In India, much is written and discussed on the topic of home purchase, because homeownership is a topic close to the heart of most Indians. Also, buying a home invariably involves a very big part of an average Indian family’s existing and future finances. This is why when things go wrong in home purchase, the fallout can be quite severe. That particular path obviously needs to be plotted very carefully.
The rental homes market, on the other hand, gets much less mention even though it plays an equally important – if not more important – part in the scheme of things. This is because:
- The rental market does not involve very spectacular figures unless one is talking about ultra-luxury homes
- It is relatively easy to ‘exit’ a bad rental home or deal
- The money spent on renting a home is obviously not an investment which can yield returns.
This is why rental housing does not get discussed nearly as much as home ownership – but the fact is that a massive part of India’s population depends on rental homes to cater to its housing needs. Investors into residential housing may be in part attracted to the relatively steady income that putting a home out on rent can earn them. However, the fact remains that residential rental yields in India are not the stuff that financial legends are made of. It can be safely said that residential investors are primarily in it for the capital appreciation a well-chosen property purchase can yield over a few years, and that rental income can be the icing on the cake.
Rental housing in India comes in various formats. The following three models are the predominant ones:
- 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 rental homes can be empty, semi-furnished or fully furnished, attract families with different needs and generate regular income for the homeowners
- Paying guest accommodation: 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 essentially share the premises with the owner of the house. This is quite an attractive proposition for those with budget constraints looking for residential options. The downside would be the lack of independence – one is living with the homeowners, and there may be various limitations built in. Paying guest or PG housing tends to thrive in areas surrounded by educational hubs or business clusters
- 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.
The Evolution of Indian Rental Consumer
With rising incomes, increased exposure to global housing standards and features and frequent movement across cities for employment, the Indian rental housing consumer is becoming more demanding of the value his or her money buys in a rental home. There is greater demand for rental homes in projects with 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.
The rental housing market scenario in India throws up some interesting contrasts and similarities with other countries. A quick look at what is happening in two of the largest countries:
China Rental Market:
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% of the population now owns their homes. The rental housing 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 Rental Market:
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 Rental Market:
The UAE rental market 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.