Rental yield in India stands last globally
The return on investment from property rentals in tier 1 cities in India is among the lowest compared to other nations, states a recent report.
As per the report by a global real estate consultancy firm Jones Lang LaSalle (JLL), the rental yields obtained on properties in Delhi are the lowest at around 2 percent while it is better in Mumbai with a value of 3.5 percent. While the NCR cities Gurgaon and Noida yield better rental values of 3.5 percent and 3 percent respectively.
Rental yields haven’t influenced appreciation
However, the lower rental yields have fortunately not affected the appreciation value of properties in the country. In terms of the capital value appreciation, the return on investment obtained somehow crosses over 20 percent compounded annually – which is one of the highest values in the world. This is the prime factor which attracts domestic as well as foreign investors to invest in Indian real estate market.
Though risky, India is investors’ favourite
The report states that the return in the Indian market is low regardless of the fact that owning a real estate asset in the country is risky (according to a World Bank study). In spite of this fact, investors’ interest has not been disturbed in the market.
According to some market analysts, in emerging economies like India, it is generally the investors who push in funds into the realty market expecting a high return from capital appreciation. That is why the general norm of high risk-high return does not be appropriate to the investment in residential realty sector in the developing countries.
Rental yield means the annual rate of return through rental income from a residential property at the current price. It is observed that, in general, the rental yields in developed countries are higher than those in the developing economies.
Rental yield vs banks fixed income
If the rental yields are compared with the opportunity cost of funds (refers to the amount equal to the interest that the same money can earn if it is kept for certain time as a fixed deposit with a bank), the rental yields offer much better returns on the investment.
For instance, in New York, the rental yield is almost six times the return from bank fixed deposits. In Tokyo, while the fixed deposits rate is around 0.20 percent, the rental yields are in the range of around 4.7 percent. In India, the rental yield is almost 30-40 percent of the fixed deposit rates. Otherwise, in most of the developing economies like Jakarta and Manila, the rental yields are higher than the fixed deposits rate. It has to be noted that owning a house in Jakarta or Manila is extremely riskier compared to that of India. In Beijing and Sydney, the rental yields are similar to that of the fixed deposit rates offered at banks, so the investors can choose any of the two options.
The World Bank report states that, India ranks 94 among 185 countries in registering property index, while the Philippines and Indonesia rank 122 and 98, respectively. This means that buying property is much more risky in Philippines and Indonesia compared to buying a property in India.
According to the JLL report, a quick increase in capital values over rents across most of the nations of Asia has led to a compression in yields. If the rentals command the same return from capital investment as the fixed deposit rate, two- and three-bedroom apartments should earn rental of around Rs 75,000 and Rs 1 lakh a month, respectively.
