DELHI: The return on investment on residential properties through rentals in tier 1 cities in India is among the lowest in the world. The rental yields in Delhi are the lowest at around 2% while Mumbai fares better at 3.5%.
But if one takes into account the capital appreciation, the returns surge to over 20% compounded annually - which is among the highest globally. The report by global real estate consultancy firm Jones Lang LaSalle (JLL) says the return in the Indian market is low despite the fact that owning a real estate asset in the country is risky (according to a World Bank study). Despite this, domestic as well as foreign investors find it highly attractive to invest in the real estate sector.
A senior consultant with another consulting firm said that in emerging economies, investors pump funds into the real estate sector for high return from capital appreciation. That is why the general norm of high risk-high return does not apply to the investment in residential real estate sector in developing countries like India.
Interestingly, the rental yields - the annual rate of return through rental income from a residential property at the current price - in developed countries are higher than those in emerging economies. Not just this, if one compares the rental yields with the opportunity cost of funds - which is equal to the interest that the same money can earn if it is kept as a fixed deposit with a bank - the rental yields offer far superior returns. 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%, the rental yields are in the range of around 4.7%.
In India, however, the rental yield is almost 30-40% of the fixed deposit rates. Otherwise, in most of the countries, including the emerging markets such as Jakarta and Manila, the rental yields are higher than the fixed deposits rate. This is despite the fact that owning a house in Manila and Jakarta is riskier than that in India.
According to the World Bank report, while India ranks 94 among 185 countries in registering property index, the Philippines and Indonesia rank 122 and 98, respectively. That means both the Philippines and Indonesia are perceived riskier than India to buy a property. However, in Beijing and Sydney the rental yields are in line with the fixed deposits rate.
So far, the JLL report said, a rapid rise in capital values over rents across much of Asia has led to a compression in yields. If the rentals command the same return from capital investment as the fixed deposit rate, a two- and three-bedroom apartments should earn rental of around Rs 75,000 and Rs 1 lakh a month, respectively.