Residential vs. commercial

At a time when there is a growing appetite for low-risk but high-return investment, here is a comparative analysis of rental yields

Indian real estate is once again poised to grow at a rapid scale. It is holding a firm ground, marked by healthy economic sentiments and low-interest rates. Alongside end-user activities, investments are also getting a shot in the arm.

Meanwhile, the old debate to invest in Commercial Real Estate (CRE) or Residential Real Estate (RRE) is also resurfacing. Both have their pros and cons. There is no standardised set of parameters to compare CRE and RRE. However, CRE outperforms its residential counterparts significantly, if we talk about rental yields. Commercial assets such as offices, retail, warehouses, etc., remain safe assets to bet on, as they can be a source of recurrent rental income.

Globally rental from housing can be a source of smart returns. The downtown area of London can easily give a yield of around 4.5%. Likewise, Dubai and Bangkok can post returns of 5.5% and 5.3% respectively, fostering a conducive environment for better investor participation.

However, the same perspective does not hold true in the Indian market. In India, the growth in the rental rates has not been proportionate to the growth in property prices.

Housing yields are around 2-3%, significantly lower compared to international markets. The rental yields are a little less than 3% in Delhi NCR. In the Mumbai Metropolitan Region (MMR), it mostly ranges between 2.5-2.7%. In the South, upcoming IT corridors in Bengaluru can yield up to 3.3% (the general average is 2.4- 3 %.).

Meanwhile, with the help of furnishing or other value addition, one can increase yield by 25-50 basis points. However, beyond a certain point, they cannot be increased.

In comparison, commercial properties render much higher yields. Grade-A office spaces can easily offer an average yield in the range of 6-7%. Heightened economic activities coupled with a stable macroeconomic outlook in FY 23 are also auguring well for the commercial leasing in the country. Meanwhile, after a prolonged period of working from home, most organisations are implementing back-to-office initiatives, fuelling demand.