An Analysis of Rental Yield In India

Investing in real estate can be a lucrative venture, and one key factor to consider is the rental yield. Rental yield in India is a crucial metric that indicates the return on investment from rental income. As an investor, understanding rental yield in India is essential for decisions. In this blog post, we will delve into an in-depth analysis of rental yield in India. This will contain valuable insights to guide your real estate investment strategies.

What Is The Rental Yield In India?

Rental yield in India is the yearly rental income yielded from a property, expressed as a percentage of its total value. It helps assess the profitability of a real estate investment and serves as a benchmark for comparing different properties and locations. Rental yield in India, commercial rental yield in India, or residential yield in India can be calculated using two main formulas:

• Gross Rental Yield: This calculation compares the yearly rental income to the property’s total value, expressed as a percentage.

Gross Rental Yield = (Annual Rental Income / Property Value) x 100

• Net Rental Yield: Net rental yield takes various expenses associated with the property, such as property taxes, management fees, and maintenance costs.

Net Rental Yield = ((Annual Rental Income – Annual Expenses) / Property Value) x 100

City-Wise Residential Rental Yield In India

Rental Yield (in %) Across Top Cities
Cities	2020	2021	2022	2023	Q3 2023-end	Q1 2024
Bengaluru	3.4	3.5	3.9	4.1	4.05	4.45
Mumbai	3.3	3.5	3.8	3.9	3.9	4.15
Gurugram	3.4	3.5	3.7	3.8	3.8	4.1
Delhi	2.1	2.3	2.6	2.65	2.65	2.8
Noida	3	3.1	3.4	3.45	3.45	3.75
Pune	3.1	3.2	3.5	3.6	3.7	4.35
Chennai	2.5	2.6	2.8	3	3.1	4.05
Hyderabad	3.0	3.2	3.5	3.6	3.65	3.35
Kolkata	2.5	2.6	2.9	3.0	3	3.15

Source: Anarock Research & Hindustan Times

Rental Yields Of Commercial Real Estate India [ 2024 ]

• Based on estimates, commercial properties typically yield higher returns compared to residential properties. 
• Commercial properties offer average returns of 8-11%, which is considerably more than the current rental yields of residential properties, ranging from 1.5% to 3.5%. 
• Additionally, commercial properties tend to have a higher potential for capital appreciation, with minimum yields of 5-10%, whereas residential units typically offer 1-3%.
• The significant difference in yields between commercial and residential properties can be attributed to lease agreements, as per experts. 
• After accounting for property taxes and maintenance charges, residential rental yields usually stand at 2-3% or even lower. On the other hand, commercial properties yield a net rental yield of approximately 7-8%.

From a yield-based perspective, the commercial real estate market in Indiapresents a more attractive and promising investment opportunity compared to residential properties.

Commercial Rental Yield In India

Cities	Rental Yield
Delhi NCR	8 percent
Mumbai	7.75 percent
Bengaluru	7.75 percent

Source: KnightFrank

Analysis Of Commercial Rental Yields In India (2024)

• The average gross rental yield across key cities stands at approximately 4.39% in Q1 2024, reflecting a slight decrease from 4.54% in Q3 2023. This indicates a competitive rental landscape influenced by various factors, including economic recovery post-pandemic, increased demand for office spaces, and fluctuating rental prices.
• Commercial properties, particularly Grade-A office spaces, offer significantly higher yields compared to residential properties. With the average rental yield in India in the range of 6-8%, commercial properties present an attractive investment opportunity. You can “affordably” invest in these premium properties via alternative investment platforms.
• The economic activities in the country are on the rise, and the stable macroeconomic outlook for FY24 further contributes to the positive commercial leasing market.
• After a prolonged period of remote work, organizations are now implementing Back-to-Office initiatives, which are driving the demand for commercial spaces.
• FY 2024 is expected to see increased transactions in high streets, hypermarkets, supermarkets, and mall spaces. Retail units can generate an average rental yield in India ranging from 8-9%, making them a prudent investment option for investors. So, the retail sector generates the best rental yield in India.
• Rathi, from Knight Frank India, mentioned that the commercial office space sector has experienced robust demand in major cities due to the return to office after the pandemic and a thriving domestic economy. Despite global challenges, the office market has displayed resilience, making it an appealing opportunity with significant potential for investors.

So, which properties have the best rental yields in India? Office space and retail shops.

As can be seen, commercial rental yield in India is higher. So, commercial real estate is the best investment to put your money in. You can also invest in commercial real estate structured debt with just Rs. 10 lacs. 

Key Highlights 2024

• Bengaluru leads the pack with a rental yield of 4.45%, attributed to its robust IT sector and a strong demand for office spaces as companies encourage employees to return to the workplace.
• Mumbai follows closely with a yield of 4.15%, reflecting a significant growth of 19% since 2019, driven by a steady increase in rental rates in key localities.
• Gurugram has also witnessed a notable rise, achieving a rental yield of 4.10%, up from 3.5% in 2019. This growth is supported by the demand for commercial spaces from various sectors.
• In contrast, Delhi NCR has the lowest yield at 2.79%, indicating a slower growth in rental prices compared to other cities.
• Chennai and Hyderabad have moderate yields of 3.10% and 3.16%, respectively. These cities are experiencing steady demand, particularly in tech and service sectors.
• Pune and Kolkata show yields of 3.09%and 3.96%, respectively, reflecting stable rental markets with moderate growth.

Market Trends 2024

• The commercial rental market is witnessing an upward trend in rental values, with prominent localities experiencing increases ranging from 4% to 9% in Q1 2024. This trend is significant as it indicates a strong recovery and growing demand for commercial spaces.
• The return of employees to offices post-pandemic has led to increased demand for office spaces, particularly in IT hubs like Bengaluru and Gurugram.
• The average rental rates in Bengaluru’s key areas, such as Sarjapur Road and Whitefield, have seen substantial increases, with reports of 8% hikes in Q1 2024 alone.

Source: 99Acres

Analysing Trends Of Residential Rental Yield In India

To analyze residential rental yield in India, let’s examine the trends and data from key cities across the country.

• Mumbai

Mumbai follows with a rental yield of 4.15%, a growth of 19% since 2019. This increase is fueled by rising rental prices in key localities, which have seen an average increase of 4% in Q1 2024. The cost of apartments remains high in relation to rent prices, making Mumbai the 13th most expensive city in the world for property buyers. Considering expenses and depreciation, it’s unlikely that property buyers in Mumbai will generate any significant return on their investment.

• Delhi NCR

Moving to Delhi, property prices are lower than in Mumbai, despite witnessing continuous price increases. Delhi has seen rental yields ranging from 2% to 3.5% in Central Delhi and 2.5% to 4% in South Delhi. The city’s rental market has been influenced by factors like location, property type, and infrastructure development. Yet as compared to other cities, Delhi has the best rental yield in India and the highest rental yield in India.

• Bengaluru

In Bangalore, rental yields range from low to moderate, spanning from 2.39% to 7.15%. Bengaluru leads with the highest rental yield at 4.45% in Q1 2024, marking a substantial increase from 3.6% in pre-COVID 2019. The city has witnessed an 8%surge in rental prices in prime areas like Sarjapur Road and Whitefield, reflecting strong demand from the IT sector and returning employees. These figures are significantly lower than the more favorable yields of 7.16% to 9.92% that were achievable back in 2007.

• Chennai

Chennai, a major city in South India, offers a rental yield of 5.06 percent. Areas like Adyar, Anna Nagar, and Mylapore are known for their higher rental yields due to their proximity to commercial hubs and educational institutions.

• Hyderabad

Hyderabad, a booming IT and business destination, has experienced a surge in real estate activities. Rental yields in Hyderabad usually are 3.88 percent.  Madhapur, HITEC City, and Gachibowli attract high rental demand and offer favorable rental yields. Hyderabad saw a 5% increase in rents in key localities like HITECH City, while Chennai’s rental growth has been more stable at about 7%over recent years.

• Pune

Meanwhile, Pune’s rental yields are lower than those in New Delhi, varying from 2.30% to 6.31%. The city’s rental market caters to diverse preferences and budgets, with factors like amenities and infrastructure development playing a key role in rental demand and pricing.

• Kolkata

Kolkata, the cultural capital of India, offers a competitive rental yield of 5.03percent. This indicates a lucrative investment opportunity for landlords and property owners in the city. Kolkata’s diverse economy and steady population growth contribute to the consistent rental property demand, ensuring a stable rental market. With its rich heritage, educational institutions, and emerging industries, Kolkata presents a favorable environment for investors seeking attractive rental returns.

• Ahmedabad

A rental yield of 4.79 percent in Ahmedabad is considered low to moderate, and it is an important factor for property investors to consider when evaluating the potential profitability of investing in residential properties in Ahmedabad. 

Source: Housing.com

Globalpropertyguide 

As can be seen above, the residential rental yield in India is low. But, why is the residential yield or why is rental yield low in India? Let us see why.

Why Is Rental Yield Low In India?

• Indeed, one of the reasons for the low rental yield in India is the imbalance between rising property prices and stagnant rental rates. The rental norms in the country often favor tenants, granting them significant power while providing limited protection to landlords.
• Furthermore, in countries where rental yields are higher, interest rates tend to be lower, reducing the opportunity cost of renting. However, in India, the opportunity cost of renting tends to be higher due to comparatively low rental rates.
• This combination of factors contributes to the lower profitability of renting out properties in India and further accentuates the disparity between property prices and rental yields.
• According to the Knight Frank report, investors in India have been attracted to other financial instruments such as fixed deposits and public provident funds due to better interest rates and returns. This diversion of attention from real estate investments contributes to the lower rental yields in the country.
• Additionally, the lack of policy intervention and support for rental housing has hindered the creation of rental housing stock in India. This absence of adequate policies and incentives for rental housing has resulted in a significant decline in the share of rentals to total housing over the years. The data from the 2011 Census indicates a steep decline from 58 percent in 1961 to 28 percent in 2011.
• Another significant factor contributing to the low rental yield in India is the classification of renting homes as a commercial activity. This leads to property tax for individuals and service tax for institutional rental housing operators. This taxation burden reduces the overall rental yield for landlords.
• Additionally, the calculation of electricity and utility rates at par with commercial properties further impacts the rental yield. Higher utility rates designed for commercial properties can significantly eat into the rental income, reducing the profitability for landlords.
• These taxation and utility rate policies create additional financial burdens on landlords. It further affects the rental yield and makes renting out properties less profitable in India.

Now that we have seen the residential rental yield in India, let us look at the commercial rental yield in India.

Key Highlights for the Indian Office Space Market in Q1 2024

Leasing Activity

• Office leasing activity dipped marginally by 3% year-over-year (YoY) and decreased by 25% quarter-over-quarter (QoQ) to touch 14.4 million sq ft in Q1 2024.
• Bangalore dominated the space take-up, followed by Delhi-NCR and Hyderabad – these three cities collectively accounted for 65% of the quarter’s leasing activity.
• The sectoral distribution of occupiers revealed that technology companies led absorption in Q1 2024 with a 26% share, closely followed by flexible space operators at 22%.
• Consistent with the trends from the past six quarters, domestic firms dominated quarterly leasing with a share of 47%.

Absorption

• Net absorption across the top 7 cities stood at 8.3 mn sq ft, up by 10.9% YoY.
• Office space absorption in India increased by 13% to 13.4 million square feet (msf) in Q1 2024 compared to the same period in 2023.
• Southern cities like Bengaluru, Chennai, and Hyderabad are driving the national office space absorption, collectively accounting for 61% of the pan-India office space take-up in Q1 2024.

Supply

• New supply of 9.8 million sq ft was witnessed in Q1 2024, registering a decline of 41% QoQ and 10% YoY.
• New completions followed a similar pattern to absorption, with a 26% annual increase reaching 10.8 msf in Q1 2024.
• Quarterly supply was at a 15-quarter low and down by 55.8% QoQ.

Vacancy and Rents

• Vacancy on a pan-India basis stands at 17.1%, a 10 bps decrease QoQ.
• With absorption outpacing new completions, there has been a slight improvement in occupancy levels across India. The current national vacancy rate stands at 13.8%.
• Limited new supply coupled with sustained absorption activity has pushed rental rates northward, with rents in the top seven cities witnessing an appreciation of 2.4% to 6.8% over the previous year.

The Indian office market continues to exhibit stability in Q1 2024, mirroring trends observed at the outset of preceding years. Overall leasing activity is expected to witness an upswing in the upcoming quarters, following a recovery in supply.

Source: JLL India

Factors Affecting Rental Yield In India

Several factors influence rental yield in India. Understanding these factors can help investors make informed decisions. Let’s explore some key determinants:

• Location

Location plays a vital role in rental yields. Properties situated in prime locations with excellent connectivity, proximity to amenities, and commercial centers tend to have lower yields due to higher property prices. On the other hand, emerging or suburban areas may offer higher rental yields due to lower property prices and growing demand.

• Property Type

Different property types, such as apartments, villas, or commercial spaces, can have varying rental yields. Generally, apartments have higher rental yields due to their higher demand, while commercial spaces may offer even higher yields in prime business districts.

• Market Demand

The demand-supply dynamics of the local market greatly influence rental yields. Cities experiencing rapid economic growth, job opportunities, and population influx tend to have a higher demand for rental properties, potentially leading to better rental yields.

• Economic Factors

Macroeconomic factors such as interest rates, inflation, and economic stability impact rental yields. Lower interest rates and stable economic conditions generally lead to higher property demand and rental yields.

Bottom Line

Analyzing rental yield In India is essential for real estate investors seeking profit opportunities in India. Understanding the rental yield trends, and factors affecting yields, and conducting area-specific analyses are crucial steps in making informed investment decisions. Remember, rental yields can vary significantly based on location, property type, market dynamics, and economic factors. Consulting with real estate professionals, conducting thorough research, and leveraging data-driven insights will help you navigate the Indian real estate market more effectively and maximize your rental income potential.

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Related Articles

1. How To Calculate Yield For All Types Of Real Estate Investments In India.
2. A Comprehensive Guide to the Mumbai Real Estate Market
3. Mumbai Land Rates and Investment Opportunities

FAQs

Q1. What is the rental yield in India?

A. The commercial rental yield in India, which includes office spaces and retail shops, presents a more lucrative investment option for real estate investors, with yields ranging from 6% to 10%. Retail spaces, such as shops in malls and shopping complexes, can offer up to 9% rental yields. Additionally, warehouses also provide competitive rental yields, falling from 5% to 6%.

Q2. What is a good rental yield in India?

A. Commercial properties, particularly Grade-A office spaces, offer significantly higher yields compared to residential properties. With the average rental yield in India in the range of 6-8%, commercial properties present an attractive investment opportunity. 

Q3. Why is rental yield low in India?

A. The rental yield in India is one of the lowest because of the following reasons:

• Indeed, one of the reasons for the low rental yield in India is the imbalance between rising property prices and stagnant rental rates. The rental norms in the country often favor tenants, granting them significant power while providing limited protection to landlords.

• Another significant factor contributing to the low rental yield in India is the classification of renting homes as a commercial activity. This leads to property tax for individuals and service tax for institutional rental housing operators. This taxation burden reduces the overall rental yield for landlords.
• Additionally, the calculation of electricity and utility rates at par with commercial properties further impacts the rental yield. Higher utility rates designed for commercial properties can significantly eat into the rental income, reducing the profitability for landlords.

Q4. Which small city yields high rental yield in India?

A. Kolkata and Bengaluru have the highest rental yield and best rental yield in India.

Q5. How much rental yield is good in India?

A.  Rental yield of 6-8% is good in India. Commercial properties, particularly Grade-A office spaces, offer these kinds of rental yields in India.