Rental Yield Is Abysmally Low In India
Young Indians tend to rent houses because renting is cheaper than buying. So, it is strange that discussions on affordability of housing rarely focus on the rental housing. There is a growing recognition that rental housing is very important. Union Urban Development Minister Venkaiah Naidu once said that we needed cheap rental housing to make housing really affordable. The government is in the process of relaxing stringent rent control norms. Yet, this is not taken seriously enough.
Rental yield in Indian cities is among the lowest in the world. According to the Global Property Guide, rental yield in India in 2014 was two per cent, while in Philipines it was eight per cent. (Rental yield is the annual return from renting out your house, relative to its current price. For example, if the house is worth Rs 1 crore, and if the annual return is Rs 2 lakh, the rental yield is 2 per cent.) This is interesting, because capital appreciation in India before real estate markets became stagnant was among the highest in the world. So, even though the returns from owning real estate assets in India seemed high, there were three barriers. Inflation was high in India till recently. Secondly, even though returns were high, the risk was high too. Lastly, the rental yield was too low for investors to profit from holding on to real estate assets.
As rental yield is low in Indian cities, the major reason investors buy real estate assets is to benefit from the high capital appreciation. It stands to reason that investors would expect a much higher capital appreciation in India than in countries where rental yield is higher. Why? If investors make profits largely through capital appreciation, it is normal that they expect a higher rate of capital appreciation than in developed countries.
The opportunity cost of holding on property in India is higher because renting out properties is not very profitable. It is also risky because rental norms give too much power to tenants and too little power to landlords. Moreover, in developed countries where rental yield is higher, interest rates tend to be lower too. So, the opportunity cost of renting out property is not very high. In Delhi, Mumbai and other cities, the regulated rent of properties under the rent control regime is even as low as 1/1000th of the value of the property.
One of the reasons why rental yield is low is that rents have not risen proportionate to the rise in housing prices. The rental market in India is also largely informal. Rental markets are more developed in the metros, however, because of migration in large numbers to cities. But, even in Indian cities, the proportion of houses in the rental stock has declined. In Mumbai, for example, since 1961, the proportion of rental housing stock had declined by over 70 per cent by 2011. Even though rents and housing prices are expected to come closer in a more efficient market, this has not happened in India because there is not a flourishing rental market. Landlords are not willing to maintain properties, and this lowers the value of such assets in the rental marker. If the difference between properties in the rental housing market and properties being sold is huge, we should expect the rents to be low. Moreover, the government offers many tax incentives for people who own houses. So, there is less of an incentive to rent if housing prices reflect rents. This is certainly a factor too.