The Indian rental housing sector is seriously under-serviced by the organized real estate industry. The onus to meet the huge demand for such housing falls largely on the unorganized sector – meaning individual property owners. By the same coin, the rate of organization of the sector is so rapid that we can see the shortage of rental space increasing alarmingly on a year-on-year basis.
Also, one should remember that the shortage of rental space in India extends far beyond the usually considered boundaries. It is typical to focus only on the mega cities which have a lot of economic activity and therefore a large quantum of inbound workforce to drive rental demand. If we factor in the 30+ cities in India with populations of more than a million that also generate a considerable demand for rental accommodation, the problem increases in visible size.
Another aspect of the rental property conundrum in India is that there is no thought given to the different kinds of products required to meet different types of rental demand. For instance, there is a huge imbalance between bachelor and family residences on the rental market in most cities.
So far, there has been no real concept of public or private agencies constructing residential projects specifically aimed at meeting the demand for rental housing. It is only now that agencies such as MHADA and MMRDA have woken up to this lacuna and have initiated certain projects targeted in this direction.
The International Model
Rental housing fares better in more developed countries, where Real Estate Investment Trusts (REITs) buy properties and put them out on rent – thereby generating income for investors while also adding rental supply to the market. Unfortunately, this model has not yet found a foothold in India. It comes up for approval in every budget, but is never addressed proactively.
Does Rental Housing Make Investment Sense?
If builders were to keep their inventories to themselves and use it purely for rent, the yields would be far too low to make business sense. From a property owner’s or investor’s perspective, the same concern of the very low yields of rental housing – limited to 3% in most cases – applies. After all, the thought process behind buying a property is to do so in an area that offers sufficient capital appreciation in the long run while offering satisfactory rental returns in the short-to-mid term so that a part of the EMIs is taken care of, or to bring in some marginal additional income.
It actually only makes financial sense to those who have owned properties for long periods – the option of buying a new property purely to rent it out is simply not attractive enough to be viable in the current scenario.
The only really lucrative investment model in this market segment is to purchase and rent out a unit in a high-profile location. However, this invariably involves a huge entry cost, and therefore this segment does not represent more than 5% of the overall rental property market.
That said, rental revenue does represent a source of steady income for the property owner. Also, rental rates are far less volatile than capital values – when real estate rates prices crash, many people buy properties, but the demand-supply mismatch remains high and in fact increases.
The Road Ahead
The MMRDA model is a good example of how Government agencies can boost the rental housing sector. It is a workable and unique model than can work in all congested cities across the country. However, the Government alone cannot service the whole bulk of demand for rental housing single-handedly. This means that the private sector has to become more involved.
The Government could incentivize individual buyers to invest in rental housing. One route would be by fixing a price for units within the mandatory rental housing component of such projects and selling them to individual buyers instead of to Government agencies. To ensure that the purchased unit is used only for rental purposes, a clause ensuring that it is not sold for a specified period could be introduced. Obviously, such a route would require extremely close and diligent monitoring.
The author, Ashutosh Limaye, is Local Director – Strategic Consulting, Jones Lang LaSalle India
