Roof Over Our Head: May 2019

I. What kind of residential real estate can get you higher rental return on investment? Find out (Source - The Economic Times)

Smart choice of investments, value-added services and a host of online rental disrupters can be a game-changing recipe for India’s rental real estate market and the investors.

Rental solutions have been key to addressing India’s housing challenges and the country’s rental real estate holds immense potential. In 2017, the rental real estate market was pegged at one crore units and was valued at $22 billion (Rs 1.53 lakh crore). By 2023, its volume is expected to be 1.8 crore and valuation $41 billion (Rs 2.85 lakh crore). However, maximising rental yields has been a challenge for the rental real estate market. Low rental yield and poor capital appreciation, especially in the past two-three years, have hurt investors. However, smart choice of investments, value-added services and a host of online rental disrupters can be a game-changing recipe for India’s rental real estate market and investors.

You can earn a higher rental yield, if you keep the following factors in mind:

Invest in affordable homes

The yields in the affordable homes segment are higher compared to the mid-level or luxury segment. There is also a significant variation between yields based on their capital values (Rs/sq. ft). We have observed across cities that properties priced below Rs 6,000/sqft have an average rental yield of more than 3%.

Lower the property costs, higher the rental yields

On the other hand, properties priced at Rs 6,000 per sq ft or more had rental yields between 2.4% and 3%. Hence, from a rental income perspective, it makes more sense to invest in affordable properties. This trend holds across most cities.

Invest in affordable real estate markets

Home buyers must keep in mind that while the broader real estate market has remained flat, there are some micro-markets across metros and large cities where property prices are reasonable and investors can expect good returns. On a pan-India level, the average yield per sqft stands at 3%, but there are some micro-markets where the rental yield can go up to almost 4.5%.

Cities with the highest yields

Cities with the lowest yields

In general, markets with cheaper real estate were found to have the higher yields. With 3.9% return, Kolkata has the highest rental yield in localities like Barasat and Garia, the rental yield was around 4.4% and 4.3% respectively. Besides Kolkata, Bengaluru, Hyderabad, Ghaziabad and Ahmedabad also have higher rental yields.

Invest in co-living solutions

There is a huge latent demand from India’s millennials, be it the student community or the migrant working professionals, in the 18-35 age bracket, for co-living options. Given that millennials make up around 30% of the population, co-living players have an opportunity to service this upcoming demand. These new models have the capacity to push effective rental yield to 8%.

Most of the demand for co-living spaces is currently from the Delhi NCR, the Mumbai Metropolitan Region (MMR) and Bengaluru. These cities account for almost 50% of the co-living segment on our platform. Compared to the overall rental market in the top 10 tier-1 cities, the supply for co-living is just 4% of the overall rental supply.

Also,70% to 90% of all co-living spaces is fully furnished, as against just 10%-30% of the overall residential rental supply. The state of furnishing has a direct impact on the rental value of the property. At a pan-India level, the average yield on furnished properties is 3.3%. Such apartments are now also being preferred by co-living players. But the differentiator for the players in the co-living market would be the experience they offer in terms of fully furnished apartments, social events, amenities, frictionless on boarding and exit, etc.

II. Should you buy or rent a house? (Source - The Economic Times)

The income of the family will determine whether it can afford to rent a house, buy or remain neutral, that is stay on rent even though it can afford to buy.

The Arthayantra Buy Vs Rent Report 2019 tracks the real estate trends in 12 cities across India to help you understand which are the places where you can buy a house and where it makes more financial sense to live on rent.

Assumptions

Price and rent are calculated for a ready-to-occupy 1,000 sqft residential property

Baseline gross annual income is considered to be Rs 8 lakh

Initial down payment amount equals 20% of the house price

Tenure for home loan is considered to be 15 years

Home loan lending rate is considered to be 8.55% per annum

Average savings rate to buy a house is 25% of one's annual income

Monthly EMI to be paid is equal to 50% of monthly take home salary

Property tax equals 1.5% of property value

Property appreciation not considered for EMI & down payment calculations

Rental security deposit varies from city to city

Property prices and rents have increased across cities

The key factor while deciding whether to buy or rent is the cost vis-a-vis the rental value. While property prices spiked by 11.59% over the past year, rents increased by 9.79%.

Who can buy and who should rent

The income of the family will determine whether it can afford to rent a house, buy or remain neutral, that is stay on rent even though it can afford to buy. It will also help calculate how many years a household earning Rs 8 lakh per annum has to save to accumulate the down payment.

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