Effect of the US Presidential Election 2020 on Indian Real Estate
Although the US accounts for around 5% of the global population, it generates 20% of the world’s income. Hence, it is interesting to keep tabs on the people who run the US government and their policies. It’s that time again when the result of one nation’s elections would have significant economic implications to all other major economies across the world. The USA considers India one of the top trading partners, and both the candidates for President consider India one of the most important strategic and trading partners. Although the US Presidential Election 2020 outcomes and the subsequent policy reforms are very unpredictable and difficult to anticipate, it is exciting to observe.
With less than one week to announce the election results, all the people and organizations across the world braced themselves to observe who would come out triumphant between Donald Trump and Joe Biden. Both individuals have a visibly contrasting political manifesto regarding immigration, policy, and tax reforms.
There are around 4.5 million NRIs or people of Indian origin living in the USA. America’s one of the largest Private Equity Firm Blackstone Corp. reached a milestone of investing $12 billion in India, which majorly consists of real estate holdings. According to 360 Realtors, in FY 21, a total of $13.1 billion of NRI capital is expected to enter the Indian housing industry. Some of the main reasons US investors are attracted to Indian markets are:
- India is one of the fastest and stable growing economies.
- Indian Rupee is relatively one of the most stable currencies among emerging countries.
- India has a higher interest rate when compared to the US.
- Alternative investments like real estate produced profitable returns when compared to efficient markets like the US and Europe.
The impact of the proposed employment, tax, economic and political reforms of both the candidates on the aspects mentioned above and the Indian real estate market is extensively analyzed below.
What are the Highlights of both the Candidates’ proclamations?
Job Market and Immigration
Donald Trump often quoted immigrants as ‘Job thieves’ and ‘criminals’ in his speeches. When Trump campaigned for President in 2016, he said his administration would eliminate the H1-B Visa system. Although he wasn’t successful in curbing the H1-B, the result of the Trump administration’s reforms made the approval rate of H1-B visas decline dramatically.
Since the US’s unemployment has come to a rise recently, and Trump often quoted, ‘America comes first’ when employment is addressed. It can be expected that the Trump administration would once again be impulsive on H1-B visa approval.
Joe Biden took quite the opposite stand to Trump on immigrants’ work permits. Biden once called America ‘the country of the immigrants,’ and he straight-forwardly mentioned he’d immediately lift the temporary ban on H1-B if he wins the elections. Along with that, Biden promised to increase the number of visas offered for permanent, work-based immigration based on macroeconomic conditions. And, he said he’d reform the temporary access to protect the wages and workers. However, the ‘reform’ he stated is unclear whether the visa approval rate would return to pre-Trump patterns.
Joe Biden also stated that he would remove the cap on employment-visas of 140,000 and increase the number of approvals and wages to attract highly-skilled workers and ensure that the employment-visa holders do not compete Americans on entry-level jobs. Joe Biden also said that India is one of the most significant sources of highly-skilled STEM field immigrant employees and health-care workers. He also said he’d be willing to continue a strategic partnership with India, just like the Trump administration.
Indian graduates keep a close eye on the US immigration reforms because hundreds of thousands of Indian job seekers consider the US one of the best places to work. Hundreds of thousands of NRIs buy their first house in Indian metropolises like Bangalore, Ahmedabad, Hyderabad, and Chennai from the income received by using in the US. An estimated $12 billion of NRI investment is expected to arrive in the Indian housing market of semi-luxury and luxury space in 2021. Hence, it is interesting to observe how India’s housing market would get affected based on the two candidates’ immigration policies.
Economy and Interest Rates
President Donald Trump’s administration announced a humongous $2trillion Corona-virus stimulus package to help sectors recover from the pandemic-struck recession. Although the bill has been passed through the US Congress, it is at the discretion of the President’s administration to decide the division of the package. Trump’s administration reportedly announced $560 billion would directly go to people’s bank accounts. The remaining amount will be focused on helping both small and large organizations to improve their business. The stimulus package’s main objective is to replenish the free fall of interest rates during the pandemic.
Interest rates fall when people are not spending, resulting in people not borrowing money and also when businesses are not running efficiently. The $2 trillion packages is announced to provide financial support to companies and people, raising the interest rate and improving the economy.
Observe the sharp fall of yield rate in February and March 2020.
Donald Trump keeps bragging about his successful handling of the economy during the pandemic in his presidential campaign. He also stated that his economic stimulus implementation plan would remain unchanged if he wins the 2020 elections. On the other side, Joe Biden naturally keeps criticizing Trump’s administration for poor handling of the economy along with the pandemic. Biden promised he’d restructure the stimulus package and bring in reforms for faster impulsion of financial support. Biden said he’d increase the stimulus package and develop policies that would restore the economy faster than Trump’s administration.
The main reason that American NRIs choose to invest in India is that NRIs receive relatively cheaper financing if they borrow money in the US. The US risk-free lending rate is currently around 0.8% when compared to India’s staggering 5.6%. It is common for NRIs to borrow money with cheap interest rates in the US and invest in Indian markets. Since Biden’s administration’s arrival could increase the interest rates rapidly when compared to Trump, there is a possibility that NRI investors might consider investing in their resident countries rather than in India. However, the certainty of a steep rise in interest rates is still a speculation, and the relation between Indian real estate and the US interest rates is unmeasurable.
Joe Biden’s worried about the relentless growth in income inequality and the lack of opportunity for the USA’s middle-class. Biden proposed a tax plan that would increase the long-term capital gains tax to 39.6% for those making more than $1 million a year. The current rate is 23.8% marking the most significant hike in capital gains tax in history.
On the other hand, Donald Trump criticizes Biden’s proposal to increase the capital gains tax since exorbitant tax rates would make people invest less, which would reduce the income tax payment. Instead, if they reduce the capital gains tax, that would spur investments and pay off in terms of income tax.
Since both the candidates’ hypothesis is quite divergent on the tax reforms, and it is unclear if Joe Biden could pull off such a massive tax hike on capital gains. If he does so, markets could expect a brief short-selling period until the initiation of the tax bill. Investors could look out for foreign markets with lower tax rates and higher growth if they believe investing in American markets is no longer profitable.
As mentioned earlier, many American NRIs and Institutional investors choose India over the USA because Indian markets are relatively stable and most promising when compared to other emerging economies. Apart from that, American markets (both financial and real estate) are among the world’s most efficient and saturated markets. A typical real estate property value in the USA would increase at an average of 4.2% with inflation indexing. Whereas in India, the increase in value would be a staggering 16.2% in Bengaluru. The lowest change in value across India is in Delhi, with 6.2%.
American NRIs invest their earnings in Indian real estate rather than the USA because Indian real estate displays a promising trend of increasing value. If Joe Biden wins the election and brings the tax hike, that would spur the American NRIs and Institutional investors to invest in the Indian real estate market.
Analyzing the outcomes of the US Presidential election is a very complex task. However, it is prudent to understand the possible implications for the global markets. Both the candidates made it clear that they’d consider India one of their most significant strategic and trading partners. The arrival of the REIT framework to India in 2017 also made it an opportune time for American Private Equity Firms. Stephen Schwarzman, member of Trump’s Business Advisory Council and the CEO of one America’s largest PE firm Blackstone said that “India is their strongest performer globally,” and he’s looking forward to a rewarding future in India.
Blackstone has significant real estate holdings in India and made a $6billion investment in India. Blackstone and Embassy Group created a joint venture in raising Rs4,000 crores as one of India’s first REITs. American E-Commerce giant Amazon’s CEO Jeff Bezos said, “The 21st century is going to be the Indian century.” Amazon also has a significant real estate possession of office spaces and warehouses across India.
However, the impact of the US Presidential election result on Indian Real estate is pretty indirect. There are implications that Biden’s ‘blue wave’ win could spur the PE investors to arrive in India, but the extent is quite unclear. Due to Biden’s reforms, the expected increase in interest rates could make a fair amount of NRI investors hesitant to borrow and invest in India. The big mystery is which scenario would prevail over the other one. Only time will tell who’ll win the elections and how their reforms will affect the Indian real estate.