Rental market lacks focus

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Thus far, the demand for rental homes has been met primarily by individual landlords and local brokers/estate agents. (THINKSTOCK) Thus far, the demand for rental homes has been met primarily by individual landlords and local brokers/estate agents. (THINKSTOCK)
SummaryDemand for rental houses in tier I and tier II cities has been growing steadily over the years.

Demand for rental houses in tier I and tier II cities has been growing steadily over the years due a variety of reasons; chiefly, increasing labour mobility, increasing capital values that are making houses unaffordable and high interest rates on mortgages, which are making it further difficult for end-users to service the mortgage of their own homes.

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.

UNORGANISED SUPPLY

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.

LOW RETURNS

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

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