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Risk associated with real estate investment

By ResidenceBuy India  |  0 comments   |  1834 views  |   Feb 25 2012

Economic risk associated with real estate investment by NRI:

  • Exchange rate risk: This is one of the biggest risks faced by the NRI and foreign investors. If you have already invested in India and the exchange rate depreciates then it negatively affects your effective return. For example, you have invested in a property which gives you a 20% return over two years. However rupee depreciated 25% during that time. Your effective return is -5%; that is it would have been better for you to hold on to cash (which has 0% return). Note that on the positive side, if the rupee appreciates by 10% during the same time period then you get a fabulous 30% return on your investment.
    We will like to add that if there is high depreciation in the short run (thus property value is low in foreign currency) then it provides a good opportunity to invest in real estate for long term as an eventual rupee appreciation combined with property market growth will yield handsome return.
  • Interest rate risk: Interest rate is a good barometer of economic health. A very high interest rate indicate inflationary outlook and a very low rate attests to the weakness in the economy. So ideally it should be neither too high nor too low. As an NRI, a high interest rate indicates future slowdown in the economy, thus lower return from all investment (including real estate). Similarly a very low rate today indicates anemic growth in the short run and an investor may be trapped with a low return for some time. If interest rate is the only deciding factor (which may not be true) then wait till it moves away from extremes to invest in the real estate market.
  • Inflation risk: NRIs have the opportunity to invest their capital in several countries, with differing inflation risk. High inflation indicates future uncertainty about the macroeconomic policy and this rising risk premium is not conducive for NRI/foreign investment.
  • Economic Slow growth: Slow economic growth has an economy wide effect including the real estate sector. Thus the return on real estate may go down overtime reducing the rate of return on investment. 

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