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Price it right - 10th Feb, 2007. Times Property (Times of India)

The change from high deposit to advance rent has been gracefully accepted and recognised by most owners, says Chetan Narain'

In a city like Mumbai, rental properties have always been in great demand. Primarily this demand came in the south Mumbai region from banks, the corporate sector, and consulates who preferred to invest their capital in businesses and not block huge chunks of money into buying a home. Apart from that, there was also the service class community that could afford a home only on rent (pagdi properties). At that time, most industries and mills were located between the Eastern and Central suburbs whereas commerce, trade and central business districts were New Marine Lines, Fort, Ballard Estate and Nariman Point.

Subsequently, these South Mumbai locations became synonymous with class and style, and businessmen, traders and companies took pride in having homes here. The 90s saw more scenic locations such as Malabar Hill, Napeansea Road, Breach Candy dominating the rental market scene. With the opening of the Indian economy in this decade, a lot of Foreign multinationals, expats and businessmen started coming to India, thus contributing greatly to the demand for homes on rent. Here, typically due to the fear of the landlords not getting vacant and peaceful re-possession, they set a trend of heavy deposits and lower rent.

For instance, we were involved in a transaction for a German bank, Commerzbank, around 1996. The owner quoted a deposit of Rs.2.75 crore and Rs.50,000 as rent for a sea-facing property at Malabar Hill. The deal was concluded in fifteen minutes, because there was little choice of premium apartments. While the larger and international banks found such transactions convenient, this was a nightmare for many.

While a decade ago, fixed deposits earned interest at the rates of nine to eleven per cent from 2000 to 2006 it dropped to five/six per cent and that was the highest return rates one could get on investment of rental deposits through conservative instruments like fixed deposits. This factor led to a hike in deposit demanded by owners now wanting higher deposit to match the interest return.

These factors gave rebirth to the advance rent terms. While the same property in the example above at Malabar Hill would effectively generate a rent of around three lakhs per month, owners now asked for the advance rent of 12 months and a deposit equivalent to three-six months of rent.

In face of such rental terms, we have to realize that not all MNCs and Foreign professionals can get into the business of placing high deposits with landlords unless they are banks and such terms prove commercially viable to them. The MNCs come here to do serious business, thus accelerating India's economy and providing huge employment opportunities. They are not here to pay deposits, with having to accommodate employees in numbers varying from twenty to fifty.

Fortunately, this change from high deposit to advance rent was gracefully accepted and recognised by most owners. With this as a background, and the continuous demand for rental properties, we see a strong revision due in rental rates of residential properties across the city. A typical formula to derive "rental returns" would be four to six per cent of the capital value (sale price) based on market facts and valuation and not expectations. To give you an idea, we are currently under negotiations for three different properties, all at different locations (all for MNCs). At Worli, a well-furnished four bedroom sea-view apartment at Rs.4.5 lakh per month (3000 sq.ft.) At Bandra, again a fully furnished, two bedroom apartment (1100 sq.ft.) for Rs.1 lakh per month At Juhu, a 4000 sq.ft. furnished apartment with four bedrooms at Rs.3 lakh per month. With the current pace of capital appreciation, it is important to ar rive at a realistic review of rental rates. However, while doing this, one has to keep in mind the several factors that apply to a property's value and hence appreciation is not the only expected outcome of the review. In many cases, overpriced properties will have to see a negative graph. Through professional guidance, correctly priced properties will not meet any resistance.
IF YOU HAVE A QUESTION ABOUT THE PROPERTY MARKET, OR ABOUT REAL ESTATE
TERMS AND TRANSACTIONS, WRITE TO CHETAN NARAIN AT TP @ EDITSOURCE . COM

Quick BYTES

Rental properties have always been in demand, particularly in south Mumbai, and with the opening of the Indian economy, there is a greater need for these
We have to recognise that MNCs are here to do serious business, not pay huge deposits on homes
There is a strong revision due in rental rates of residential properties across the city