Rental Housing: Top factors holding back growth of rental market in India

Published: March 15, 2018 3:37:42 PM

Rental housing can meet the exponential demand for housing in India if adequate steps are taken to address the problem.

Rental Housing in India, rental housing act, rental housing policy, rental market in india, affordable housing, PMAY Several reforms are needed to bring in a comprehensive structure in the rental housing market.

The Economic Survey 2016-17 highlighted that migration had doubled from 5.5-6 million a year in the 2001-11 period to almost 9 million a year in the 2011-16 period. Over 90 cities in India recorded annual population growth of 3 per cent or more despite figures indicating the highest migration numbers to Delhi. In contrast, the urban housing shortage back in 2012 was 19 million homes with a majority of such homes required by the lower income groups.

In urbanising countries, rental housing makes for a significant component of housing which allows for greater mobility of labour. For the lower income households that are often part of the informal sector, rental housing provides a better way to live given their risk profile and volatile incomes. Home ownership in such cases becomes difficult as it restricts their mobility in a situation where they can’t remain unemployed for long. Home is also an illiquid asset that is subject to market conditions and requires fixed monthly payment of dues. Therefore, such lower income groups look for access to rental housing rather than ownership of a house.

However little the data available on migration-rental hypothesis, available numbers suggest states like Andhra Pradesh, Gujarat and Maharashtra have a considerably high percentage of rental housing. As per industry reports, small, medium and large cities had 28 per cent, 36 per cent and 40 per cent of rental housing respectively across classes. Parts witnessing large-scale construction and wards with industrial corridors have the highest share of rental housing in a city like Bengaluru, where 60 per cent of households are on rent.

With a majority of rental housing in the informal sector, the National Sample Survey 2012 reported that 71 per cent of such rental households lived in houses with no contracts provided in writing. It was due to the nature of accommodation, which was, slums. The figures representing the share of rental vary because of the nature of accommodation. While Census showed that rental share decreased from 54 per cent in 1961 to 28 per cent in 2011, National Sample Survey showed an increase from 34 to 35 per cent during 1991-2011.

The irony of it all is that 11 million units lie unused and vacant. Though not all of these houses put together can match the demand, it can help at least release some of the pressure on housing.

Let’s understand the factors holding back the growth of the rental market in India:

# Landlords in India have been disincentivised from renting their houses owing to several state-enacted Rent Control Acts (RCAs). The RCAs which favoured the tenants made it difficult for landlords to evict defaulting tenants and also froze the rents. This led to properties getting vacant and deteriorated owing to lack of maintenance. Almost half of rental units in Mumbai, for instance, are either beyond repair or condemned as a result of direct rental control. In fact, rental control has severely impacted the market sentiments.

# A fast-track court to settle eviction disputes which would take less time to be settled coupled with repealing the RCAs would enable more confidence in the rental housing market.

# What is also taking away the confidence of landlords to rent is low-rental yields. Experts say that rental yields in India amounting to just 2-4 per cent is one of the lowest in the world. In several cases, landlords end up paying up more for maintenance and taxes than the rental earnings.

# Unlike most other countries, India does not have Rental Management Companies (RMCs) which can help landlords manage their rental properties in a hassle-free way. Such housing associations and RMCs in Europe have shown tremendous success owing to their ability to generate superior rental income, easy eviction procedures without injustice to the tenant and seamless maintenance.

# Countries like Japan and South Korea have structured their housing markets with comprehensive policies and actions to provide subsidized rental housing to low income groups. Thanks to the evolution of Pradhan Mantri Awas Yojana (PMAY), meant to fillip home ownership in India, there is a room to evolve rental housing policies for people who still cannot afford buying a house under PMAY.

Several reforms are needed to bring in a comprehensive structure in the rental housing market. The newly-implemented Real Estate Regulatory Act (RERA) steers clear of rental housing. Amendments in RCAs can help, but the supply market also needs to be controlled as it would increase the rent and the subsequent burden on tenants. Additionally, with structural benefits in investing in rental housing, it is much more beneficial to buying than those looking for premises for rent.

Today, more than 377 million residents live in over 7,900 urban centers. Every year, the migration figures only seem to grow with people looking for opportunities in fast-growing cities and metropolitan areas. Rental housing can meet the exponential demand for housing if adequate steps are taken to address the problem.

(By Honey Katiyal, Founder & CEO, Investors Clinic, a real estate consulting firm)

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