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The Bengaluru Rental Yield Report Credits:Augustus Binu/www.dreamsparrow.net Contents Definition of Rental Yield .................................................................................................................................... 3 Significance of Rental Yield ........................................................................................................................... 3 Bengaluru in Numbers ........................................................................................................................................ 4 Interpretation ................................................................................................................................................... 4 Bengaluru Locality Rental Yields ....................................................................................................................... 5 Gross Rental Yield for Unfurnished Houses Weighted by Built Up Area ..................................................... 5 Interpretation ................................................................................................................................................... 5 Bengaluru 2 BHK Rental Yields ........................................................................................................................... 6 Interpretation ................................................................................................................................................... 6 Bengaluru 3 BHK Rental Yields ........................................................................................................................... 7 Interpretation ................................................................................................................................................... 7 Other Considerations Before Buying ................................................................................................................. 8 Appendix 1 .......................................................................................................................................................... 9 Appendix 2 ........................................................................................................................................................ 10 Locality-wise Rental Yield for Unfurnished Houses in Bengaluru .............................................................. 10 Locality-wise Rental Yield for Furnished Houses in Bengaluru .................................................................. 20 IREF Bengaluru Rental Yield Report |2 Definition of Rental Yield Gross rental yield of a single property is defined as the ratio of gross annual rent income, from the property, to the purchase price of the property. For example, if a landlord earns a gross rent income of INR 50,000 per month for 12 months on a house that is priced at INR 1,00,00,000 in the market, she will earn a gross rental yield of 6%. A house, bought with the intention to rent out, is an investment in real estate similar to any other investment with an equivalent risk profile. The Return On Investment (ROI) in real estate, then, is the net annual rent income aka Net Operating Income (NOI) which is defined as gross rent income minus expenses, annually. Expenses include vacancy losses, collection losses, concessions given to tenants, operating expenses and property taxes. NOI depends on how well a landlord can negotiate the above expenses with the tenant. Therefore, NOI and net rental yield cannot be calculated on a micro-market level for a locality; however, gross rental yield can. Then, it can be used to compare the investment potential of different localities. Significance of Rental Yield From an investment point of view, houses with not only higher absolute rental incomes but also lower absolute purchase prices are the ones that give the maximum ROI. Hence, the metric “gross rental yield” is of prime importance in comparing alternative investment opportunities; a higher gross rental yield is better. IREF Bengaluru Rental Yield Report |3 Bengaluru in Numbers Interpretation In addition to offering one of the highest rental yields among the 7 metros of India, Bengaluru is much more affordable with an average buy price of 4300 per sqft**. In comparison, Mumbai Metropolitan Region and Delhi – NCR offer an average buy price of 5700 per sqft** and 5000 per sqft**. However, these are the citywide averages (containing localities where real estate transactions were prevalent i.e. in significant numbers) and not representative of different localities in Bengaluru. The following pages provide an in-depth locality wise analysis. **Source: IREF Research Q3, 2015, *Source: KnightFrank Research H1, 2015 IREF Bengaluru Rental Yield Report |4 Bengaluru Locality Rental Yields In the following pages, Bengaluru locality rental yields on the secondary market are shown on scatter plots where you can compare the average rental yield of a locality with the affordability of that locality and different localities with each other. In order to avoid clutter on the scatter plots, only those localities which have number of listings more than a threshold are shown; this threshold is mentioned along with the scatter plot. However, rental yield calculations have been made for all localities satisfying the conditions shown in Appendix 1; all these localities’ rental yields are shown in tabular format in Appendix 2 at the end of this report. Gross Rental Yield for Unfurnished Houses Weighted by Built Up Area Number of localities:28 Threshold: More Than 350 listings per Locality Size of bubbles: Rental Supply per Locality Interpretation In Q3, 2015, there were 128 localities where buying and selling of real estate was prevalent (more than 30 listings per locality). In the figure above, as the affordability decreases (price per square feet increases) the rental yield decreases. For example, it is more affordable to buy a house in Electronic City rather than Vijayanagar. The difference in average monthly rents is not stark in these localities (Electronic City: INR ~14000 to INR ~14500 and Vijayanagar: INR ~11300 to INR~12300). However, there’s a huge difference in the average buy prices weighted by area (Electronic City: ~INR 36.25 Lakh to ~INR 37 Lakh and Vijayanagar: ~INR 72 Lakh to ~INR 76 Lakh) HSR Layout is majorly a residential locality where buy prices are quite high because of its proximity to major commercial areas of Bengaluru. Though Electronic City is only 10 kilometers away from HSR Layout, buy prices are lower in Electronic City because it’s outside the main city. However, rental demand is extremely high in ECity because of large influx of IT professionals into the area. IREF Bengaluru Rental Yield Report |5 Bengaluru 2 BHK Rental Yields Type: Unfurnished Houses Number of localities:59 Threshold: More Than 100 listings per Locality Size of bubbles: Rental Supply per Locality Type: Furnished Houses Number of localities:59 Threshold: More Than 100 listings per Locality Size of bubbles: Rental Supply per Locality Interpretation In Q3, 2015, there were 109 localities in Bengaluru where buying and selling of 2 BHKs was prevalent (more than 30 listings per locality). In Bengaluru, the rental yield for unfurnished 2 BHKs is ~3.28% and for furnished 2 BHKs is ~4.84%, i.e. you can achieve ~50% higher rental yield on furnishing your property before renting out. IREF Bengaluru Rental Yield Report |6 Bengaluru 3 BHK Rental Yields Type: Unfurnished Number of localities:22 Threshold: More Than 55 listings per Locality Size of bubbles: Rental Supply per Locality Type: Furnished Number of localities:22 Threshold: More Than 55 listings per Locality Size of bubbles: Rental Supply per Locality Interpretation In Q3, 2015, there were 54 localities in Bengaluru where buying and selling of 3 BHKs was prevalent (more than 30 listings per locality). Balagere turns out to be the best locality for investment with rental yield as high as 8.5% for a furnished 3 BHK. If you prefer buying a 3 BHK, Electronic City should not be preferred as only for an average increase of INR ~300 per sqft in buy price, you can gain ~1.6% more rental yield in Balagere. IREF Bengaluru Rental Yield Report |7 Other Considerations Before Buying There are several other considerations like financial, demographic, locational, etc. that you should look at before buying a house, even if it is your second or third house. This report, however, considers only one of these aspects i.e. rental yields. IREF Research will publish further reports on these other factors as well. Please turn over to view Appendix 1 and Appendix 2. IREF Bengaluru Rental Yield Report |8 Appendix 1 The calculation methodology for the residential rental yields is explained in the following steps. 1. All the listings are from Housing.com for secondary markets in Delhi, NCR, Mumbai, Pune, Bangalore, Hyderabad, Chennai and Kolkata for the last 3 months were considered for this index. 2. Transaction price for each negotiable listing is assumed to be 95% of the listing price. Transaction price for each non-negotiable listing is assumed to be the same as the listing price. 3. The set of transaction prices for each locality is in fact only a sample set which is not representative of all the transactions that took place in the locality in the last 3 months. Hence, we have used statistical wizardry to develop estimates of the average buy and rent prices in each locality, separately for different configurations (for example 1BHK, 2BHK, 3BHK, etc.). The following

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