What's Leading To Sharp Rise In Residential Rental Yields In India

There has been an increased demand for homes leading to an increase in both rental and capital values

<div class="paragraphs"><p>(Source:&nbsp;<a href=";utm_medium=referral&amp;utm_content=creditCopyText">Youssef Abdelwahab</a> on <a href=";utm_medium=referral&amp;utm_content=creditCopyText">Unsplash</a>)</p></div>
(Source: Youssef Abdelwahab on Unsplash)

Rental demand has soared ever since offices and schools reopened following the Covid-19 pandemic, leading to an increase in rental yields.

Rent prices have gone up significantly across the prominent areas of the top cities on the back of increased demand for homes, leading to an increase in both rental and capital values.

Rental yield is the annual rate of return an investor can earn from capital invested in a property. Yields are a function of annual rental income as a proportion of capital value, and in the short to medium term, many factors, ranging from interest rates and rent growth to demand-supply expectations, influence their movement.

Among the top seven cities, Bengaluru has the highest rental yield at 4.1% as of Q1 2023-end, followed by Mumbai with 3.9%, according to data as of the first quarter of the current fiscal by Anarock. The national average had been 3% before the pandemic.

"In the case of the residential segment, there has been an increased demand for homes, leading to an increase in both rental and capital values. Among these variables, rents respond faster to demand-supply dynamics, and with a three- to four-year lead time for new residential inventory to hit the market, accelerated rent growth has led to increased rental yields in some markets," said Vivek Rathi, director of research at Knight Frank India.

With more companies calling their employees back to the office, including in hybrid mode, rental demand is rising across the seven top cities after plummeting during the two worst Covid-19 waves.

"As both property prices and interest rates continue to rise, the overall cost of property acquisition is increasing, leading to an increase in deferred property purchase decisions. Resultantly, they will seek rental homes," said Anuj Puri, chairman, Anarock.

What About Commercial Rental Yields?

However, rental yields have remained stagnant in the commercial space in the National Capital Region and Bengaluru, whereas Mumbai has seen yields fall during the third and fourth quarters of 2021 and have remained the same since then, according to Knight Frank India.

"In the case of commercial office space, with the return to office across major cities and a strong domestic economy, demand has remained strong in the face of global headwinds, and the office market continues to show strong potential for investors," said Rathi of Knight Frank India.