They have been aggressive savers as most Indians tend to be culturally oriented to set aside money for a rainy day. They also remain wary of debt, prefer to pay off home loans early, and avoid credit card debt. However, their investment options have remained firmly stuck in buying property in India. They have their retirement savings and children’s education funds, but the rest of their wealth is in land and property. Why is this a problem?
Why is it a bad idea?
First, many NRIs buy a house in India with the intention of returning to live there some day. The housing markets in India have been free to source modern materials, fixtures and fittings only in the years after the economic liberalisation. Housing projects have become incrementally modern, better designed and well-equipped as the market has evolved with growing demand. The houses bought for occupation after serveral years run the risk of obsolescence. Many of them admitted they were unhappy with the flats they had purchased just a few years ago. Hence, that 1,500 sq ft flat in a crowded complex could run the risk of becoming unattractive over the years.
Second, some of them have families living in these properties that they have purchased or upgraded. They see it as an act of benevolence to provide for a comfortable upgrade in living conditions of their close relatives, especially parents. These properties tend to remain in the parents’ names if upgraded and modernised, creating a share for other siblings who may inherit or begin to live in these properties when one of the parents passes away. Many find it awkward to stake a claim to the houses they have funded. It turns out to be an investment that yields no rent or return, but further commitments for upgradation and possible loss of ownership of the asset.
Third, many of these properties are funded by foreign currency converted to rupees. This results in a further loss in value as the rupee has depreciated against the dollar over the years. These investments are made mostly due to pressure from families and parents to invest in property back home as a safety net or hook for possible return. As years roll by, the NRIs seldom return, more so as their children grow older and begin to work and study abroad. They now stare at a chunky asset that has lost value in dollar terms. The typical reaction to an asset in loss is to let it lie.
Pain points for NRIs
Fourth, these assets are seldom used by their owners in their lifetimes, nor are they worthwhile passing on to the next generation. I asked for instances where the property was sold for the college education of children. There was no such instance. Selling amounts to signalling distress, and they would like to hold up the image of doing well abroad. The next generation is unlikely to care for a flat in a city they don’t identify with, or plan to visit or live in after their parents have passed. Many of them narrate stories of their own difficulty trying to liquidate land and property their parents have left behind for them. However, these experiences do not chasten them enough to stop perpetuating the pain to the next generation.
Fifth, living in a foreign country leaves them at a disadvantage when it comes to dealing with the properties in India. Not many engage property management services to rent, maintain and help dispose of their properties. They don’t see their holdings as big enough to incur this cost. The losses from unoccupied properties that are remotely repaired at a steep cost; the distress from unscrupulous renters (one of them reported that the tenant took away all the fixtures, including air conditioners); unfamiliarity with local laws and procedures with respect to sale; inability to make frequent or long trips to sell property; and the possibility of black money and underhand dealings are real risks for an NRI investor in property.
What about the appreciation in value, they ask. My question is whether this appreciation is available to them as wealth to use in their lifetime, or to pass it on to their children. The property lies underutilised despite a sizeable sum invested in it. There is a significant prestige value to boast about multiple properties in India, but these assets do not help the household finances of the one investing in them. Sadly, no one questions it because the cultural tuning makes one believe there is something to fall back on if there is a crisis. This over-funded emergency fund earns too little, and whatever it does, is seldom realised and used.
Domestic property logic
If the NRIs want a diversified portfolio and have a property as another source of income, they should buy it in the country they live in. They will benefit from laws and processes that they understand; proximity and better level of control; ease of sale without the fear of black money; availability to children as a bequest; and no loss from currency depreciation. It will still be a chunky asset unavailable for smaller needs, but will be better than remotely holding a chunk of property elsewhere and fooling oneself that it is an act of patriotism, benevolence to family, or an asset for the next generation. Sadly, it’s none of these.
The Author is Chairperson, Centre for Investment Education And Learning
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