Property Index Ranks
India at 94
by Mr. Ashutosh
Limaye, JLL India
Residential rental
yields * across Tier I cities in Asia have an interesting story to tell. While yields in India are higher than in
Singapore, Hong Kong & Beijing, they are lower than in cities such as
Jakarta and Manila. Several factors are responsible for this - the local
demand-supply situation, macro-economic scenario, end-user demand, local
land-related policies, etc.
 |
| Mr. Ashutosh Limaye, JLL India |
Does this yield
variation in Asian cities clearly reflect the risk-return trade-off?
The World Bank’s
Registering Property index (part of its Doing Business index) provides some
insights.
The Registering Property
index ranks India at 94 among 185 surveyed countries.
China, Hong Kong and
Singapore rank higher than India, while Indonesia and Philippines rank lower.
Both Indonesia and Philippines are perceived as having relatively weak legal
frameworks.
This clearly shows
that weakness in the legal framework is directly indicative of higher the risk
– and therefore higher yield:
This differential in
rental yields for residential property is a crucial consideration for global
investors for whom the diversification of markets is an important criterion.
Also, higher yields
in Asia might tempt global investors, particularly from the West, to invest
while they have access to cheaper funds onshore. Local investors also benefit,
because higher yields mean a rising rental value, offsetting moderated capital
values – the former rise faster than the latter.
Rental Yields –
Emerging Asian Versers Developed Markets..
The intra-regional
comparison of various Asian cities reflects a logical differentiation between
rental yields.
However, the same
logic does not seem to apply in developed markets. It is widely believed that
emerging Asian countries are relatively more risky for real estate investment
than developed economies. Yet, the rental yields in emerging Asia do not
reflect the relative risk-return differential.
For example –
residential real estate rental yields in Mumbai, which are currently about 3.5
%, are lower than those observed in London, Tokyo & New York. All these cities rank quite high on the World
Bank’s Registering Property index.
Despite stronger
regulations & a better legal framework in the developed economies,
comparison with emerging Asian yields reveals a different picture. Lower
penetration of financial markets, higher inflation & larger population
creating a constant demand for housing could be reasons for this.
Also, households in
emerging nations generally prefer to channel a large proportion of their
savings into physical assets such as gold and real estate.
According to India’s
central bank RBI (Reserve Bank of India) data, the country’s household
investments in physical assets are over 50 % of the total household savings. In
a country like the United States, the figure is below 30 %.
Based on yields,
global investors do display a degree of skepticism over investing in Asian
residential property markets. However, domestic investors continue purchasing
at lower yields purely for the capital appreciation (typically about 10 % p.a.
– and definitely higher than inflation) and because of the savings culture.
The question is - how
long will this continue?
Can the existing
yield differential between emerging Asia & developed markets sustain?
Over the last few
years, rental yields have been on a decline across various Tier I cities in
Asia. So far, it has been the faster rise in capital values over rents across
much of Asia that has led to a compression in yields.
In Mumbai, yields
have fallen by 0.5% to 0.9% across various precincts during the period
2007-2Q13.
After property prices
took a beating during the Global Financial Crisis (GFC), they bounced back
quickly, resulting in yield compression. More recently, during 1Q 11-2Q 13,
yields have risen moderately, owing to marginally higher growth in capital
values over rental values.
Similar trends have
been witnessed in Hong Kong, Singapore and Beijing, where rental yields fell by
0.5 % to1 % during the same 6 year period.
Manila & Jakarta
exhibited a similar trend, though the rates of fall were quite different. While
residential property rental yields in Manila fell 0.3 % to 0.35 %, the fall was
much sharper in Jakarta at 2.5 %.
This is attributable
to the steep rise in capital values beginning 2Q10, which was the result of
escalating cost of transaction and construction material.
Rise in capital
values occurred even when economies were slowing down from peak growth rates.
Mumbai has seen residential property prices surpass the previous peak of 3Q 08,
and they continue to remain high despite a slowdown in the Indian economy (FY13
GDP growth fell to 5.% level after averaging 8 % growth during FY10-FY12).
This has led to
concerns about affordability and overheating of the property market in a
scenario wherein job creation and income growth have slowed.
Stemming the Tide..
Manyl Asian
governments have started taking steps to cool down property prices.
In China, the
measures have included raising the minimum down payment, raising the interest
rate for second home purchase, restrictions on property purchases by non-Chinese
buyers, etc.
In India, measures to
curb speculative buying include the approval and visible fast-tracking of the
Real Estate Regulatory Bill, which intends to checking demand-supply imbalances
and bring more transparency to the sector.
The Singapore
government has introduced similar measures to curb the irrational rise in
property prices.
In such a scenario,
it is hard to foresee further price escalation unless the economies revive or
restrictions ease.
Yields Must Reflect
True Investment Rationale..
In the near term,
residential yields in Asian Tier 1 cities will either stabilize or rise
marginally as capital value appreciation begins to drag. This is good for the
real estate sector in Emerging Asia on the whole, since the current prices and yields
do not correctly reflect the actual macro-economic scenario.
Any or / a
combination of three possible scenarios could prevail in the near future –
Existing high capital values could instigate
authorities to further step up efforts to curtail speculation, resulting in a
price corrections - or / at least stabilization
Rentals would probably remain unchanged, thereby halting further yield
compression.
Further rise in
capital values could boost demand for rental housing, leading to increased
rental values. This would stabilize yields if both capital and rental values
grow in tandem.
An increasing number
of individual investors hitherto focused on Emerging Asia could switch to
investing in other regions (especially developed markets), attracted by higher
yield and better amenities.
So far, the
likelihood of such a sea-change in investor orientation was remote, largely due
to the strong cultural preference of Asians for local real estate. We are now
looking at a different scenario.
Though the RBI has
now curtailed investment by Indians into offshore property, many HNIs and
non-resident locals in other Asian countries have already displayed an increasing
preference for investing in properties on foreign shores.
In Asian countries
other than India, such a trend can still lead to fall in domestic property
prices, thus putting a floor to yield compression or fueling gradual rise in
yields.
* Residential rental
yields = monthly rental x 12 months / capital value of the property, or / the
annual rate of return an investor can earn from his/her capital invested in a
property.
About the author..
Ashutosh Limaye
is Head (Research & REIS) at Jones Lang LaSalle India
No comments:
Post a Comment