“Real estate is the driver of economic growth in India, and now that the government is allowing 100% foreign investment, the opportunity is clear for investors in Luxembourg. The journey may have just started, but we are on a firm footing,” said Sudhir Kumar Kohli, president of the Indian Business Chamber Luxembourg (IBCL), as he introduced its latest event, entitled “Indian Real Estate – An Attractive Alternative Investment”.

As real estate markets across Europe stagnate or collapse, the Indian one shows characteristics that should appeal to Luxembourg-based investors. Vivek Bansal, India-based Founder and Managing Partner of Plus Capital, highlights “the huge supply/demand gap in all asset classes of real estate in India, especially residential, where there is a current shortfall of some 20 million units.”

This comes back to the Subcontinent’s emerging and growing middle-classes, among other factors. As Bansal points out, “the tradition in India is for people to prioritise property, and the average age of first time buyers is falling all the time.”

Demand across the board

Furthermore, the development in office space is truly eyebrow-raising, with total surface area set to increase five times over in the coming five years, while growth and market correction point to a sustainable opportunity for investment. All of this potential comes with a caveat, however, and Bansal stresses the importance of “the kind of development, the timing at which the investment is made, and the location. That is crucial in India, just as it is everywhere.”

Where the country’s property market is booming is not necessarily in the major cities of Delhi, Mumbai and Kolkata, but the emerging ones like Hyderabad, Chennai and Bangalore, as well as smaller ones which see comparatively high and ever-growing incomes. These are enjoying a rapid increase in urban populations and demand for “global” facilities and lifestyle. That said, it is of paramount importance for foreign investors to seek out local expertise in all aspects of real estate in India. There are forms of development that are successful there that seem unusual to Western investors, and due diligence must be undertaken to avoid ending up with a worthless and isolated shell, without the people to drive demand for facilities.

Favourable fiscal climate

“The double tax avoidance treaty with Luxembourg will make India much more accessible as a market for real estate investment,” says David Roach, Head of Real Estate Tax at PriceWaterhouseCoopers. Again, Roach advises caution, but where previously investment in India went through Mauritius, which has had a tax treaty with India for a long time, the process is now simplified to the extent that Luxembourg-domiciled real estate funds can deal directly with India, subject to meeting certain criteria outlined by the Indian tax authorities, not least the requirement for a real structure in Luxembourg, whereby it can be proven that a company can pass a “bona fide activities test” and is not there for the sole purpose of milking the system, as well as the establishment of a Special Purpose Vehicle in the Subcontinent.

Once these factors are taken into account, the master fund can theoretically be based in any tax-friendly jurisdiction. Mauritius may be the traditional route for foreign direct investment in India (accounting for 43% of the total), but there are creases in that double tax treaty, which have seen an unhappy Indian tax authority “lose” some 600 million dollars, making it keen to renegotiate. Luxembourg is not in line to replace the island but, as Roach concludes, “it is certainly an alternative.” Now it’s over to investors here to take advantage.