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Thursday, July 25, 2024

Challenges for NRIs Managing Bengaluru Real Estate Investments: Exploring Exit Options

Dr. Renuka Divakaruni, a seasoned real estate investor based in the United States with more than 15 years of experience, is contemplating a strategic exit from her extensive real estate holdings in Bengaluru. Her deliberation on this move is fueled by the myriad challenges that Non-Resident Indians (NRIs) like herself often encounter when managing real estate assets in the region.

Divakaruni highlights the persistent issues of dealing with opaque and time-consuming bureaucratic processes, as well as navigating local regulations for property transactions in Bengaluru. Having diversified her investments across multiple properties in the eastern and northern districts of the city, she has reached a juncture where divestment seems increasingly attractive.

Her sentiments resonate with numerous NRIs, who frequently find themselves grappling with the complexities of property maintenance, especially concerning residential rental assets. Kiran Kumar, Vice President at Hanu Reddy Realty, who is currently facilitating the sale of one of Divakaruni’s properties, emphasizes the prevailing predicament. Many NRIs initially invested in real estate approximately 6-7 years ago when the Indian Rupee held a stronger position against the US Dollar. Today, divesting from these assets implies reduced returns due to the 20 percent Tax Deducted at Source (TDS) applied to such transactions. Furthermore, with soaring property prices in prime locations within the city and looming general elections, NRIs are hesitant to reinvest their capital.

This issue of managing real estate assets extends beyond Divakaruni’s experience. A survey conducted by NRI-focused fintech firm SBNRI Technologies Private Ltd reveals that about 24 percent of NRIs face considerable difficulties in managing rental properties in India. The survey encompasses the insights of more than 4,000 NRIs, primarily hailing from the United States, the United Kingdom, the United Arab Emirates, Singapore, and Canada.

Moreover, the survey exposes the challenge of dealing directly with tenants, encountered by 6 percent of NRIs from Canada, the US, and other nations. An additional 7 percent of NRIs from Canada and other countries choose to delegate the tenant management responsibility to trusted family members and friends. In contrast, 4 percent of Singapore-based NRIs, along with their counterparts from the US and Canada, personally oversee property inspections and maintenance during their visits to India. Interestingly, a small percentage—5 percent of NRIs from the US, 3 percent from Canada, and 1 percent from Singapore—entrust property managers with these responsibilities. However, it is important to note that even with property management companies, trust concerns linger due to the substantial financial commitments involved.

In the quest for more attractive returns on investments, NRIs are increasingly turning their attention toward commercial real estate (CRE). Balaji Badrinath, Managing Partner at the local office of the US-based real estate consultancy Coldwell Banker, underscores this shift. Residential real estate in Bengaluru yields approximately 2 percent in returns, while CRE offers a significantly higher return of about 6 percent. Nevertheless, the substantial capital required for CRE investments, often exceeding INR 15 crore on average, presents its own set of challenges for NRIs.

The SBNRI survey further demonstrates that 52 percent of NRIs are contemplating CRE investments as a means to diversify their portfolios within the Indian real estate segment. Notably, CRE investments outshine residential real estate in terms of preference, particularly among NRIs from Singapore (9 percent) and the UK (8 percent). These percentages exceed the investment levels in the residential sector, which stands at 6 percent. In contrast, UAE-based NRIs exhibit a preference for residential property investments (9%) over CRE investments (7%).

Fractional ownership has gained popularity among NRIs as it offers a solution to the capital dilemma. Instead of investing substantial sums ranging from INR 5-10 crore for commercial properties, groups of investors can pool their resources, with a minimum investment as low as INR 25 lakh, to collectively purchase Grade A commercial real estate.

The survey findings underscore the increasing appeal of CRE investments for NRIs from various countries, driven by the potential for higher returns and a lower barrier to entry, which fractional ownership facilitates. As NRIs seek opportunities in the Indian real estate market, diversification into commercial real estate emerges as a prominent trend, reshaping their investment landscape.

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