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Economy Dec 8, 2012

The growing pains of India’s rental market

By Arlene Chang

New Delhi: India's residential rental market is in a strange flux. While an emerging economy, an increasingly globalised workforce and a permeating private multinational work culture has given a fillip to the growth of India's rental residential space over the past few years, it may never be as mature a market or as viable a business as it is for Western counterparts.

Typically, in the west, buyers make money off a rental property in down markets, when they buy it for a throwaway price, but rent it at costs that more than cover their mortgage. Interest rates and demand play an equal part here.

"In India there's a cultural as well as economic aspect to this. Most people here live in one house and one place for 20-30 years - where owning a home is also a big deal. So mobility is mostly limited. Compare this to the West, where people stay in a place for an average of 4-5 years- thus generating a very steady and robust demand for rental residential spaces," Ashutosh Limaye, head of research and real estate intelligence services at Jones Lang LaSalle told Firstpost.

RENTAL PROPERTY DEVELOPMENT: NOT GOOD BUSINESS SENSE

"Businesses have to earn profits for them to participate and invest in a venture and because return on rents is just a sliver of what the house would cost them, developers and businesses shy away from digging into their pockets for it," he said.

India's rental residential market is a 100 percent unorganised and there is no institute or developer who is constructing a project with the sole purpose of renting out homes in it. AP

It is due to this, that India's residential rental market is completely unorganised -- which means it is run completely by individual homeowners and not builders or real estate companies, for whom building a project for the exclusive use of rental is unviable.

By Limaye's estimates the rental residential market is a 100 percent unorganised and there is no institute or developer who is constructing a project with the sole purpose of renting out homes in it. With rental yields in the residential space being just 3 to 3.5 percent per annum, developers do not find it an attractive business proposition.

"The cost of building a house is so much higher than the return on letting out a house, that it doesn't make sense for them. One may ask, 'How does the rental residential market in the West survive?' The answer is that while rental yields are similar to that in India, interest rates in the West for developers are much lesser -- so it's more feasible for them," he said.

20% HOUSEHOLDS IN MUMBAI, DELHI LIVE ON RENT

While it is difficult to pinpoint an exact estimate of the numbers in the rental residential space, due to a lack of research, Limaye's experience indicates that every two of 10 households in big cities like Mumbai and Delhi NCR either live in rented homes or require rental housing. This estimate he said is linked to his experience and work on the residential sector in these regions, where 30 percent of residential properties sold by developers are purchased by investors. By his assessment, while every investor may not rent out his house immediately, two of three do so.

Leave and license (L&L) documents make up 32 percent of papers registered at the Department of Registration and Stamps' Mumbai office. According to a Times of India report, Mumbai's IG of registration and controller of stamps saw 69,000 L&L documents being registered in 2011-12, accounting for over 32 percent of the papers (69,000 out of 2,10,000) that were registered in that year.

"Additional residential properties are purchased by individuals or investors solely for their capital value appreciation - and being able to rent it out and start recovering some amount that can pay towards the EMI is surely helpful. But from a business point, one cannot make money in rental housing. With just about 3.5 percent yield, one would rather put that money into a fixed deposit in a bank and make double or more of that money. Even just having that money in one's savings bank account will yield more," Limaye said.

GROWTH OF THE RENTAL HOME MARKET

But despite the nature of the residential rental space, the trend to live in rented homes is expected to see a rise. Tier 1 cities like Mumbai, Delhi, Bangalore and Chennai, with a population of 20 lakh people or more, will continue to increase its share of rental houses in the market, but even other cities like Hyderabad, Pune, Kolkata and smaller towns will see a rise in the trend. Reason being, a more spread out urban growth, better facilities across cities and towns, improved employment prospects and better education infrastructure in small cities too.

"If you look at the urbanisation pattern of India, the rate of urbanisation is larger for big cities and they will continue to attract more migrants. But, smaller cities will also buck the trend, even as they build on good centers of higher education and more employability. This will not only keep the local youth from going to big cities to study or work, it can boost inward migration -- creating a demand for homes for rent," Limaye said.

With improved education and a rise in mobility, more people are moving to places where there are opportunities for work and study. Many who move are younger and more likely to be in their 20s and 30s, when they still have the liberty to experiment with work and where they would like to live, without the concern of uprooting their entire family.

A major reason for the growth of the rental residential market, according to Limaye, is that employment opportunities are penetrating more widely and into towns and cities more spread out across the country, as opposed to just a few key traditional working cities.

The other reason for this ascent in rental housing, especially in major cities like Mumbai and Delhi, are the prohibitive prices of buying a house in these cities. When a housing market has lost its affordability, the natural tendency is for people to steer towards rental housing, till the time they can afford to buy their own house.

"Everybody wants to live close to their workplace and within their budget, but when home prices are skyrocketing, such people have no option but to look to the rental market," Limaye said, adding, "I don't expect any price correction in residential properties in the near future and it is natural that when the residential market goes beyond the affordability of an end user, they have to look at rented homes till the time they better their lot and can afford the cost of buying one of their own."

While the end user living on rent keeps looking for that elusive silver lining and hopes property prices will fall, investors and individuals who do have that second or third house, will continue to see the sun shine for a while longer.

by Arlene Chang

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