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Thursday, December 09, 2021

Residential rental yields in Asia: Towards stabilisation

Does this yield variation in Asian cities clearly reflect the risk-return trade-off?

November 9, 2013 12:28:56 am

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 and Beijing,they are lower than cities such as Jakarta and Manila. Several factors are responsible — the local demand-supply situation,macroeconomic scenario,end-user demand,local land-related policies,etc.

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 is a crucial consideration for global investors. Higher yields in Asia might tempt them 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.

Asian vs 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 realty investments than developed economies. Yet,the rental yields in emerging Asia do not reflect the relative risk-return differential.

For example,rental yields in Mumbai,currently around 3.5 per cent,are lower than London,Tokyo and New York,all of which rank quite high on the Registering Property index. Despite stronger regulations and a better legal framework in developed economies,comparison with emerging Asian yields reveals a different picture. Lower penetration of financial markets,higher inflation and larger population creating a constant demand for housing could be reasons for this. Further,households in emerging nations generally prefer to channel a large proportion of their savings into assets such as gold and real estate. According to the Reserve Bank of India,the country’s household investments in physical assets are over 50 per cent of the total household savings. In the US,it is below 30 per cent.

Based on yields,global investors do display a degree of scepticism over investing in Asian residential property markets. However,domestic investors continue purchasing at lower yields purely for the capital appreciation (typically around 10 per cent p.a.).

The question is,how long will this continue? Over the past few years,rental yields have been on a decline across tier I cities in Asia. So far,it has been the faster rise in capital values over rents that has led to a compression in yields.

In Mumbai,yields have fallen by 50-90 basis points from 2007 to Q2,2013. More recently,from Q1,2011 to Q2,2013,yields have risen moderately,owing to marginally higher growth in capital values.

Rise in capital values occurred even when economies were slowing down. Mumbai has seen residential property prices surpass the previous peak of Q3,2008,and they continue to remain high despite a slowdown in the Indian economy. This has led to concerns about affordability and overheating of the property market.

In such a scenario,it is hard to foresee further price escalation unless the economies revive,or restrictions ease.

In the near term,residential yields in Asian tier 1 cities will either stabilise or rise marginally as capital value appreciation begins to drag. 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 stabilisation. 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 stabilise 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).

Although the RBI has now curtailed investment by Indians into offshore property,many HNIs and non-resident locals in other Asian countries have already displayed such a preference. Such a trend can still lead to fall in domestic property prices,thus putting a floor to yield compression or fuelling gradual rise in yields.

The author is Head-Research & REIS,Jones Lang LaSalle India.

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