Indian investors have always had a long-standing love affair with Dubai property. Earlier this year, figures from the Dubai Land Department showed that Indians were once again the top expatriate buyers in the emirate, spending AED5.895bn ($1.6bn) in the first quarter of 2014.
To put this figure into context, Indian investors spent AED8bn in the first half of 2013 and AED9bn in the whole of 2012. It’s also not just the amount that is surging: in second place were British citizens and Pakistanis, who accounted for just AED3.145bn and AED2.410bn, respectively.
But that was all in the first quarter of the year and recent changes in India are making it harder for Indians to invest overseas. Many Gulf-based real estate experts are concerned this might curtail investment into the region and the long-term implications are currently unclear.
The number of Indian nationals buying property in the Gulf is expected to decline after the new government removed an exemption on capital gains tax for those buying property overseas. Indians who sell property and buy another residence within two years, or within three years for newly built homes, are exempt from the 20 percent tax on capital gains — the profit made after taking inflation into account.
However, in releasing its first budget since being voted into office in May, Narendra Modi’s new government has amended a clause in the legislation to only allow the exemption when the subsequent property is bought in India. The change could affect thousands of Indian nationals who have invested in the Gulf.
“The benefit was intended for investment in one residential house within India. Accordingly, it is proposed to amend the aforesaid sub-section (1) of Section 54 to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India,” the budget documents said, making it clear that the government wanted to close the loophole and make sure that Indians invested in one place and one place only: India itself.
Narayan Jain, former general-secretary of the All India Federation of Tax Practitioners, told The Telegraph newspaper in Kolkata that the new ruling will hit those who had planned to retire overseas. “Many a time we see old people selling their properties in India and moving abroad. They used to get the tax benefit. Now it will not be available any more,” he said.
The report also stated that the amendments would also dent the ambitions of high net worth individuals who were hoping to take advantage of the cooling price growth in the US and Dubai, a view that is shared by those Arabian Business spoke to locally.
According to a report by the Dubai-based Cluttons real estate agency, the recent budget statement released by the Indian government looks set to bring about a sea change in the tax regime surrounding domestic and international investment. While it believes there may be an initial adjustment period by mutual funds and Foreign Institutional Investors (FIIs), the long-term impact at an institutional level may be too early to assess.
“Indian nationals were the largest group of buyers in the Dubai residential market last year and remain amongst the largest cohort of investors in the emirate,” says Faisal Durrani, Cluttons’ London-based international research and business development manager. “The ending of the period of tax-free property trading for this group will of course further deter ‘property flipping’, which could have a knock-on effect on the residential market’s growth in the short term, while Indian investors assess their options.”
While it is too soon to know if the impact will lead to an exodus of Indian investors, the latest figures certainly make one thing clear; one way or another, the Dubai property boom seen in recent years is cooling. Figures from international agency Knight Frank shows that annual growth in prime property prices in Dubai almost halved in the second quarter of 2014, compared to the previous quarter. Prime prices rose by 6.3 percent in the year to June, down from 11.7 percent in the last quarter, its Prime Global Cities Index for Q2 revealed.
Dubai was ranked the 13th best performing real estate market tracked by the property consultancy, a sharp fall from previous quarters when the emirate featured in the top two positions. Knight Frank said moves to introduce a mortgage cap and double transfer fees at the end of 2013 has “influenced buyer activity more than forecast”.
Om Ahuja, CEO of residential services at JLL India, is of the opinion that the recent budget changes will hit Indians looking to the Gulf to help bypass the tax burden. “Previously, resident Indians in the Gulf could save on paying tax that was generated from the sale of a property asset by investing into another residential asset. Many Indians availed of this benefit and managed to avoid paying taxes via this route,” he says.
“Due to the absence of greater clarity on this, many Indians invested into residential assets outside India. In this budget proposal, the government has stipulated that the residential asset invested into has to be within India. Also, it has clarified that the investment must be into one residential apartment and cannot be done into multiple units.”
The capital gains tax amendments are likely part of a wider trend to clamp down on Indians investing in foreign property markets and to try and encourage them to keep their money closer to home.
“Earlier, the Reserve Bank of India (RBI) had already restricted any direct investments by resident Indians into international real estate. The circular dated 14 August 2013 clearly restricts remittances for purchasing any such asset outside India to agreements entered into by resident Indians until August 2013, and limits such remittances to $125,000 per Individual. This effectively means that resident Indians cannot legally buy assets outside India post August 2013,” Ahuja points out.
Besides the tax issues, Anshuman Magazine, chairman and managing director of real estate consultancy CBRE South Asia, says there are two other issues further affecting Indians and their ability to invest in the Gulf: the declining value of the rupee against the dollar and the restrictions on how much Indians can remit overseas.
“Indians will continue to invest outside the country and in Dubai but the bigger issue is currency. The Indian rupee has weakened and that has an impact. Currency is a major factor,” he says. At the start of August, the Indian rupee plunged to its worst weekly loss since January 24, making investing in dollar markets even more unattractive.
Even if Indians wanted to invest abroad, the clampdown on how much they can invest overseas will also be a major factor. “Previously each individual could remit $200,000 so if there was a family of four they could remit $800,000. That was stopped completely and then after some time each person can remit $75,000,” says Magazine.
“Before it wasn’t a problem, you could remit nearly $1m from a family. The limit has also come down. That is another detriment on the amount you can remit. You could set up a company but it is not for the normal retail investor.”
Durrani from Cluttons believes the targeting of overseas investments seems misplaced.
“Current regulations mean that international investors are locked in to India-based real estate investments for a period of three years, after which they are faced with a 20 percent capital gains tax, should they liquidate their investment. Creating capital gains tax bands that are linked to the length of real estate investments would not only reward longer periods of investment, but also dramatically boost the appeal of India to the international investment community,” he says.
However, Durrani concludes that it is “important to note that at this early stage it remains unclear as to how the Indian government intends to implement this proposed change and perhaps more significantly, how they plan to monitor global property transactions by Indian nationals”.
The only saving grace for a market like Dubai is that it has a very diversified range of investors and while the loss of Indians will be a big dent to the overall market, UAE nationals are still the biggest investors, with a total of 1,228 Emiratis purchasing properties worth AED7bn during the first quarter of the year. If anything, it might mean local buyers may be able to get better prices and choice as a result of less demand from Indian buyers.
Having said that, it’s unlikely that local real estate agents, who have been riding high as a result of the recent boom, will see the moves in quite the same light.
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