Will the falling rupee attract NRIs to Indian real estate?

Dubai, among the most popular property investment destinations in Central Asia, is seeing a recovery in the property market after the financial crisis. In 2012, real estate prices recovered for the first time, growing by 10 per cent y-o-y. Not surprisingly, the recovery is backed by huge investments by expatriates, particularly from India. Non-resident Indians (NRIs) are among the top five investor communities here.

Similarly, given the falling Indian rupee, could the NRI community be looking at Indian real estate investment? Indian real estate prices have increased dramatically over the last few years, following the Lehman collapse, by about 40 per cent across major markets.

The Indian rupee (INR) has seen ~12 per cent depreciation against the US dollar from May to June 2013, forcing its value down against other currencies pegged to the dollar, including the UAE Dirham (AED). The rupee depreciated against the AED by ~12.0 per cent in the same period.

A simple back-of-envelope calculation suggests that if a Dubai-based NRI invests AED 10 million in Indian real estate now (INR/AED is 16.4), even assuming conservative returns of 15 per cent in the near term, he could expect repatriated returns of over 27 per cent, assuming the INR returns to its pre-May mean of 14.8/AED.

Merely the incremental return of ~12 per cent owing to exchange rate fluctuation is comparable to the 10-12 per cent total returns expected in the near term from investment in Dubai real estate. Similar incremental returns can be expected by NRIs in other parts of Central Asia whose local currency is pegged to the US dollar.

It could be argued that NRIs might prefer real estate in Dubai over that in India on the basis of socio-economic factors. However, a recent survey conducted by Sumansa Exhibitions showed that NRIs place a higher intrinsic value on property owned in India. Factors that help sustain NRI interest in Indian property include the higher economic growth in India, renewed focus on new infrastructure, and the rising demand for commercial spaces.

Given these findings, the fall in the rupee could be a trigger for the NRI community in the Middle East to switch focus towards properties back in India.

The writer is Head, Research & REIS, Jones Lang LaSalle India