Rental housing in India may boom in next two years: Report

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Updated: Aug 19, 2020 7:21 PM

Driven by rapid urbanization, migration to cities and the rising cost of home ownership, rental housing in India is likely to see a boom in the next two years.

Rental housing, Rental housing in India, Savills India report, RERA, PMAY, Model Tenancy Law, Affordable Rental Housing Complexes, ARHCs, Operational GuidelinesRental housing in India is in its infancy. However, there is a tremendous upside potential for the market participants to explore.

Driven by rapid urbanization, migration to cities and the rising cost of home ownership, rental housing in India is likely to see a boom in the next two years, according to a report by Savills India.

As per the 2011 census, urban households on rent stood at over 21 million, which is around 20% of the total number of houses in urban India. Almost 80% of the rental housing market in the country is concentrated in urban centres.

While India’s urban population share has grown more than threefold in over a century at around 10% in the 1900s to the current levels of more than 34%, annual inter-state migration is estimated to be growing at around 9-10 million annually. Meanwhile, the cost of house ownership across India has shown a CAGR of around 5% in the past few years, as per the report.

The events and policy initiatives over the last few years – including the establishment of RERA, PMAY, Model Tenancy Law, and others – have laid the foundation for development of rental housing. The missing piece of the puzzle was about making it viable and sustainable for the development and distribution process. This is because the returns from residential real estate have remained very low. It fails to attract capital, or, long-term operations-interest. This missing-part received a significant boost through the Central government’s announcement of creation of rental housing for poor urban migrants during the COVID-19 induced lockdown.

During lockdown, the migrant workers and economically-weaker sections frequently symbolised the plight, mainly because impermanent housing and the attendant economic woes forced them into reverse-migration. This class of society has, for long, been the biggest latent demand-segment for such housing. However, high land costs in cities (coupled with overall project costs) have historically rendered any solution ineffective, as rent-paying capacities of

the subject demand segment did not provide any buoyancy to project cashflows. Moreover, lack of suitable operational mechanisms for long-term, made it impossible to address this issue in the past.

The Affordable Rental Housing Complexes (ARHCs), Operational Guidelines July 2020 released by Ministry of Housing and Urban Affairs, has now laid a roadmap. “This is a remarkable attempt in this direction. We may say that this could prove to be a possible watershed development in the direction of sorting housing woes of urban poor,” states the report.

Operational Guidelines for ARHCs have laid down two models – while the first model (M-1) envisages the operation of vacant government funded houses as ARHCs by a concessionaire for 25 years, the second model (M-2) provides for public & private entities to create ARHCs on their own vacant lands.

ARHCs can, arguably, be called the most important of all the policy measures since 2005, since it can enhance liveability in the quickest time – compared to other measures which require longer implementation-timeframes. If implemented via one of the two models, the rental housing availability can begin in less than 2 years.

As per the report, the guidelines have laid a clear roadmap for investors looking at stable long-term returns. ARHCs can match the risk-return profiles of offshore wealth, insurance and sovereign funds, and give them a strong foothold in the large residential market of the country. ARHCs also open the prospects of having a residential REIT in the country.

“Rental housing is another market that is yet to be tapped, especially in the urban areas which have seen prices of homes go beyond the cusp of most of the city dwellers. The recently released operational guidelines on Affordable Rental Housing Complexes (ARHC) are a long-awaited giant leap in the right direction,” says Anurag Mathur, Chief Executive Officer, Savills India.

Rental housing in India, in fact, is in its infancy. However, there is a tremendous upside potential for the market participants to explore. Much like REITs, India can take a leaf out of the immense learning experience worldwide.

Singapore, Hongkong, Germany, UK, etc., have significantly mature rental housing markets. In due course, the Indian market should explore some of the concepts in play in these countries, such as

  • 99-year lease models
  •  Greater private and community ownership of assets
  •  Negative Gearing, a concept in use in Australia
  •  Utilisation of centrally sponsored savings schemes to fund buying or leasing of rental houses, among others.

Interestingly, senior living and co-living segments have also commoditised the monthly rentals derived from households. Only, their target segments are obviously different, since they focus on elderly population and the millennial age bracket, instead of the low-income group focus of affordable rental housing schemes.

These classes of rental houses are clearly complimentary in nature, and can well be stepping-stones for investors to achieve higher returns and diversification of residential portfolio.

 

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