Colliers International
With increased globalisation, it is becoming a norm for savvy investors to allocate a share of their portfolios in foreign assets as international portfolio diversification allows them to get superior risk-return trade-off than the portfolio of domestic assets. However, the size of this share usually depends on cross-country rules and regulations, and limitation on investment.
The increase in foreign remittance limit up to USD 250,000 (approximately 1.5 Cr per year) under the Liberalized Remittance Scheme (LRS) by RBI for resident individuals has broadened the doorway for investors to invest in different asset classes across borders. Under the Scheme, resident Indians can invest in other countries out of bank accounts opened abroad. Accordingly, Indian resident individuals are free to acquire and hold immovable property, equity shares, units of mutual funds , venture capital funds, unrated debt securities, gifts and donations, promissory notes or any other asset outside India without prior approval of the Reserve Bank of India.
However, there are a few prohibited transaction as well, such as purchasing of lottery or sweepstakes, funding margin calls, funding active foreign exchange trading, funding the initial capitalisation of a company, speculation (derivatives or any other financial instrument) and remittances to Bhutan, Nepal, Mauritius and Pakistan or other non-cooperative countries.
Out of so many investment options available, overseas property investments is becoming one of the favourite asset classes among investors because of their relatively low volatility and risk. There are a couple of other reasons for investing in real estate aside from portfolio diversification. For example, people invest in residential properties outside India if they travel to those countries frequently, have business interests there or have kids who are studying abroad. It is also a status symbol to own property abroad. The preference for investment prominently depends on cost of ownership, taxes, residency rules, economic condition, etc. Dubai, Singapore, Sri-Lanka, Switzerland, Mauritius, London, New York and Malaysia are some of the preferred countries where Indians invest.
Now, given the wide range of investment options available in real estate, investment in residential property is quite popular, especially, holiday homes, studio apartments and villas in panoramic locations like Switzerland, Sri Lanka and Dubai. The current limit of around US$250,000 is sufficient to buy a studio apartment or a small apartment in most of these countries. Moreover, as the rules state, this limit is per individual. One can remit more amounts per financial year depending on the number of family members.
Purchasing properties is becoming even more convenient because in most countries, if one is buying under-construction property, the payment can be done in several years, similar to India. However, some countries like Cyprus, Hungry, Portugal, Malaysia and Oman permit investment in their properties only if the investment crosses a certain limit.
While investment in outside properties provides better risk-return trade-off, investors need to be aware of the limitation of global diversification. In mature countries, the risks of delayed project completion, quality, exit and land title, among others, is relatively low, whereas emerging economies still face these problems. Assuring legality of the titles of properties is also very important. One should know whether the property is leasehold or a freehold. For example, in Dubai, some developers sell leasehold titles, in which the title is valid for the period stipulated in the lease agreement. In countries like Cyprus, the ownership of many properties is disputed. Thus, one needs to be aware of local laws and check all the paperwork personally when purchasing property abroad.
It is also advisable to obtain the help of agents and legal consultants to ensure that the total cost and procedures for buying property abroad are accurate. In a few countries, the formal process of buying a property is still not very clear. Therefore, before entering into any agreement, it is better to seek the assistance of local consultants about the legalities. The bottom line is that you should make sure that you understand what you are getting into.
If planned right, investment across borders really makes sense for the purpose of diversification and risk-return trade-off. With the RBI increasing the limit, one can explore decent options in the cross-border property market.
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