As per the Ministry of Housing & Urban Poverty Alleviation, India suffers from housing shortage of about 18.78 million units, spread over economically weaker section (EWS), lower income group (LIG) and middle income group (MIG) categories.
This chasm in housing demand and supply is mainly due to inappropriate positioning of the supply.
Most of the planned supply is targeting the high income group (HIG) though the maximum shortage, i.e. about 95 per cent of the shortage is due to demand from households belonging to the EWS and LIG categories. Thus, high interest rates, spiralling capital values and non-availability of appropriate property have forced most end-users to postpone their buying decisions and are looking for suitable rental options instead.
Thus far, the demand for rental homes has been met primarily by individual landlords and local brokers/estate agents. Market research suggests that there is a huge stock of unoccupied and unsold residential stock that exists within major cities such as Mumbai, Delhi, Bangalore, Chennai, etc, which also face the paradox of having a huge number of homeless or overcrowded households.
Whilst the inventory of unsold stock is the result of poor demand-supply mix by developers, the unoccupied stock is the result of ill-informed and misguided attempts by the Government to control the rental housing markets through legislations, such as various Rent Control Acts passed by various State Governments. These sought to control the private sector rents artificially and also provide protection to tenants vis-a-vis the landlords. As a result, many landlords and investors were discouraged from investing in the rental markets over a period of time as they wanted to protect their investments.
Those investors who did buy additional properties preferred to keep them locked-up and capitalise on appreciation in capital values, rather than lose their property’s ownership rights under such Acts. This has resulted in a highly unorganised residential rental market in India.
Even though the government has now eased the process of leasing and brought in some checks and balances that also favour landlords, for the private sector, investing in rental housing in India to earn rental income is still not such an attractive proposition.
Residential rental yields being abysmally low at 2-4 per cent in even the top Indian cities, the investments in this sector have seen minimal growth. Though the capital values have risen steeply in many places, the rental values have witnessed only marginal appreciations. Since the residential rental yields are much lower than even the fixed deposit rates offered by all banks private sector investments are not being attracted towards this asset class.
In mature residential markets around the world, there are Real Estate Investment Trusts, Real Estate Mutual Funds, and public and private property management firms that generate income out of housing rentals, generate income for their investors while also adding rental supply. This model has not yet found a foothold in India.
The Ministry of Housing & Urban Poverty Alleviation has now realised the need for promotion of rental housing. The ministry is setting up a panel to suggest policy measures to make rental housing more lucrative.
Ensuring that existing restrictive laws and controls are addressed, would lead a healthy infusion of investments, contributing towards making the Indian rental real estate market more organised and structured.
—SHVETA JAINis Executive Director – Residential Services,
Cushman & Wakefield India