While it is a known fact that property prices in Mumbai are the highest in the country, a new report by a London-based realty research firm shows the city has the highest transaction cost in relation to its rents on a global scale.
Transaction cost refers to taxes and levies that a buyer has to incur even before taking into account the actual price of buying a property. Since these taxes are a percentage of the property cost, the high transaction cost is indicative of unusually high capital value of property. According to the World Cities Review by realty agency Savills, it takes 4.3 years in rented accommodation in Mumbai before the cumulative cost of rent exceeds the transaction costs alone of buying that property. Of all the 10 global cities detailed in the report, this is the longest in terms of number of years.
In comparison, it takes just six months worth of rent in Moscow to cover the transaction cost, while in London, Sydney and New York it takes only between one and two years worth of rent to match the cost of transacting. Jatin Patel of Savills India said that transaction cost includes stamp duty and registration charges, municipal tax, agent’s commission, legal conveyance fee and service tax, all of which add up to over 10 per cent of the actual property cost. For instance, if the monthly rent of a house costing over a crore in Mumbai is Rs 20,000, over 4.3 years the total rent paid would amount to Rs 10 lakh. This is equal to the sum that a buyer purchasing the property ends up paying as transaction costs alone, making it substantially cheaper to rent than to buy a house in Mumbai. Patel said the high capital value and low rental yields are indicative of an extremely speculative market. “Investors are buying into property not for the rental yield but for the whole per-sq ft price increase game that goes on here, a trend that is very unhealthy for the market,” he said.
The report states that considering that robust rental levels are an indication of healthy demand from end users, Paris, London and Hong Kong are sound markets. “Rental yields in Mumbai are under three per cent of the property value annually. Such low rentals and exorbitant capital values are symptomatic of a market where property is bought for capital growth by investors, making it speculative and volatile,” said Yolande Barnes, head of Savills Residential Research.
She said owing to global economic conditions, Mumbai and the other new world cities of Shanghai, Singapore and Hong Kong that were booming until six months ago have now slowed down considerably. The report states that the property price growth in these new world cities over the last several years have outperformed that in the old world cities. However, over the last six months, it is on the wane with real estate prices here growing by only 0.7 per cent as compared to 1.4 per cent in established old world economies such as Europe and United States. The report adds, “Mumbai, having seen price increases of 154 per cent over the last six years, looks to be on the brink of correction. 2012 may mark the tipping point, with falls of between 10-15 per cent anticipated.”