When it comes to investing in Indian property, NRIs have a few options. According to RBI guidelines, an NRI can invest in any immovable property in India apart from agricultural land and farmhouse. The above stipulation remains void in case you owned agricultural land or a farmhouse before becoming an NRI.
Apart from these, there are two other property investment options for NRIs wanting to invest in India – REITs (2007) and InvITs (2014). With so many investment options, it may be confusing to choose which type of property to invest in. Let’s have a look at each property type to understand the pros and cons of each.
What are REITs and InvITs?
REITs: Real Estate Investment Trusts are companies that own and finance income-generating properties. The trusts are structured like a mutual fund that allows interested parties to invest in real estate portfolios. REITs were introduced to the Indian market in 2007. They are monitored and regulated by SEBI.
Typically, the corporation owning and managing the trust will lease out the property. The income generated through rent will be distributed among shareholders as dividends. To qualify as a REIT, a company must fulfill specific criteria. Some of them are:
- It has to be structured as a corporation or a trust
- It should extend fully transferable shares
- It should be managed by a board of directors or trustees
- It should have a minimum of 100 shareholders
- 50% of its total shares should not be held by less than 5% of its members
- It should pay 90% of the taxable income as a dividend
- At least 75% of the assets should be in real estate
InvITs: InvIT was introduced in Indian markets in 2014 as a collective investment scheme that allows investing in the infrastructure of the country. It builds a portfolio of revenue-generating infrastructural assets like roads, railways, etc. They are regulated by SEBI and listed on different trading platforms.
Usually, there are two types of InvITs – income-generating finished projects, and under-construction projects. The cash flow generated from the pooled resources of investors is distributed as dividends. This type of investment allows infrastructure companies to repay their debt obligation quickly. The typical structure of an InvIT consist of four elements:
- Trustee – Responsible to invest at least 80% of total investment in infrastructure assets
- Sponsor – Should have a net worth of at least 100 crores and must hold at least 15% of the InvITs
- Investment Manager – Responsible for managing operations
- Project Manager – Responsible for executing projects and supervising ancillary duties
Commercial Property vs. Residential Property
Investment in commercial property has gained quite a momentum in recent years. This is mainly due to the following reasons:
- Commercial properties give a higher margin of return compared to residential properties. Residential properties usually have a rental income of 1.5% – 2% yearly in metros and Tier I/II cities. In comparison, rent on a commercial property generates a 6% – 8% return per annum.
- In the case of residential property, it is the owner who has to provide maintenance, although maintenance fees can be charged to the tenant. As an owner of commercial property, you don’t need to physically take any responsibility for maintenance. The responsibility of maintenance lies with the tenant. This makes it easier for NRIs to prefer a commercial property for investment.
- The capital appreciation for commercial properties is much higher compared to residential properties. Moreover, recent updates in RERA have favored more investment in commercial real estate.
Best Property Investment Option for NRIs
The best investment tool for you depends on several factors such as your budget, expected long-term gains, the city you wish to invest in, etc. While investing in commercial properties is favored for NRIs, tools like REITs and InvITs should not be totally ignored. An HNI individual may consider investing in Indian infrastructure while smaller players may tend to stick to traditional options.
As an NRI, you should always be cautious while choosing to invest in real estate. Whatever type of property to choose to invest in, it is always a wise decision to do a thorough groundwork. Take into consideration the developer’s history and financial strength. Talk to locals to understand a general perception of the investment. If you wish to invest in REIT, scrutinize the management team of REIT and their performance record. You should park funds into REITs that hold diverse properties and tenants. Similarly, for InvITs, check the capability of sponsors and the perceived quality of corporate management.
