20th February 2017 - Why Rental Yields for Residential Properties in Gurgaon are lower than those for Office Properties
In this article we attempt to look at the possible reasons for residential property yields to be lower than office property yields. On an average currently residential property yields are at about 2.5% currently per annum which is poor considering office property rental yields are at about 6% on an average across the board. Note we are only considering ready property yields for the purpose of analysis and not assured rental yields where in any case in most cases there's high risk involved due to lack of liquidity on the part of developers and frankly no real pay-outs in a down cycle.
There are two variants or ways at looking at rental yields of properties. 1) Current Rental Yield and 2) Historic Rental Yield
Current Rental yield is defined as rental income earnable in a year over current capital value of the property. Historic Rental yield is defined as rental income earnable in a year over capital value cost or acquisition price of the asset. Both ratios provide different perspectives and are useful in their own way. Note the figures of 2.5% and 6% for residential and office assets are current rental yield percentages and those noteable at the time of acquisition or investment study. Historic Rental yield is a ratio which gives an idea to an owner of his existing assets as to how they're performing with reference to past acquisition of the property. Naturally this ratio will be more inflated a figure than current rental yield but is useful and its tough to give a percentage approximation of this as it depends on when the investor invested in the asset.
Astute investors who've learned how to time the market well usually report better ‘historic rental yields' for both residential and office properties.
Now let's consider why current rental yields for residential assets are lower than those for office assets in Gurgaon currently. Essentially, it's the fact that rental income earnable in residential assets is low – this is plausible for a couple of reasons. Firstly, I'd peg the fact that there are more options out there in the market for prospective tenants in the residential segment on an average and also that residential properties particularly condominiums have somewhat of a shelf life. Also, the supply pipeline is regularly infused with new supply owing to higher construction qualities available, changing tastes and standards of customers. I'm not saying there isn't supply of office assets available for lease, there is but less on an average across the board than for residential assets. Additionally office leases are long term leases 3+3+3 years visa via 2-3 year leases of residential assets.
In terms of the denominator in the ratio that is current capital values for residential and office properties I would say that it isn't a factor in the analysis as since the beginning of time residential and office assets price bases have been different.
Having said all this, I'd like to point out that capital appreciation wise residential assets rather than office assets have performed significantly better on a percentage growth basis (if one were to compute per annum) both during boom and bust cycles with residential assets even recording as high as 25% per annum returns versus a 12-13% average capital appreciation for office assets. This trend of higher capital appreciation for residential assets over office assets is likely to continue though ofcourse returns over the medium term would be higher end single digit growth at a steady pace as the market matures and then next boom kicks in..
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