Buying a house is perhaps one of the biggest decisions in your life. Besides the pride associated with home ownership, Indians view property as a source of wealth creation for the family and future generations. Hence, property has always been considered very valuable.
With land being scarce and a burgeoning population, investors have put in money in multiple properties in anticipation of high appreciation driven by increase in demand for housing. The expectation has always been that real estate prices can never fall. The recent stagnation in residential real estate prices, accompanied by a fall in certain cases, has shattered that myth. This should be reason enough for you to think twice about your next real estate investment.
When you evaluate any investment, you need to keep two things in mind. Capital appreciation and income generation. Capital appreciation is the return you make on selling the asset. The second is income that the asset generates when you own it.
The examples of capital appreciation are when you buy and sell stocks, bonds, property or gold, while income generation are dividend from stocks, interest or coupon payments from bonds and rent from property. Assets like gold and art do not generate income and hence act as a pure store of value.
However, when it comes to real estate, people often become the victim of “greater fool theory”– there will always be someone who would be willing to pay the higher price. Blinded by expected appreciation, they completely ignore the rental values that they can derive while holding on to the property.
Given the current slowdown seen in the realty sector over the past couple of years, the guaranteed super-normal appreciation may look shaky. But you can certainly consider income generation while making an investment, which is more likely to be under your control. Here, the rental yield plays an important role.
Rental yield is one of the most quoted and often used indicators when assessing a property’s investment potential.
Simply put, rental yield on a property is the annual rate of return when it is rented. For instance, the rental yield on a property worth Rs 1 crore, let out at Rs 50,000 per month (Rs 6,00,000 per annum), is 6% per annum.
Analysts consider the recent rental yield figures of the major cities across India to understand how much a property will fetch in terms of investment.
1) Average rental yield at 2-4%: The average rental yield across India hover in the range of 2% to 4%, with some pockets generating returns of around 6%. For cities like Ahmedabad, Bangalore, Chennai and Hyderabad, the average annual rental yield stands at around 2-4%, while Coimbatore’s is in the range of 1-3%.
In metros– Delhi NCR, Kolkata, Mumbai, though the average rental yield works out to around 2-3%, there are certain areas showing 6-7% returns. Hence, before buying a property, it is important to consider the city as well as the location.
2) Low-cost properties generate better returns: Our study shows that relatively lower priced properties generate better rental yields as against costlier ones in upscale markets. Thus, for investment purpose, if you want to put in say Rs 5 crore in the property market, then you would be better off if you invest it in 5 different properties worth Rs 1 crore each than investing in one worth Rs 5 crore.
In effect, being aware of rental yields, to ensure that your real estate investment actually holds true, will help you offset any disappointments later.