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A general view of Mumbai. Image Credit: Shutterstock

Investment in residential real estate is a very different kettle of fish than end-user homebuying. When the intention is returns on investment, knowing how the housing asset class is performing is of prime importance.

From an RoI perspective, there are two buckets to check – capital appreciation and rental yields. In terms of property prices, the current average prices in the top seven Indian cities are collectively around Rs6,150 per square foot. If we look back, the last five years have seen an increase of over 11 per cent across the top seven cities (from Rs5,551 per square foot in 2018 to around Rs6,150 in 2022). Last year saw the maximum annual rise (by 6 per cent) in average property prices (Rs5,826 psf in 2021 to Rs6,150 psf in 2022).

The previous four years, on the other hand, saw either no change or a maximum of 3-4 per cent y-o-y increase in 2021 against 2020. Before the pandemic, property prices across cities remained range-bound due to a prolonged demand slowdown.

Post-pandemic, demand soared across cities – as did developers’ input costs – causing prices to rise, particularly in 2021 and 2022. Another factor driving prices up is the fact that most sales happening now are by branded developers who have not shied away from price hikes on the back of strong demand and rising construction costs.

Southern cities shine

Among the cities, Bengaluru and Hyderabad have seen maximum five-yearly increase of 10 per cent in average property prices in last five years. Average property prices in Bengaluru stood at Rs4,894 psf in 2018 and went up to Rs5,570 in 2022. As for Hyderabad, average prices in 2018 stood at Rs4,128 psf and had risen to Rs4,620 in 2022.

Rental yield saw a decline across most cities in 2020 when compared to 2019 – a natural fallout of the pandemic and its work-from-home and e-schooling ethos. 2021 saw some improvement, with rental yields rising across cities and nearing 2019 levels. However, 2022 saw a decent rise in rental yields, which breached pre-Covid levels of 2019 across all the top seven cities.

This was largely due to a sudden spurt in rental demand with offices and schools reopening. The current rental demand will remain strong in all cities as urban work opportunities rise and more people migrate to cities.

More property value gains

The outlook for 2023 is optimistic, though under-researched investments and a short-term profit perspective must be avoided. All the factors that drove up capital appreciation and rental yields are firmly in place, and the profitability potential for both investment rationales remains promising.

That said, 2023 will face some headwinds in terms of economic slowdown and inflationary pressure, and this needs to be factored into any investment decision – including for real estate.

The RBI will likely take a pause after a spate of interest rate hikes, so growth momentum will continue. 2023 will continue to be driven by end-user demand, but serious long-term investors will find the market dynamics more than favourable. Property prices are likely to rise by another 5-8 per cent in the larger cities – this bodes well for investors focused on capital appreciation, but also means that rental demand will increase.

Because of the new demand profile, larger-configuration homes will outperform compact affordable housing. Properties by branded large developers will pay better dividends in terms of both rental yields and capital appreciation.