Rental Housing: Top factors

holding back growth of rental

market in India
Rental housing can meet the exponential demand for housing in India if
adequate steps are taken to address the problem.
Published: March 15, 2018 3:37 PM

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Several reforms are needed to bring in a comprehensive structure in the rental
housing market.
The Economic Survey 2016-17 highlighted that migration had doubled from
5.5-6 million a year in the 2001-11 period to almost 9 million a year in the
2011-16 period. Over 90 cities in India recorded annual population growth of 3
per cent or more despite figures indicating the highest migration numbers to
Delhi. In contrast, the urban housing shortage back in 2012 was 19 million
homes with a majority of such homes required by the lower income groups.
In urbanising countries, rental housing makes for a significant component of
housing which allows for greater mobility of labour. For the lower income
households that are often part of the informal sector, rental housing provides a
better way to live given their risk profile and volatile incomes. Home ownership
in such cases becomes difficult as it restricts their mobility in a situation where
they can’t remain unemployed for long. Home is also an illiquid asset that is
subject to market conditions and requires fixed monthly payment of dues.
Therefore, such lower income groups look for access to rental housing rather
than ownership of a house.
However little the data available on migration-rental hypothesis, available
numbers suggest states like Andhra Pradesh, Gujarat and Maharashtra have
a considerably high percentage of rental housing. As per industry reports,
small, medium and large cities had 28 per cent, 36 per cent and 40 per cent of
rental housing respectively across classes. Parts witnessing large-scale
construction and wards with industrial corridors have the highest share of
rental housing in a city like Bengaluru, where 60 per cent of households are
on rent.
With a majority of rental housing in the informal sector, the National Sample
Survey 2012 reported that 71 per cent of such rental households lived in
houses with no contracts provided in writing. It was due to the nature of
accommodation, which was, slums. The figures representing the share of
rental vary because of the nature of accommodation. While Census showed
that rental share decreased from 54 per cent in 1961 to 28 per cent in 2011,
National Sample Survey showed an increase from 34 to 35 per cent during
1991-2011.
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The irony of it all is that 11 million units lie unused and vacant. Though not all
of these houses put together can match the demand, it can help at least
release some of the pressure on housing.
Let’s understand the factors holding back the growth of the rental market in
India:
# Landlords in India have been disincentivised from renting their houses owing
to several state-enacted Rent Control Acts (RCAs). The RCAs which favoured
the tenants made it difficult for landlords to evict defaulting tenants and also
froze the rents. This led to properties getting vacant and deteriorated owing to
lack of maintenance. Almost half of rental units in Mumbai, for instance, are
either beyond repair or condemned as a result of direct rental control. In fact,
rental control has severely impacted the market sentiments.
# A fast-track court to settle eviction disputes which would take less time to be
settled coupled with repealing the RCAs would enable more confidence in the
rental housing market.
# What is also taking away the confidence of landlords to rent is low-rental
yields. Experts say that rental yields in India amounting to just 2-4 per cent is
one of the lowest in the world. In several cases, landlords end up paying up
more for maintenance and taxes than the rental earnings.
# Unlike most other countries, India does not have Rental Management
Companies (RMCs) which can help landlords manage their rental properties in
a hassle-free way. Such housing associations and RMCs in Europe have
shown tremendous success owing to their ability to generate superior rental
income, easy eviction procedures without injustice to the tenant and seamless
maintenance.
# Countries like Japan and South Korea have structured their housing markets
with comprehensive policies and actions to provide subsidized rental housing
to low income groups. Thanks to the evolution of Pradhan Mantri Awas Yojana
(PMAY), meant to fillip home ownership in India, there is a room to evolve
rental housing policies for people who still cannot afford buying a house under
PMAY.
Several reforms are needed to bring in a comprehensive structure in the rental
housing market. The newly-implemented Real Estate Regulatory Act (RERA)
steers clear of rental housing. Amendments in RCAs can help, but the supply
market also needs to be controlled as it would increase the rent and the
subsequent burden on tenants. Additionally, with structural benefits in
investing in rental housing, it is much more beneficial to buying than those
looking for premises for rent.
Today, more than 377 million residents live in over 7,900 urban centers. Every
year, the migration figures only seem to grow with people looking for
opportunities in fast-growing cities and metropolitan areas. Rental housing can
meet the exponential demand for housing if adequate steps are taken to
address the problem.
(By Honey Katiyal, Founder & CEO, Investors Clinic, a real estate
consulting firm)
Growing rental market to
create more rental
management companies
The growth in the rental market in India, presents an opportunity for rental management companies
to step in. We examine the role that these companies can play and the benefit that they bring, to
tenants and property owners

The rental market in India is gradually evolving, owing to a change in the mindset of
people. Renting a house, is no longer merely driven by affordability, as compared to
buying a home. Rather, people are now choosing the rental option, to be able to live
in a preferred locality and also to avail of amenities that promise a good lifestyle.
This changing trend, presents an opportunity for organised players and rental
management companies (RMCs) to step in.

Vinayak Katkar, director and co-founder of Amura Marketing

Technologies, points out that in India, traditionally, the rental market was
driven by local brokers because the supply/accessibility to inventory was
limited to brokers. “With various property portals available now, this inventory
availability issue has been sorted. Nevertheless, brokers are still managing
rental homes. What young people want, is not just a home but managed
property services that take care of their daily needs and chores. Start-ups like
Nestaway and Grabhouse, are managing properties and finding tenants for
landlords. This has certainly helped people to find good places to live and has
also boosted the rental yields for property owners,” Katkar explains.
How rental management companies
(RMCs) can help property seekers
Communication and transportation, have also had a major impact on the rental
market, says Kiran N, co-founder, RentMyStay.

“People are travelling, for pleasure or work, more frequently than before. For
short stays, people earlier used to rely on hotels or serviced apartments,
which can be very expensive. For example, if someone wants an
accommodation for two months, hotels can be very expensive and flats have
minimum lock-in period of six months. Consequently, a person may be forced
to pay for six months, even if he stays for only two months. In such scenarios,
a short-term rental plan, which allows customers to book a furnished flat for
one day to six months, can be ideal. People can save a lot, by choosing such
flats, instead of hotels and cooking for themselves instead of ordering food
from hotels. Such needs, have created big opportunities for RMCs in India,”
says Kiran, adding that tenants now prefer services that are transparent and
customer-oriented, rather than the existing systems.
See also: Rental properties in residential and commercial segments pick up
post demonetisation

RMCs’ professional services to benefit

developers
Kawal Nagpal, managing partner at Hi-tech Constructions, maintains that RMCs
can also be very useful, in case of builder flats, till the time the ownership is not
completely transferred. “They provide professional services, like security guards,
maintenance of flats or the complete society, like operating the lifts and also take
charge of electricity supply, horticulture requirements, etc. This happens especially in
commercial properties. In this way, RMCs can help to generate good rentals and at
the same time, it does not require a lot of time from the builder,” Nagpal elaborates.

As the rental market grows, owing to the slowdown in real estate construction and
high real estate prices, organised RMCs are bound to tap the opportunity. In the
beginning, RMCs will be seen setting up their bases in the metro cities because this
is where the real action is – in the form of jobs, as well as crunch of space to live.
Moreover, these factors will also force people to search for a hassle-free
accommodation that offers additional benefits. From a property owner’s perspective,
however, before giving house on rent, it is important to ensure that the disadvantage
of renting are outweighed by the benefits.

Advantages of a rental home over

property ownership
The Economic Survey 2016-17, described India as a country on the move. It refers
to the emergence of a free-wheeling generation, averse to build their lives around a
permanent fixture called a ‘home’. While the debate, over living in an owned
residence over a rental property can be unending, certain benefits of the latter are
undeniable. Firstly, you could afford a rental house that is more than 2-3 times the
value of a property within your purchasing power. Moreover, this value is not
restricted to just the size or quality of the apartment. It also pertains to other crucial
yardsticks such as the social infrastructure, the time spent on commute and the
difference in the overall quality of life.
Secondly, it could have a huge bearing on one’s career. A person in a rental
accommodation is obviously more mobile, as compared to someone tied down
by equated monthly installments (EMIs). The advantage assumes huge
relevance, considering that a large section of the workforce in our metro cities
belong to small towns. However, the acute shortage of rental housing in India
and its unorganised structure, continue to be natural pain points.

The market for rental housing in India

Despite the burning demand for rental properties, there is no structure for this kind of
accommodation in India. Unlike matured economies such as Singapore and Dubai,
our housing policy has failed to consider the housing needs of the large population
migrating across the country. This explains the massive slum population infesting our
metros today. According to the National Sample Survey of 2012, 71 per cent of the
households living on tenanted apartments did not reflect on paper. On the other
hand, industry estimates show that approximately 11 million housing units lie vacant
in India.
While the demand for rental homes might not be enough to offset that number,
a strategic government policy could still bridge the demand-supply divide.
Worse, the pro-tenant Rent Control Act (RCA) is probably the most draconian
regulation of our times. The regulation that prohibits landlords to charge
market rates and face long-suffering litigations to evict tenants, played a major
role in squeezing out market confidence in rent-yielding developments.
However, the addition of the leave and license clause in the RCA, brought
some reprieve for landlords. Markets such as the Europe have a flourishing
rental management business, thanks to a flexible policy environment to evict
defaulters and nurture investors, including pension funds, with healthy returns.
Ignorance towards planned rental housing, could hound India in the near future. It is
high time we come out of our slumber.

India
The following three models are predominant in our market:
Single family rentals: Here, an apartment or a house is rented out to one
family which is in control of the entire property for a fixed period of time
as per the rent deed.
This is the most common rental mode, given the scarcity of affordable
homes despite demand being extremely high. Such homes can be empty,
semi-furnished or fully furnished, and attract families with different needs
and generate regular income for the owners.
Paying guest accommodation (PG): This is yet another form of rental
housing where students, working professionals and others who need
temporary accommodation are given a part of a house on rent and can
share the premises with the owner. This is quite an attractive proposition
for those with budget constraints looking for residential options. The
downside would be the lack of independence.
Shared apartments: In this model, working individuals or students can
pool their money to rent an apartment and live in it together, more or less
on their own terms and certainly without the limitations of a PG scenario.
They have their own privacy and do not come under the owners’ scrutiny
unless there are issues with other apartment owners, or the apartment is not
used as specified in the rental agreement.
Like PG accommodation, the shared apartment model is popular in areas
which have educational institutions or office complexes in the
neighbourhood.

Evolution of consumers
With rising incomes, increased exposure to global housing standards and
features and frequent movement across cities for employment, the Indian
rental consumer is becoming more demanding in terms of good amenities,
quality interiors and in well-connected and respectable localities.
In the categories of family rental homes and even shared apartments,
tenants are willing to pay a bit extra for these value-adding features.

International markets
The rental housing market scenario in India throws up some interesting
contrasts and similarities with other countries.

China
When we compare Indian rental housing market with that in China, one
has to understand that the real estate boom in China happened over two
decades ago, and almost 90 per cent of the population now owns their
homes. The rental market in China is still evolving and rentals are quite
high, given the quality of accommodation available.
In contrast, India does not have enough homes to cater to every stratum of
society, and growth in infrastructure is still in its nascent stage.

USA
America has gone through various cyclical ups and downs in its real estate
market, the most recent being the housing bubble burst of 2008. Currently,
the American rental market is growing as home ownership is becoming
more expensive and the economy is still not healthy enough to attract
buyers despite the substantial availability of residential projects. This is
certainly reminiscent of the Indian scenario.

UAE
The market here is going through a churn period. Even though residential
projects available for rent offer world-class facilities, rentals are headed
 southwards due to changing macro-economic factors. Decline in oil prices
coupled with a slowdown in the economy has resulted in the creation of
fewer top-level jobs and lower salary rises. This has resulted in lowering
of rentals across all segments, but it still has not erased the sheen of
attractiveness to owning a property to be put up on lease, as the demand
for rental projects is still high. As per forecasts, rentals should bottom out
by the year end, and start rising from next year onward.

Thewriter is CEO, JLLR

MIGRATION FACTS

A large section of people migrates from Rural areas to urban areas each year in search of
employment & livelihood. However, this number is not growing tremendously due to below
reasons.

1. Economic liberalization play a less significant role as thought of.

2. Urban growth is more to do with population growth, then migration growth.
3. Higher agricultural productivity urges people to move to urban areas, it is counterintuitive but a
fact. Higher productivity leads to higher income and literacy and people wants to move to urban
cities and explore opportunities. Howeve since India is doing fairly on agricultural productivity,
this number doesn’t seem to be increasing.
4. It is very difficult to convert agricultural land into non-agricultural land in India, so people would
not be able to sell it off easily and move to urban cities.
5. People have communal feelings and do not believe strangers easily, they would stick themselves
to transactions within their hometown and do not explore things. This lead them at rural places
for ever.

In general, we can take migration rate as 2 to 3% each year.

TABLE 10: NUMBER OF MIGRANTS BY PLACE OF BIRTH – INDIA 2001

Category Migrations by Place of birth Percentage
A. Total Population 1,028,610,328
B. Total Migrations 307,149,736 29.9
B.1 Migrants within the state of enumeration 258,641,103 84.2
B.11 Migrants from within the districts 181,799,637 70.3
B.12 Migrants from other districts of the state 76,841,466 29.7
B.2 Migrants from other states in India 42,341,703 13.8
B.3 Migrants from other countries 6,166,930 2.0
Source : Table D1 India, Census of India 2001.