In the late 90s when famous European pop group Vengaboys released their single, We’re going to Ibiza, the Mediterranean island city of Spain became a sought-after travel destination. Owning a beach property there became a dream for many and investors from across the world flocked to the property market in Ibiza. Till date, Ibiza remains a hotspot among foreign investors.
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Like their counterparts from developed nations, affluent Indians too dream of owning a second or a third property beside the sea or scenic hills around the world. Over the past two decades, demand for a second home in a foreign land by wealthy Indian buyers has been a central driver of residential price growth in Europe, the Caribbean region and North America, says The Wealth Report by Knight Frank and CitiBank.
Real estate markets across the world have shrunk in the past few years, owing to the global meltdown. As a result, there are few domestic buyers and property prices are lower. And that can be seen as an investing opportunity.
However, prices can’t be the only factor to be considered when investing in a foreign property that you may not be able to track at all. There are risks of fraud and misuse of your premises in your absence. But the good news is there are various other factors that make the proposition more attractive for you. Here is why some of them may work for you, how to make your deal risk-free and how to go about it.
Why it works
Cheaper locations: Several destinations in these locations are cheaper than upscale areas in Mumbai, Delhi or Bangalore. Take Ibiza’s example: it is cheaper to buy property in Ibiza than in Mumbai. According to the Knight Frank report, while the average rate of luxury property in Mumbai is $17,100 per sq. m (Rs 7,58,563.71 per sq. m), Ibiza offers luxury property at an average rate of $5,700 per sq. m (see graph).
Rental yields: Properties in the Ibiza category basically cater to travellers and those looking for short stays, making rental income an important aspect.
While your property value keeps appreciating, tenants keep paying your equated monthly instalments (EMIs) on your home loan in the form of rent and perhaps leave something extra for you.
Apart from tourist destinations, options such as Moscow, London, New York, Paris, and Rome offer better rental returns than Indian markets.
Says Anita Mehra, managing director, Benham and Revees, a London-based real estate consultancy, “While rental yield in Delhi is around 2-3% of the total property cost, central London offers yield in the range of 5-6%. The Australian property market offers rental returns in the range of 6-7%.”
Further, data from Global Property Guide, a residential property advisory firm, suggests that countries in the Baltic region, Slovakia, Turkey, Bulgaria, Romania, Hungary offer rental yields in the range of 8-10%. In one of its report published in February, it says these countries offer alternative investment options in Europe in terms of cheaper properties. These can give you good rental returns and have better capital appreciation as compared with other regions, the report says.
Transparent markets: Over the past decade, property market in Canada, Australia, the UK and the US have become organized, while the Indian real estate market still lags because of problems of title frauds and fly-by-night operators. “The certainty regarding property titles and the high regard for property rights in these countries (mentioned above) are also a significant draw,” says Rohit Talwar, chief executive officer and founder, Fast Future Research, a market research firm.
Jones Lang LaSalle’s transparency index, which ranks 81 countries according to transparency in real estate transactions, has Australia on top. Sweden, Denmark, Belgium, Ireland and Netherlands are among the top 10 most transparent markets in the world.
Indian tier I cities rank 41 on this index and comes in the semi-transparent category. The survey was first conducted in 1999 and is updated every two years. The survey considers factors such as performance measurement, market fundamentals, regulatory and legal environment and transaction process.
Steering clear of risks
Seeing is believing: Most investments in foreign locations take place through brokers. A safe way to secure your investment is to visit the property and the location before actually buying it. This ensures that the property on sale is genuine and you are not being cheated.
Often brokers organize “open house” exhibitions over weekends, wherein properties are open for viewing for prospective investors. The broker takes you to a number of properties on sale. But the arrangement requires you to pay for the travel and lodging expenses. Finalizing a destination while on a business trip or holiday may work for you.
Reliable broker: To seal a deal, you would need to hire a broker. Getting in touch with an organised broker could help prevent risks such as title frauds.
Owing to rising demand from Asian countries, several property and brokerage firms from developed countries have set offices in India providing services to potential corporate buyers and investors. For instance, the Australian Property Group recently showcased properties in Australia. Similarly, London-based Ballymore Group was seeking buyers from India in the past.
Benham and Revees recently announced that it is expanding its offices in Indian metros. Its offices in Delhi, Mumbai, Dubai, Singapore and Hong Kong provide buy and renting services to those looking for properties in London. Others such as ReMax India and Hamptons International have their offices in some key cities in India.
One way to find out whether your broker is genuine is visiting the office of the National Association of Realtors (NAR) that represents dealers and brokers around the world. Although NAR does not have any legal authority, broker listed with it would be genuine.
An organized broker firm would also provide you an array of services involving documentation, document verification and sanctioning of your loan. Apart from this, an organised firm gives you information on the rental yield and price appreciation, too. Says Mehra, “When a buyer or a prospective tenant approaches us, we offer a research-based property search. For instance, we inform our buyers about the appreciation potential of the property.”
For their services, these firms will charge you a brokerage of 5-8% of the property value.
There are plenty of options to look at. The UK and the US has always been way ahead in terms of options. But in terms of popularity, Canada, Australia, New Zealand, Hong Kong and Singapore, France and Switzerland is also rising.
The Knight Frank report points at several cities in countries such as Italy, Portugal and France that offer lower rates compared with Mumbai.
The second home market in Asia is smaller compared with the European and the US markets. But it is growing strong, according to the Knight Frank report. Apart from established destinations such as Bali in Indonesia and Phuket in Thailand, there are new options. For example, Vietnam has seen buyers from Europe and the US looking to buy before the market matures.
Ho Chi Minn City in Vietnam offers luxury residential property at an average rate of $4,800 per sq. m. Phnom Penh in Cambodia, too, is a new market, which is seeing very strong interest from adventurous Asian and European buyers, the report adds. Jakarta-Indonesia, Phnom Penh-Cambodia and Christchurch in New Zealand offer affordable rates in comparison to Bangalore. But the principle of buy-and-hold would work in your favour in these markets.
How to buy
You would require to open a foreign exchange account with an authorised bank in the country where you are making the purchase. Your broker or your bank in India can help you find such a bank.
Your bank in India can tie up with a foreign bank or its branch in that country to create the account, where you will transfer the money. “The amount transferred in this account will not go to the seller till the time his ownership is verified by the bank. In case of a developer, too, the procedure is the same,” says Sean Mulryan, executive chairman, Ballymore Group.
If you are not taking a home loan, you will just need to furnish a copy of your latest income-tax returns form to the bank. However, if you are taking a home loan, you will need to do more documentation. You will also have to give an income certificate and proof of investments to the bank. The bank basically ascertains your repayment capacity.
If you are buying in an under-construction project, you need not pay the entire amount or even 50% of the entire amount. “Initially, you need to deposit only 10% of the property value. In the next six months, you need to put another 5% of the property value. You pay the remaining amount at the time of completion of the project,” says Mehra.
Limitations: The Reserve Bank of India has put a cap on the upper limit of investment per individual. As per the existing norm, each person can invest up to $200,000 every year. But a family of four can jointly invest $800,000 per year.
Weigh your options well before making any investment.
Graphic by Sandeep Bhatnagar/Mint