Rent or Sell – Where is enough ROI in Mumbai?
The growing property market has everything going right for it, except for the fact that the Return on Investment (ROI) for property buyers or investors who are looking to buy and then lease out properties is dwindling. However, the prospects for Capital Appreciation in select areas remains buoyant but the perceived returns may not be the same as the past 3 Years. The high growth in property prices all across the city in both categories of Residential and Commercial properties which are already touching all time highs is negating high capital growth prospects in select locations and especially when leasing a property is the first criterion.
The accepted benchmark on the ROI till last year was 4-6% for Residential Properties and 9 to 12% on Commercial Property Investments. If you are buying a property at current market levels and are accepting the same returns then it may be tough to do the numbers today, as the Residential Returns even after being a bit liberal is not more than 3 to 4% on the Investment one makes today. This may not sound very encouraging here, but if the Residential Market remains bullish as it has been over the past 4 Years then we can accept Capital Appreciation for sure which compensates the overall Investment Plan. Investments in Commercial Property on the other hand is still bullish as there is not major stock expected in the Mumbai property market over the next 2-3 years and the large developers are primarily looking to lease their properties to MNC’s and there are very select properties in the market available for the mainstream small investors to be sold. Even if the properties are available they are sold at a Premium and a lot of builders are more inclined towards making larger floor plates upwards of 5000sq.ft which means an investment of over 70 Million Indian Rupees on an average in Andheri East.
Locations like Thane, Kharghar, Vashi, Belapur and locations beyond Borivali do not enjoy high Lease rental values, the availability for rental apartments is far more here in these locations compared to the demand from Individuals or Professionals looking to rent homes. In the Current market around 44% people are looking for properties in Western Suburbs, 29% in Navi Mumbai, 24% in Eastern Suburbs, 2% in Central Mumbai and around 1% in South Mumbai on outright basis and this tells us simply that the markets in suburban areas are more tuned towards buying than leasing in current day. This is more so because of the fact that an average salaried person can only afford properties in these suburbs than in the mainstream city.
The maximum returns on lease rentals are, in any case, more in locations which are close to CBD’s (Central Business District) which are primarily beginning from South Mumbai and headed down till Malad, Goregaon, and Powai. These locations attract more individuals as they are working for Companies and MNC’s etc and the proximity to the office from these locations and the conveniences of the mainstream city etc are of prime importance to anyone relocating.
Property Market largely is also driven by Investors who are not only business people or veterans but, also Professionals in large MNC’s and NRI’s. Typically, the way to go about property Investment is that Investors like to enter into a Project when it is just launched or at Under Construction Stage where in the prices are relatively low and depending on the Builder Reputation and the kind of project they envisage returns and with staggered payments over the period of time they have time from 2 to 4 years to complete the project. A lot of Property Investors who buy property as a Second Home, are more linear towards the Lease Rent Income. The rest rely on re-selling after paying either the Short-Term Capital Gains or Recycling the property by re-investing the proceeds from the sale into another property after the 3 years of holding period. This is where the maximum returns are in the property market today as unless you don’t recycle you will not get enough capital appreciation and this is the best way to do so as there is no tax liability here and hence the ROI is the highest.
The moment you feel that there is a saturation point has come in your investment and there are a lot of signs for example when the Building society is formed and most of the residents are there to stay, the builder is totally out and most of the other buildings in your location are also sold out and then if either you getting a good offer or you see stagnation hitting and no activity is seen for buying or selling in the neighbourhood, it is time for you to think!!!. Each location or each building has its upwards level, not everyone has a sea facing property at Breach Candy or Band Stand, Bandra West which will remain premium and sought after throughout and hence the key is to exit at the opportune moment and re-invest the proceed in another upcoming location with a Top Builder and in the Best Project possible. This is one of the best and easiest ways you can maximize the Returns and they will not just remain on paper and you can at least see the profit or the live capital appreciation and then when you re-invest you will see the History repeating itself again.
Investors who have bought property in the Year 2004-5 are reaching a point where they can either sell their property or if the property is nearing possession they can lease the same out. For a lucky few, the return on Investment has been fabulous considering that the capital values have gone more than 200% over a period of 3 years. And for them even the lease rent income is like a bonanza today as if they have invested for e.g. at 40 Lacs in Powai for an apartment, they can get an income of around Rs.25000-Rs.35000 per month for a 2 BHK, which more or less takes care of their EMI’s automatically and the returns are above 6%.
The mantra today for investment is changed, with growing needs and expectations it is essential to understand the dynamics of the ever-changing world of real estate to benefit the most and it is always advisable to capitalize on your investments by either re-investing or giving the property on the lease than to leave the same notional.