Bangalore Real Estate: What happens when rents follow prices down?
I’ve blogged before about the out-of-whack Price/Rent ratios in some parts of Bangalore, as well as the rapid decline in asking prices for 3BHK apartments in SE Bangalore (ORR / Sarjapur road).
Here is another example: that of the Sobha Mayflower project in the same area. Like Primrose, it too has 3BHK apartments for sale listed on Craigslist at Rs 2800 per sq ft. Note that these rates are down from 3500 or so earlier this year. Also, note the emphasis on “No commission charges”. It doesn’t explicitly say whether the ad is by the owner. If this is a broker ad, it’s the first time I’m seeing them waive their 1-2% fees.
Let’s compute what the monthly installment on this works out to. Rs 2800 per sq ft * 1725 sq ft =~ Rs 48 lakhs. Add in another 12% for overhead (registration, stamp duty, and what not) and let’s round it up to 54 lakhs. Using HDFC’s home loan calculator, the installment (EMI) for with 100% financing works out to ~ Rs 63,000 per month - based on a 20-year loan period and a fixed interest rate of 13%.
Before you think that this 20% drop in prices is the end, look at this ad for a similar apartment for rent:
Even now, the Price/Rent ratio is 63000 / 14000 = 4.5! Either the rents need to go up a lot (less probability given the huge number of apartments being completed in 2007/2008 in this area) or prices need to drop further.
Even if prices drop to Rs 2250 per sq ft and if the home loan rates drop from 13% to 10% (for a fixed interest loan over 20 years), the EMI works out to 42,000 - that’s a Price/Rent ratio of 3. Alternatively, even if you bought the apartment at Rs 2250 per sq ft, your rental yield is 4%.
Tough!
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October 28th, 2007 at 8:52 am
What elusive rental yield are you targeting anyway?
I don’t know but I think in the west the rent/EMI parity is very low and i doubt if India will have a similar scenario any time soon.
October 28th, 2007 at 10:14 am
The 4% annual rental yield has to be looked at in the context of opportunity costs: I could put the same investment instead in fixed deposit (8-10%), money market / arbitrage funds funds (10-12%), stock market (20%), land (?), etc.
At 4%, anybody who invests is essentially betting on double-digit price appreciation. In the above case, I have my doubts whether that’ll happen anytime soon.
October 28th, 2007 at 11:08 pm
It will be interesting to see what percentage of these real estate “investors” are even considering renting out their properties. My totally unscientific gut feeling says - less than 50%.
In that case, essentially the rental yield argument is only theoretical, since a majority of investors are willing to accept a 0% yield from their investments, solely banking on capital appreciation, and a possible future use of their properties (when they return to India).
The fear of being “priced out forever”, rather than a calm look at opportunity costs is driving many of these investments.
The smart money (builders) has already left the building (literally)
October 29th, 2007 at 10:50 am
Evaluating a house purchase on the basis of rental yield alone must be compared to the dividend yield (which for the sensex is much less than 2%).
Fixed Deposits do not have capital appreciation nor loss. The 20% figure for the stock market includes capital appreciation. Unless you compare the capital appreciation of land/house/apartment with the stock market returns, the comparsion is not valid.
In essence, what is the long term risk adjusted returns of house/land/apartment vs. stocks ?
The way I look at it is that the correction in real estate can been brought about by RBI’s interest rate stance, while the correction in the stock markets has not set in yet.