When Ramnik Shah retired in 2008, he decided to invest in a real estate asset -- thinking that was a safe way to get an assured rental income. The former bank employee bought a two-bedroom apartment for Rs 60-lakh in an upscale block in Mumbai's Goregaon area, happy that he was getting a monthly rental of around Rs 25,000.
Three years down the line, while the price of his property is quoted anywhere around Rs 1.2 crore, his rental income stays put. The rate of return measured as a percentage of the current market value of the property has dipped, something not known to Indians in recent history.
"Rental yields in the city was 6% in 2004-05 but has now dipped to only about 2%. This is also true for most of the real estate markets in India where property prices have gone up but the rentals have not," said Ambar Maheshwari, managing director, corporate finance, at real estate consulting firm Jones Lang LaSalle India.Industry experts say that the fall in rental yields reflects the "unsustainable" increase in the property prices. "In Mumbai, except a couple of areas, most properties get rental yields as low as 1% to 1.5% per annum. Like if you go to Palm Beach road in Mumbai you have to shell at least Rs 80 lakh for a 1,000-sq ft apartment but you can get the same property on rent for anywhere around Rs 6,000 per month," said Pankaj Kapoor, managing director, Liases Foras, a real estate consultancy.
According to industry data, real estate prices in tier-1 cities have increased by more than 100% in the last 5 years, while in Mumbai and New Delhi it has also crossed the peak 2007 levels.
The weighted average price of a two-bedroom house in Mumbai Metropolitan Region (MMR) is quoted at Rs 1.17 crore. The rental yields that were a healthy 5% to 6% in 2005 and about 3.5% in 2009 have now fallen to only about 1.9% in Mumbai, while in NCR the weighted average price has been increasing by 5% a year, but rentals have remained low.
If the rental yield from the property slides, most of the investors who invest in realty for rental income would stay away from the investment, say industry trackers. "In a healthy real estate market the equal monthly installments for a property and rental per month should not be divorced from each other. And whichever markets that does not give a 5% to 6% rental yields could see a correction in prices," added Kapoor.
Industry experts also say that there is an inventory pile-up in the country, that is also visible on the balance sheets of listed real estate companies. This denotes that there are lesser sales but the prices of residential properties are still moving up. A healthy market maintains 8 to 10 months of inventory but MMR has an inventory for 40 months while NCR has for 30 months.
When asked about the rental yields and price mismatch the CEO of a listed real estate firm joked, "Logically prices should come down in Mumbai, but then there are many factors that work against logic in the city."