Luxury Home Rents Rise Faster Than Prices In Last Seven Years, Yields Still Low, Says Anarock

Rentals on luxury homes rose faster than prices of high-end properties in the last seven years in India's top cities as the nation's real estate market stagnated. That caused an uptick in rental yields but returns still rank among the lowest in the world.

Average rentals on a home of at least 2,000 square feet rose 17-26% in the key luxury markets in top seven cities between 2014 and 2020, according to a report by Anarock Property Consultants. “In the same period, average capital prices in these micro-markets saw a maximum rise of 15%—and some even saw a marginal dip.”

The seven-year period is marked by a prolonged slowdown as 2016 cash ban, goods and services tax, a stricter housing law and a credit crisis among non-bank lenders left developers struggling for funds. And slowing economy also crimped demand. That either slowed or stagnated prices, especially for luxury homes. Rentals, however, continued to grow.

For instance, the average monthly rentals in Gurugram's Golf Course Road rose 17% during the period. But the average property price fell marginally from Rs 13,167 a sq. ft. to Rs 13,150.

Hyderabad's HiTech City saw the highest rental appreciation of 26% between 2014 and 2020 among the top seven cities. Average property prices rose at less than half the pace.

Rents on luxury properties rose on an average 3-6% every year between 2014 and 2020, according to Anuj Puri, chairman at Anarock Property Consultants. "In contrast, capital appreciation in this period either remained range-bound or varied each year. Some years saw a decent yearly rise as high as 7%, while prices dropped by about -5% in other years—particularly in 2017, when many micro-markets saw capital prices plunge against the preceding year.”

In 2017, both Real Estate Housing Act and goods and services tax were rolled out. After this period, most localities only saw a marginal capital price rise averaging 1-3%, while rentals continued to grow, the report said.

According to Anarock, 2020 was an outlier year for Indian rental markets because of the pandemic as most luxury localities either didn't see any increase in rentals compared to the preceding year or reported a decline.

“Without a doubt, Covid-19 impacted luxury rental markets amidst the growing work from home culture,” the report said. “Average property prices also showed little or no change in 2020 over 2019.”

The luxury residential market, however, now appears to have recovered with demand for homes on rent is now almost back to pre-Covid levels. Monthly rentals in some of the localities have begun heading north, the report said. With vaccinations now rolling out, the growth will pick up momentum, it said.

Rental Yield

India ranks low on rental yield or the percentage returns from the rental income of a property.

In the pre-Covid period (2019), average residential rental yield largely stood at 3%, according to Anarock Research. “But this was across all budget segments including affordable, mid and luxury,” he said. “If we break it down, the average rental yield within affordable segment was anywhere around 3-4%; for mid segment it was between 2% and 3.5%; while in the luxury segment it ranged 1-3% depending on property type, location, builder.”

Post Covid-19, now that the luxury rental market is seeing a revival, the rental yields are likely see some uptick, the report said. In comparison to 2014, the yields in most luxury markets saw a decent uptick by 2020. Hyderabad's HiTech City leads the list at 3.7% rental returns.

That, however, is still lower than 3.5-4% for other Asian countries and 4.5-5% for European countries, according to Anarock. Yet, residential rental yields in India are higher than in Beijing, Singapore and Hong Kong—three of the world's costliest real estate markets.