While the commercial sector in India enjoys annual rental yields in the range of 6-8%, yields in the residential sector are far more anaemic in a 2-3% range. Rental yield is defined as annual rent as a ratio of the property price after deducting all expenses.
Unlike commercial real estate, which has attracted foreign capital and has led to development of the REITs (real estate investment trusts) market in India, the rental market in the residential sector continues to languish for lack of formalisation, keeping investors at bay.
Rental yields in the residential asset class are at much lower levels compared to commercial projects. While the commercial sector in India enjoys annual rental yields in the range of 6-8%, yields in the residential sector are far more anaemic in a 2-3% range. Rental yield is defined as annual rent as a ratio of the property price after deducting all expenses.
If policies and framework are developed for encouraging the rental residential market, yields could become attractive and the potential to attract foreign capital will be large. According to the last estimates by the IMF, India’s residential rental market was worth over $20 billion, of which 68%, or $13.5 billion, is in urban areas. However, the largely unorganised and informal nature of the rental housing market has made it tough to arrive at the actual market size despite holding a massive potential to address a part of the housing shortage in India, according to findings by Knight Frank India.
Support for rental housing also assumes significance at a time when large stocks of residential units remains unsold. Some estimates put the unsold stock at as high as 10 lakh units. Apart from high prices of houses, factors such as low rental yield, poor maintenance of vacant stock, concerns of forceful possession are some of the reasons that keep people away from buying houses and putting them on rent.
Niranjan Hiranandani, founder, Hiranandani Group, believes that mobile workforce to different job centres, in search of exploring multiple opportunities, will encourage emerging platforms like co-living and student housing. “Therefore there is a need to provide additional housing to create ready services apartments as a new business model,” he said.
Archaic rent control acts, no rental housing industry body, absence of a regulatory backbone to formalise rental housing and legacy disputes surrounding landlord and tenant equation, are some of the reasons affecting rental housing in India. However, with the changing mindset of people, who increasingly prefer to live in rented accommodations rather than own a house, industry experts say the time is ripe for the rental residential market takes off in India. With a proper rental housing policy, some of the issues plaguing residential sales could also be addressed.