Indians investing in the UK




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The scale of possible i nvestmentIf we combine the growth in the Indian economy and the levelof wealth creation to date with the projections made earlier inour report, it is clear that the potential spend on UK residentialproperty investment can be huge over the next ten years.

Specific predictions are difficult but we can make somebroad assumptions to give us some idea of the potentialscale of investment. It has been forecast that there will bearound 1.9 million Indian households with wealth exceedingUS$ 500,000 by 2017. Currently, the proportion of anyindividuals wealth invested in property is typically 20%of all assets. We can also make the assumption that theapproximate proportion of wealth invested in the UK ratherthan elsewhere is 10%. By combining these numbers thefollowing seem quite plausible over the next 10 years.

1015 billion could be spent by Indians on UKresidential property.

Indians could own 20,00030,000 UK residential properties. By adding in other potential sources of UK residential

investment, such as spending by HNWIs as well asinvestment by some of the mass middle-class, thesefigures could prove quite conservative.

Other costsWith the number of middle-class Indians another potentialsource of UK residential investment as well as greater potentialspendingbyHNWIswithsignicantlymorewealththanUS$500,000,thesegurescouldprovequiteconservative.Investors in UK residential property should also be aware of theother main costs when buying, selling and renting a property.

When buying, these include stamp duty land tax,solicitors fees, mortgage related costs such as valuation,survey and arrangement fees and a Land Registry fee.

When selling, the main costs include estate agent andsolicitors fees.

When renting out a property the main costs are thepayment of a managing agent and furnishings.

COPYRIGHT JONES LANG LASALLE IP, INC. 2008. All rights reserved. 9


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Residential property should usually be regarded as long-term investment asset. It therefore seems wise to consider

the long-term historic performance as well as the medium-term outlook of UK residential property when consideringsuch an investment.

Past UK residential property performance UK residential property has increased in value at an

average of 10.4% pa during the period 19702007,stronger than either UK equities or UK commercialproperty (see Fig 6).

Residential property values in the UK have riseneven faster over the last 10 years at an average of11.5% pa growth.

In total return terms (capital value growth plus incomereturn) it is estimated that UK residential propertyhas generated a return of over 16% pa since 1970,significantly stronger than UK commercial property(12% pa) and UK equities (14% pa).

Furthermore, and unlike equities, the ability to borrow usingproperty as collateral enables the return on equity to beevenhigherthanthetotalreturnguresquotedhere.

Short-term out lookAs a consequence of the credit crisis residential propertyprices are currently falling in the UK. It also remains quiteuncertain how long and how deep the economic and

housing slowdowns will be. At present we expect houseprice falls in the region of 12% this year and 7% next yearbefore prices begin to recover.

Medium-term forecastsWhile there are current uncertainties and weaknesses in the

UK housing market we believe that there are a number offundamental reasons why UK residential property will appreciatestrongly in value in the medium-term. Currently we forecast thatUK residential prices will increase by 89% pa during 20102013with around 6% pa likely in the medium-term. Our forecasts derivefrom economic and household income growth as well as restrictedhousing supply and strong demand factors (see opposite). Inaddition to capital value growth investors should be able to obtaina gross rental income return of between 4% and 6% pa.

In addition to capital value growth investors should be able toobtain a gross rental income return of between 5.5% and 6.5% pa.

Fig 6: UK capital value growth 19702007

Source: Jones Lang LaSalle; Nationwide; IPD

Residential property 10.4% paCommercial property 5.5% paEquities 9.0% pa

Index

(1970

=1

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Why invest in the UK?

There is a fundamental

undersupply of housing inthe UK and in London




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Undersupply of residential propertyFor many years the population of England and thedemand for housing has been expanding at a fasterrate than the building of new homes. In response theBritish Government has set targets for additions to thehousing stock in England of 3 million by 2020 and atarget of 240,000 a year by 2016. While additions haveincreased recently, they are still well below governmenttargets (see Fig 8). Furthermore, as construction levelsare likely to fall significantly over the next few years dueto the weaker UK housing market, the divide betweenhousing demand and supply will only increase further.

Restricted land sup plyThe amount of developable land in the UK is constrainedby a tight planning system which, in particular, restrictsdevelopment on greenfield land that has not previouslybeen built upon. As a result it is difficult for housingsupply to increase to meet demand.

Demographic demand driversDemand for housing in the UK has increasedsignificantly in recent years through natural populationrises, positive net inward migration and the need formore single person households. This trend is likely tocontinue if not accelerate over the medium-term.

Home ownership and rentingThere is a strong aspiration in the UK for adults to owntheir home which helps to maintain a reasonable level of

housing demand over a medium-term time horizon. Thisis borne out by the fact that around 70% of householdsown their home in the UK. Around 12% of UKhouseholds rent from private landlords, and significantlymore in London, which implies there is a healthy sourceof potential tenants for residential investors.

Growing importance of the family home

A familys most valuable asset has often been its homebut it has taken on even greater importance in recentyears as home owners have increasingly used the valuein their home as a supplement to their pension provision.Additionally, and because of the growing importance,this has led many parents to give financial assistanceto their children to help them onto the property ladder.Typically this has been funded through parents takingequity out of their home or by raiding their savingsrather than waiting to pass down financial supportthrough inheritance.

Rise in residential investorsAnother significant change in the UK housing market hasbeen the increase in buy-to-let investors. Indeed, thenumber of buy-to-let mortgages outstanding in the UKhas risen from around 30,000 in 1998 to over 1 milliontoday. Residential investment has been used as a realalternative to investing in shares and other asset classesespecially as capital values have been rising so stronglyover the last 12 years. It is also being used as a pensionsupplement and income generator during retirement.

Fig 7: UK residential property forecasts

Source: Jones Lang LaSalle; Nationwide

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London Central & Northern UK

%changepa


Fig 8: Homebuilding in England

Source: Jones Lang LaSalle; DCLG

100

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1991/92

1992/93

1993/94

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'2004/05

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Net addit ions New completions Government target

Numberofdwellings(000s)


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City Population % Privaterented sector

Average houseprice

London 7,410,500 15.3 355,000

Birmingham 2,161,000 6.8 133,000

Manchester 1,480,500 10.0 116,000

Leeds 496,000 12.2 155,000

Sheffield 448,000 9.2 142,000

Liverpool 439,000 13.1 126,000

Bristol 363,000 13.8 188,000

LondonBristol

Birmingham

Sheffield

Leeds

Liverpool

Manchester

1

2

3

4

5

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7

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7



NORTH LONDON

WEST LONDON

EAST LONDON

SOUTH LONDON

Mayfair

Chelsea

Knightsbridge

St Johns Wood

Southwark

Camden

Regents Park

St James Park

Hampstead Heath

Canary Wharf

Houses of Parliament

London Eye

Lords Cricket GroundThe City

Buckingham Palace

Tower of London

Hyde Park

Fulham

Islington

RiverThames

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Central London West: KensingtonLakshmi Mittal, the fourth richest person in the world and wealthiest Indian, is said to be innegotiations to buy this mansion in Kensington for around 117 million.

Central London West: Knightsb ridgeJones Lang LaSalle recently sold studio, one and two bedroom apartments in this newLondonewcastle development in Knightsbridge.

One bedroom apartments sold for around 1.0 million (approx 1,400 per sq ft)Two bedroom apartments sold for around 1.9 million (approx 1,200 per sq ft)

Central London West: FulhamJones Lang LaSalle are currently selling studio, one and two bedroom apartments as well

as three and four bedroom houses in this new Astral Homes development in Fulham.

One bedroom apartments are on the market for around 400,000 (approx 740 per sq ft)Two bedroom apartments are priced at around 700,000 (approx 850 per sq ft)Three bedroom houses are on the market for around 800,000 (approx 650 per sq ft)

Central Lond on East: DocklandsDeveloper Ballymore has almost finished construction on a total of 736 units in two towersat Canary Wharf in Londons Docklands area. Almost all units have sold off-plan.

One bedroom apartments around 400,000Two bedroom apartments around 500,000

North London: StanmoreStEdwardHomesaredevelopingStanmorePlace.Therstphasewillconsistof119unitsincorporating views over a lake and landscaped gardens. Completion for this phase is due in 2010.

One bedroom apartments around 250,000 (approx 500 per sq ft)Two bedroom apartments around 350,000 (approx 450 per sq ft)

Three bedroom apartments around 460,000 (approx 450 per sq ft)

BirminghamAt Park Central in central Birmingham, Crest Nicholson are marketing a selection of one tofour bedroom townhouses.

One bedroom houses around 160,000 (approx 250 per sq ft)Three bedroom houses around 230, 000 (approx 230 per sq ft)

ManchesterTaylor Wimpey are currently selling one and two bedroom apartments as well as three andfour bedroom townhouses in the affluent West Didsbury area of South Manchester.

One bedroom apartments around 150, 000 (approx 320 per sq ft)Two bedroom apartments around 180,000 (approx 320 per sq ft)Three and four bedroom townhouses around 320,000 (approx 260 per sq ft)

South London: CroydonBarratt Homes are developing New South Quarter, a new community in Croydon of over700 studio, 1, 2 and 3 bedroom apartments in contemporary buildings, set around their owncourtyards and gardens. Development will be phased during 20092012.

One bedroom apartments around 200,000 (approx 420 per sq ft)Two bedroom apartments around 250,000 (approx 340 per sq ft)


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Non Resident Indians investing in India

Only a Person of Indian Origin (POI), including NonResident Indians (NRIs), as well as all residents in Indiaare permitted to buy residential property in India. Non POIresidents in the UK are therefore not allowed to investin Indian residential property. In this section we focus onresidential investment in India by NRIs and POIs living inthe UK as well as non-domiciled Indians resident in the UK.Unless otherwise stated in this section the term investors

refers to anyone meeting one of these three criteria.

In recent years the Government of India has introducedquite liberal policies to enable NRIs to invest in India.However, since property transactions and holdings count asdealing with foreign exchange, all investment must abide bythe legalities set out in the Foreign Exchange ManagementAct (FEMA) of 1999. These and other rules and restrictionsare detailed below.

Investment restrictions and conditions Investors are permitted to acquire any form of property

in India with the exception of agriculture, plantationproperty or a farmhouse without the need of formalpermission from the Reserve Bank of India (RBI).

A declaration of purchase of any property must be madeto the RBI.

Residential properties can be purchased using inwardremittances from anywhere outside India or throughfunds maintained in NRI bank accounts in India.

There are no restrictions on the number of propertiesthat can be owned.

NRIs are permitted to sell a property to any personresident in India or to another NRI or to any POI.

A POI is free to sell their property to any person residentin India or to an NRI but may only sell to another POIwho is not resident in India or an NRI with the strictapproval of the RBI.

NRIs are permitted to transfer the ownership of anyproperty to a resident Indian without any approvalor restrictions.

NRIs may inherit property owned by other NRIs provided thatthe property was bought within the provisions of the foreignexchange law in force at the time of the property acquisition.

A POI may acquire any immovable property in Indiaby way of inheritance from a person resident outsideIndia provided that the property was bought within theprovisions of foreign exchange law in force at the time ofthe property acquisition.

Financing optionsIn financial terms buying property in India has been madereasonably convenient since many Indian banks offerspecialist home loan and mortgage schemes specifically forNRI investors. Some banks have even launched in Londonto further aid property investment buying.

Investors are permitted to acquire mortgages without priorapproval from the RBI and can repay the loans throughinward remittance via normal banking channels, via NRE orFCNR accounts (see below for explanation) or directly outof rental income. Loans can even be repaid by a borrowersclose relatives (under certain rules).

At present loans of up to 85% loan-to-value can be obtainedreasonably easily although loan-to-value ratios are moretypically around 60%. Fixed rate buy-to-let mortgagescovering the entire duration of the loan are currentlyavailable at an interest rate of around 14% pa.

Tax implications and considerationsTax liabilities are dependent on individual circumstancesand how property is purchased and financed. However, theguidelines below are broadly appropriate for most investorsbut it is strongly recommended that personal tax advice issought before considering residential investment in India.

A Non Resident Ordinary Rupee Account (NRO) may be maintained by any

person resident outside India. These accounts can be maintained for savings,

current accounts and recurring or fixed deposits. The account can be credited

with remittances received in any permitted currency from outside India or

legitimate dues in India. All local payments in rupees and remittances outsideIndia of current income are permitted to be made from a NRO account subject

to the necessary compliances.

Non Resident External Rupee (NRE) accounts may be opened without any

approval if the funds for the account are transferred in freely convertible foreign

currency. These accounts can also be maintained for savings, current accounts

and recurring or fixed deposits. Balances held in this account and any interest

earned on this account are exempt from tax. NRIs may jointly open this account

with another NRI.

A Foreign Currency Non Resident account (FCNR) is a deposit only account

which may only be held in Pounds Sterling, US Dollars or Japanese Yen. The

deposit is accepted for a period of not less than six months and not above three

years. Remittance from abroad has to be made in the foreign currency in which

the account is nominated to be maintained. The balances and the interest onthis account are also exempt from tax.




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Investors must pay income tax in India on any rental incomereceivedfromtheirIndianpropertyholdings.However,aatrate deduction of 30% of rental income is applicable beforeassessing the level of taxable rental income. If a propertyis purchased out of borrowed funds, the interest payablequaliesfordeductionagainstrentalincome.Thecurrentrate of income tax in India varies according to income leveland rises to a maximum of 30.9% on income exceeding

USD 11,628 (INR 500,000). Additionally, a surcharge isapplicable if income exceeds USD 23,256 when the effectiverate of tax becomes 33.99%.

If more than one property is owned, which is used forself-occupation or is vacant, an investor is liable to pay taxon the notional rental income (annual letting value) on anyadditional property. An investor is eligible for a 30% reductionon the notional rental income when computing the notionalproperty income for tax purposes.

Investors do not have to pay tax on any interest earnedfrom the proceeds of both rental income and capitalgains as long as these proceeds are placed in specialist

non resident bank accounts, an NRE or a FCNR account(see below for explanation). Investors are also liable for wealth tax annually on certain assets

including immovable properties. However, one residential houseis unconditionally exempt from wealth tax while residentialproperty which is let out for a minimum period of 300 daysduring the year is also not liable to wealth tax. However, otherproperties that are used for self-occupation or rented out forless than 300 days are liable to pay tax on their notional rentalincome (annual letting value). In computing the wealth, theborrowingspecictothepurchaseofapropertywhichissubjectto wealth tax is deductible. Wealth tax is levied on all taxableproperties at 1% of the value exceeding INR 1.5 million.

Investors are permitted to repatriate any proceeds fromthe sale of residential property in India although the

amount to be repatriated must not exceed that originallypaid for the property either in foreign exchange by debitto a NRE or a FCNR account.

The repatriation of sale proceeds out of foreign exchange,however, is restricted to a maximum of two properties.

Investors are also restricted from repatriating proceedsfrom residential investments in the form of dividends.

Capital gains may be credited to an NRO or FCNR

account from where an investor may repatriate up toUS$ 1 million per financial year.

Investors have to pay capital gains tax in India on theircapital gains from the sale of any property. Capital gainson properties held for more than 36 months is computed byindexing the cost of acquisition and is taxable at 22.66%.An exemption may be available against capital gains forany re-investment of sale proceeds of the property intoanother residential property or if the funds are locked intogovernment bonds for at least three years.

Capital gains on properties held for less than 36 monthsare subject to tax at 33.99%.

As capital gains tax in India is higher than in the UK,investors would have no UK capital gains tax liability asa result of the double taxation relief agreement betweenthe governments of India and UK.

Other costsInvesting in Indian property also attracts following main costs.

When buying, these include stamp duty, registrationcharges, legal charges and mortgage related costs suchas processing and valuation fees.

When selling the main costs include brokerage andsolicitors fees.

When renting out a property the main cost is payment toa managing agent.

COPYRIGHT JONES LANG LASALLE IP, INC. 2008. All rights reserved. 15


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Over the past few years there has been a steady rise inthe number of NRIs investing in Indian residential property.There are several reasons behind this trend which is partmotivated by investment gain but also guided by personalfactors such as home town investment.

In this section we consider the driving forces behindthe potential for strong house price gains as well as the

preferences and trends already evident and likely to becomeevident in India over the medium-term.

Past Indian residential property performanceThe growth rate of residential property across major cities inIndia has been recorded at a high of 100% in prime locations ofTier I cities to a low of 30% in Tier III cities over a period of 23years. The average rate of growth for the top 7 cities has beenapproximately 19% pa over the last 23 years.

Short-term out lookThe credit crunch and global economic slowdowns have

recently decelerated the growth in house prices. Thenumber of transactions has also declined compared to thelast few years.

The residential market in India has become price sensitiveand price points above INR 2,500 to INR 3,500 mightface resistance from mass market consumers. The luxuryor high-end housing market is expected to remain firmeras this niche sub-market caters to a smaller set of morewealthy buyers, who will remain largely unaffected by risinginterest rates as many purchases will not need to depend onmortgage finance.

Medium-term forecastsWhile there are current weaknesses in the Indian market webelieve that there are many reasons why residential propertyprices can rise strongly in the medium-term. In India theseare principally demand drivers and are highlighted opposite.

Growing economyAs has been mentioned earlier, the Indian economy isexpected to grow strongly over the medium-term, buildingfurther on recent performance, despite slowdowns in moredeveloped economies. A key driver of the economy is expectedto be the services industry including sectors such as IT/ITES

(Information Technology Enabled Services), semi-conductorsand bio-technology. This strong economic activity will lead tohigher employment, income and demand for housing.

DemographicsDemand for Indian residential property is set to escalate stronglyin the medium term. Indias population is set to rise by around320 million from 1.13 billion in 2007 to 1.45 billion by 2025.Furthermore, with 60% of the current population under the ageof 30 many of these will provide an additional source of housingdemand over the coming decades.

Emergence of nuclear familiesGiven current demographics, the recent trend towards theemergence of nuclear families (households containing parentsand immediate children only, rather than extended families thatcan include aunts, uncles, grandparents etc) is set to intensifyfurther. This trend is being driven further by the wave of youngadults migrating to other cities for better career opportunities.It is estimated that more than 70% of households are currentlynuclearfamilies,agurethatisexpectedtorisefurtherandcreate additional demand for housing in the medium term future.

Rising dispos able income levels

Total personal disposable income has risen from US$ 492 billionin 2003 to US$ 876 billion in 2007 and is expected to rise toapproximately US$ 1,800 billion by 2012. Rising income levels andincreasing purchasing power are likely to lead to stronger consumerspending as well as potential funds for residential purchases.

Home ownership and leasingWith disposable incomes rising among young working Indians,especially in the IT/ITES sector, many more people are aspiringto own a home. Although the migrant population across majorcities, many of whom have moved for better career opportunities,prefer to live in leased houses initially, which is providing a ready

source of tenants for residential investors, many of these aimto buy a home in the future. This is mainly led by the need forsecurity, the emergence of real estate as a favoured investmentassetclassaswellashomeloantaxbenets.

Urbanisation and infrastructur e developmentsIndias urban areas are set for strong growth in the medium-term. It is forecast that 41% of the population will be livingin urban areas by 2011, an increase from 28% in 2001.Furthermore, the number of cities with more than one millionpeople is expected to double from 35 in 2001 to 70 citiesby 2025. The Central Government of India also recognisesthe dependence of economic growth on infrastructure and

estimates that investment will rise to US$ 150 billion inthenextveyears.Thisurbanisationislikelytoleadtosignicanthousingdemandandsupplyinthemedium-term.

Why invest in India?




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Housing preferences f or NRI investorsDevelopers in India report that 1525% of all newdevelopments are bought by NRI investors. The source ofNRIs is quite diverse with significant numbers residing in theUK, the US, Singapore, Malaysia, Dubai and the Middle-East.

Evidence to date suggests that 3BHK (3 bedrooms,hall and kitchen) are the most popular size of propertybought by NRI investors, with 2BHK properties followingclosely behind. Villas and penthouses are also provingto be as popular as apartments.

High specification is proving a crucial factor for NRIinvestors. Internally this includes air-conditioning, powerback-up, wi-fi capability, solar water heating and luxuryentrance lobbies with CCTV. Externally, swimmingpools, health and sporting facilities and quality securitysurveillance are also positive attributes.

The most developed Indian cities have so far provento be the most popular destinations for residentialinvestment and include the Tier I cities of Delhi, Mumbai

and Bangalore. Significant too is the emergence ofTier II and Tier III cities as likely residential investmentlocations. The key in these cities is the additionalpotential for growth and therefore property price growth(see Fig 9).

Emerging residential i nvestment trends Integrated townships are gated complexes that are

professionally managed where residents can walk towork and have important amenities such as schools andhospitals close at hand.

Golf-centric properties, residential developments that

form part of a golfing complex are proving popularamongst HNWIs. We expect the emergence of second or third homes that

can be used as holiday homes, either by the sea or inthe hills, to accelerate in the coming years as wealthspreads and deepens.

Temple towns such as Nashik, Tirupathi and Nathdwaraare likely to see the development of pilgrimage homes,probably high-end villas, catering to the regular floatingpilgrims of the NRI population.

Fig 9: Most preferred cities for NRI investment

Source: Jones Lang LaSalle Meghraj



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City Population1 Average houseprice (prime city)2

Average houseprice (suburbs)2

Mumbai 21.1 m INR 36,666,667 INR 7,975,000

Delhi 20.8 m INR 25,850,000 INR 5,995,000

Kolkata 16.3 m INR 13,200,000 INR 3,960,000

Bangalore 7.2 m INR 12,914,000 INR 5,417,500

Hyderabad 7.0 m INR 8,690,000 INR 4,253,333

Chennai 6.5 m INR 14,700,000 INR 4,482,500

Pune 363,000 INR 9,900,000 INR 4,803,333

1

Cencus 20062 Based on 2 bedroom apartment approximately 1,100 sq ft



Key items

Tier I Mature markets with attractive opportunities, low risks andmedium returns.

Tier II Growth Markets with attractive opportunities, low-medium risksand attractive returns.

Rising Stars Nascent Markets with lucrative opportunities, high risksand high returns.

Mumbai

Delhi

Bangalore Chennai

Hyderabad

Pune

KolkataAhmedabad

Chandigarh

Kochi

Coimbatore

Ludhiana

Amritsar

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MumbaiScheme: Lodha Solitaire, Developer: Lodha BuildersWell designed expansive bungalows with private gardens and sweeping verandas in a welldesigned community setting.Prices: INR 51 crores

Gurgaon, DelhiScheme: The Palm Drive, Developer: Emaar MGFVillas and apartments with international standard specifications, spacious interiors,excellent views and fine finishes.Prices: INR 24 crores

Noida , DelhiScheme: Unitech Grande, Developer: Unitech LimitedA project spread over large area of 347 acres, with 8 iconic towers and all apartments areluxurious facing the golf course.

Prices: INR 1.53 crores

KolkataScheme: Rosedale Garden Complex, Developer: Rosedale Developers Pvt. Ltd.Luxurious housing project for NRIs giving them the same comforts and amenities as thewest. A blend of modernism and international living.Prices: INR 11.5 crores

BangaloreScheme: Pebble Bay, Developer: B. Raheja BuildersPebble Bay is centrally located in up-market Dollar s Colony. The Project includes duplex

apartment and penthouse equipped with luxury facilities.Prices: INR 1.82.4 crores

HyderabadScheme: Palm Meadows, Developer: Splendid Aparna Projects Private LitmitedPalm Meadows, spread over an expanse of 95 acres, offering state-of-the-art facilities andamenities with 14 acres of central park in a gated community.Prices: INR 1.52.5 crores

ChennaiScheme: Garden City, Developer: DLFFeaturing International standards geared to serve customer needs, the DLF Garden City is going to beatruereectionofqualitylivingandcontemporarylifestyles.Theproductstrivestodeliverthesynergisticstrengths of good architecture, appropriate designs, impressive aesthetics and safety features.Prices: INR 4560 Lakh

PuneScheme: Picasso, Developer: Kumar PropertiesEach residence incorporates expertly planned layouts and is inspired by the most beautifuldcor style.Prices: INR 60 Lakh 1.5 crores

Mohali, ChandigarhScheme: The Views, Developer: Emaar MGF

The Views is a gated community of premium apartments.Prices: INR 1 crores and upwards

Prices mentioned are indicative figures (exclusive of additional charges) and may vary as per size, type and developers norms.

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Contacts

COPYRIGHT JONES LANG LASALLE IP, INC. 2008. All rights reserved. No part of this publication may be reproduced or

transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material that we believeto be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors.

No liability for negligence or otherwise is assumed by Jones Lang LaSalle for any loss or damage suffered by any party resulting from

their use of this publication.

Neil Chegwidden

Head of UK Residential Research

Jones Lang LaSalle

London

+44 (0)20 3147 1499

[email protected]

(Assisted by

Katyayini Krishnamoorthy)

Abhishek Kiran Gupta

Head of Operations, India Research

Jones Lang LaSalle Meghraj

Mumbai

+91 (0)20 3147 1499

[email protected]

(Assisted by Nitika Masih and

Neha Gupta)

James Thomas

Head of UK Residential

Jones Lang LaSalle

London

+44 (0)20 7399 5584

[email protected]

Anuj Puri

Chairman and Country Head


Mumbai

+91 22 2482 8400

[email protected]

Simon Halfhide

Head of UK New Homes

Jones Lang LaSalle

London

+44 (0)20 7399 5177

[email protected]

Vincent Lottefier

Chief Executive Officer


Gurgaon

+91 124 460 5000

[email protected]

Paul M. Guest

Head of EMEA Research

Jones Lang LaSalle

London

+44 (0)20 3147 1925

[email protected]

Raminder Grover

Managing Director

Homebay Residential

Delhi

+91 11 43317070

[email protected]

(A subsidiary of

Jones Lang LaSalle Meghraj)

Research Uk - India Cross Border Residential Investments 2008

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