Series of planned interventions by the government has recently brought in structural changes in India’s real estate industry. The government has introduced a string of economic subsidies through tax-breaks for first-time home buyers and there is a healthy supply of ready-to-move in properties in the market.
But what about those who are planning for a second house? There is surely some hope in the market. New emerging rental models and investments in certain pockets in specific micro-markets would ensure higher than average rental yields. Market data shows that properties in affordable markets priced less than Rs6,000 per sqft offer a rental yield higher than three per cent while properties priced at Rs6,000 per sq.ft or more have a rental yield of two to three per cent, which is the national average.
When compared with other asset classes, real estate still offers high rate of appreciation to homeowners over a long period of time. On the other hand, the equity market is generally a high risk and volatile investment. While gold is an option, the market is getting mature and there are various investment avenues such as REITs. With the interest rates going down, REITs are likely to give higher returns than FDs and government bonds may come up as a preferred way of investing in commercial real estate.
One must remember that the ROI of real estate investment comprise of rental income and capital appreciation. Commercial real estate in India has always given high rental income vis-à-vis residential real estate. Market data suggests that the average rental yield from residential real estate ranges in between is 1.5-2.5 per cent while for commercial it is around six to seven per cent.
In residential real estate, the focus is now on affordable home as our data suggests that yields in the affordable homes are marginally higher than mid or luxury-segment homes. Homebuyers must also keep in mind that there are some micro-markets pockets across metros and large cities where property prices are reasonable, and investors can expect good returns.
While the recent liquidity crisis in NBFCs took some sheen off the real estate, banks have started to fund viable projects. The outlook for commercial real estate, both office and retail, look positive as banks’ lending to commercial real estate projects rose 15 per cent in July, 2019 compared to 4.2 per cent in the same period last year. Industry reports also suggest that the PE investments in commercial real estate received close to $3 billion funds in the first three quarters of 2019.
New emerging rental models like co-living and co-working have disrupted the rental category. Millennials are contributing around 30 per cent of the overall population and co-living players are potentially staring at an opportunity to service this upcoming demand and becoming a sizeable business proposition. The good news for home owners is that these new models have the capacity to push effective rental yield to eight per cent from the conventional rental yield of two to three per cent.
Market data suggests that most of the demand for co-living is now generated from the markets of Delhi NCR, the Mumbai Metropolitan Region (MMR) and Bengaluru- almost 50 per cent of the co-living segment on our platform. Compared to the overall rental market, in the top 10 Tier-I cities the supply for co-living is just four per cent of the rental supply. But the differentiator for the players in the co-living market would be the experience they would offer.
The good news for home buyers is that real estate has become affordable in the last four-five years. While prices have remained stagnant and home loan rates have remained favourable, the price to income ratio in owning a house has now become favourable more than ever before.
The author is the CEO, Magicbricks