While institutional investors have historically diversified their investment bets globally, a new class of Indian Retail and HNI investors are now increasingly looking to buy global commercial real estate. Driven by greater stability and growth potential of real estate investing in developed markets, investors are seeking to allocate capital globally for maximising returns and mitigating risks.
In this article, we will explore five essential tips to help Indian investors make informed decisions and succeed in the world of global commercial real estate.
Also Read: Land Buyer’s Guide: 5 Things You Must Check Before Buying A Plot
Tactically play the cyclicals:
Conventional wisdom suggests that one should ‘buy low and sell high’. Historically, periods of high interest rates have been quickly followed by periods of low rates, resulting in a significant increase in asset values. Currently, we are nearing the peak of an inflation-driven interest rate cycle.
Developed countries like the US and UK, which typically maintain near-zero interest rates, have increased interest rates to as high as 5%. This environment has shifted the risk-reward balance for certain categories of global commercial real estate assets.
There is tremendous value in assets like Global REITs at the moment, where the high-interest-rate scenario has depressed market values by 25% to 30%, while the underlying growth drivers remain unchanged.
Following the global financial crisis of 2008/09, REITs nearly tripled in less than two years. This exceptional return cycle repeated itself recently when REITs nearly doubled in less than two years after the crash of 2020.
Current valuations provide an excellent entry point for investors who can strategically allocate capital to the right assets and select the favoured investment themes to generate higher returns when interest rates eventually cool down.
REITs, for instance, have historically outperformed equity markets. Combined with the high liquidity and diversification they offer; they should be strongly considered at this time.
Explore the right themes within the real estate universe:
Historically, most Indian investors have put their money in residential real estate abroad because the ticket sizes used to be within the LRS limit. However, managing a property in a foreign country while residing in India can be very time-consuming, and the rental yields generated are in the low 3-5% range.
Additionally, it is becoming increasingly difficult to find residential properties for purchase abroad below the permissible LRS limit of $250,000. Also, buying commercial properties abroad is out of reach for most investors due to the LRS limits.
Global real estate exposure can be added to an Indian Investor’s portfolio in 2 forms, either through direct investment in select Global REITs or by buying into curated institutional grade properties through a CRE platform like Property Share.
In both cases, it is of paramount importance to find the right themes for capital allocation, for which professional investment advice should be sought.. For example, in most western countries like the UK and US, commercial real estate has underperformed over the last 18 months. However, the same theme has performed significantly better in the Middle East and in India.
Even within the UK, the commercial office market and the warehousing market are currently in different stages of the economic cycle. The warehousing market in the UK has performed exceedingly well over the last couple of years due to increased take-up by 3PL and e-commerce players, as well as limited supply in Grade A warehouses.
However, the office market in the UK is an out of favour theme currently due to increased office vacancies driven by the continuation of the hybrid policy amidst the high-interest-rate regime aimed at reducing spending.
Harness the rupee depreciation viz dollar/pound:
Developed economies benefit from stable currencies that generally appreciate in value compared to the currencies of developing economies, such as the Indian Rupee. This ensures that the cash generated retains its value over the course of the investment and contributes to overall returns.
For example, in India, if an investor receives an 8% return in rupee terms, another investor in the UK earning a 5% yield in pound terms also achieves a similar 8% yield in rupee terms. This effect is reversed when investing in a weaker economy, so investors should expect correspondingly higher yield expectations when investing in such economies.
Understand the remittance & tax regulations:
Before investing internationally, a resident investor should be well-versed with the prevailing RBI guidelines for remitting funds from India.
Currently, the annual limit for remittances under the Liberalized Remittance Scheme (LRS) is $250,000 (approximately Rs. 2 crores) per individual, encompassing not only investments but also foreign expenses, including trips abroad. Larger investments can be made by families as long as the property is registered in the names of multiple individuals.
Another consideration when investing abroad is the tax collected at source (TCS). For any expenses or investments exceeding Rs. 7 lakh per year (to be increased from 5% to 20% starting from October 1, 2023), an additional tax outflow will have to be paid as TCS. Although this amount can be reclaimed, it represents a significant upfront cash outflow.
Lastly, as an Indian resident, all global proceeds received, including rent and capital gains, are subject to taxation.
Buy ‘global’ but understand the prevailing ‘local’ statutes:
Purchasing real estate in foreign jurisdictions can be challenging, as each country or market has specific regulations regarding permits, timelines, and payment processes. Each country has its own standard market practices that gives a portfolio additional diversification. Having a strong local team of consultants is crucial to ensuring a smooth acquisition process and a litigation-free investment cycle.
However, it can be challenging to find reputable brokers, lawyers, and the right tax consultants to assist in the investment process in foreign countries. This is where established platforms like Property Share are now enabling Indian investors to invest in foreign commercial real estate by providing curated institutional-grade fractional ownership opportunities for owning assets outside India.
In an increasingly interconnected and dynamic global economy, the landscape of commercial real estate (CRE) investment has transcended traditional boundaries, paving the way for a new era of international opportunity.
Savvy Indian investors should understand the substantial alpha generation capability that global real estate investing can bring to one’s portfolio. It is important to navigate the international landscape effectively by making systematic investments in the right themes to get outsized returns along with the added diversification benefits.
-The author is Vice President- Investments at Property Share, a commercial property investment platform. Views expressed are personal.
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