Rental yields have reached a five-year high of 4.5% due to rising home prices

As rates skyrocketed, residential rental yields increased to as much as 4.5% in places like Bengaluru, perhaps the most in five years. The nation has always had poor rental yields; before to the pandemic, they were ranging from 2% to 3.5%.

 

The yearly rate of return that an investor might get on their capital investment in a property is known as the rental yield. A number of variables, including interest rates and the demand-supply matrix, affect their movement in the short-to-medium term.

Bengaluru’s residential yields increased from 3.6% in 2019 to 4.45% in the first quarter of 2024. They increased in Mumbai from 3.5% in 2019 to around 4.15% in the first quarter of 2024. Anarock Property Consultants said that the percentage was 4.1% in Gurugram at the time.

As workers in major economic centers resume their jobs after the epidemic, the demand for rental houses has increased dramatically. According to Saurabh Rathi, co-head of Motilal Oswal Alternates’ real estate funds, a notable characteristic of the rental market is the considerable mismatch between supply and demand as well as high prices.

The asking price for a two-bedroom flat in Bengaluru’s eastern suburbs has gone up by 50–60% since 2019. Localities like Golf Course Extension in the national capital area of Gurugram have seen increases of between 55% and 60% since 2019, according to Rathi.

Some cities saw a sharp increase in rental demand. For example, the average rental zoom of Whitefield in Bengaluru increased by 44% in the first quarter of 2024 compared to the last quarter of 2022. During this time, the average rent in Hyderabad’s Gachibowli increased by 37%, according to Santhosh Kumar, vice chairman of Anarock Property Consultants.

“After the epidemic, rental demand spiked at a number of apartment complexes in prime locations in major cities like Bengaluru, Mumbai, and Gurugram, creating a mismatch between supply and demand. As a result, we saw rental prices increasing northward by up to 40%, according to Kumar. In addition, fewer newly constructed, ready-to-move-in homes were released during the Covid-19 outbreak, which “in a way led to the surge in rents and this rental yield,” the speaker said.

According to Rathi of Motilal Oswal Alternates, the rental housing market in India, where residential rental returns normally vary between 2% and 2.5%, has been greatly impacted by issues including low transparency, complicated regulations, and unresolved legal issues.

India’s rental market is further complicated by an increased property price-to-rent ratio, especially in places like Mumbai and New Delhi. According to him, this ratio is in contrast to worldwide peers like London and New York, indicating comparatively lesser returns when compared to the costs of purchasing real estate in Indian metropolises.

According to Rathi, “high land costs, elevated interest rates (8–9.5% for home loans), and a lack of market transparency are factors contributing to India’s comparatively lower rental yields.”

Co-founder and CEO of NoBroker.com Amit Kumar Agarwal believes that as rents level off or prices rise, rental yields will stabilize.

“If investors can obtain a yield of 4% on their houses, it’s a good time for them to buy.” Due to their belief that renting is excessive, many renters are considering purchasing, according to Agarwal.