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Are rental yields attractive in Asia?
May 6, 2015


Whether the real estate sector is in a bubble phase or not was a question we had for the promoters of a well respected affordable real estate firm a few years ago. And the response we got was that whenever rental yields fall close to 2% levels, it would be safe to assume that things have heated up.

The Indian real estate sector has been going through troubled times for a while now. High prices have led to a massive inventory buildup, big enough to meet demand for as long as two years in some of the major Indian cities. To add to that, new launches continue to hit the markets. Demand has come down considering that the focus on affordable housing has been less, thereby making the properties way out of reach for the majority of the population. Not to mention that with other asset classes such as equities doing well, real estate as an investment destination has become less favoured as well.

Here's another indication as to how heated up things seem. Today's chart of the day indicates the rental yields across major Asian economies. And as you would have guessed it, yields in India are the lowest amongst the pack. We came across this story on Seekingalpha.com. But the data therein was referred to from an article put up on livemint.com earlier.

The long term prospects of the Indian housing sector are favourable, no doubt - especially considering the major difference in supply and demand. However, with factors such as lack of transparency and the high prevalence of cash transactions (read black money) being the norm amongst most developers, a much needed correction in prices is only being delayed.

If the market forces were to take over, it would only lead to a sharp reduction in prices we believe; especially considering that funding new projects with inventory pile up is a situation that would be difficult to hold on for long.

In fact, here's another proof which was mentioned in the same article. The difference between rental yields and interest rates was provided for the same countries displayed in the chart. And the difference remained the highest in India - about 8% as compared to 0% for Malaysia and 2% for countries such as The Philippines, Thailand and Hong Kong, thereby indicating that investment in property by taking on debt is not feasible in India.

Data Source: Seekingalpha.com

This Chart Of The Day was published in The 5 Minute WrapUp - Is it time you prepare for Sensex 24,000?

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