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The Indian rental market has been mostly overlooked, despite the segment comprising a sizable portion of the Indian housing industry. It is estimated that in Indian metros, close to 30-35 million migrant households reside in rental accommodation. Despite the soaring demand for owning homes, the rental market continues to grow at a steady pace backed by growth in migration, organizations implementing the back-to-office initiative, the rising trend of nuclear families, and many youngsters preferring to live close to offices. The demand is also being pushed by the growth in expats and many business tourists opting for long stays.
Diverse Nature Of Rental Market in India
In major Indian metros and other cities, around 28-40% of the housing demand emanates from the rental market. In some cities, the rental market contributes to 50% of the demand, underscoring its critical role. Given that the size of Indian housing is worth around USD 250-300 billion, it can be safely assumed that the rental market amounts to USD 100- 120 billion.
Meanwhile, the market is far from homogenous and quite diverse. At the highest echelon of the market are expats, high-income earning corporate, digital nomads, creative professionals, medical tourists, and business travellers looking for sophisticated services, mostly at par with international cities. Followed by this is the middle level, which mostly comprises salaried professionals employed in IT, ITeS, manufacturing sectors. There is also a vast lower stratum with an appetite for affordable housing solutions. This includes the migrant workforce mostly employed in the informal economy, blue collar salaried workers, small-time traders and business people, etc.
Also Read: All you need to know about Home Loan Foreclosure
Focused Policies to Boost the Segment
The built-to-operate or built-to-lease market is relatively small in India. However, it is vast in the USA, UK, and the Middle East. India, too, has tremendous potential in the segment.
However, to boost the sector in India, there is a pressing need for government agencies and local urban bodies to take proactive steps and offer enabling policy impetus. Despite inherent benefits and soaring demand, the dearth of favourable policies has deferred investors from actively participating in the Indian rental markets. It is imperative to create an institutional framework to enable the participation of developers, investors, and operators in a coherent manner. The urban local bodies and slum rehabilitation committees should work with developers and investors to develop new models of rental housing, with quick turnaround potential.
To enable this, there has to be clearly defined regulatory support such as lowered tax rates, rationalized GST rates, and reduced license fees & registration charges for developers who are participating in the rental market. The government should also create a separate pool of funds to support the rental market segment in India.
Other disruptive policy changes should also be considered. 100% FDI has been allowed under construction activities, townships, infrastructure, etc. However, real estate operations & management have been kept out of the purview of the FDI. To vitalize the rental market category, it is important to unlock new sources of capital, and allowing FDI can be one of them.
A Solution to Stressed Asset Management
A positive thrust to the rental market can be instrumental in managing the growing bottleneck of stressed assets in India. As per the industry estimates, there are close to 650,000- 700,000 stuck assets in India in major cities. Out of this, around 130,000- 150,000 units comprise RTM units, while the rest are under construction. Lack of funding, difficulty in access to capital, limited options for last-mile funding alongside poor marketability of the projects, and an upbeat secondary market have further made the scenario more challenging.
To manage the growing bottleneck, industry players and financial houses have introduced stressed asset funds to offer last-mile funding. The government has also launched an INR 25,000 crores fund to offer financial stimulus to developers pressurized by high unsold and stuck inventory overhang. Though creating dedicated funds for stressed assets is a prudent step, looking at the volume of challenges, this won’t be sufficient.
An important and prudent initiative to reverse the challenge will be alternatively developing the rental market. The units which are finished in a stuck project can be rented out, preferably at subsidized rates. This will result in quick absorption and drastically improve the liveability and marketability of the project. This will also help the developers to strengthen their cash flow. The management could be in hands of a PPP structure made up of developers and local urban management bodies to enforce transparency.
The rental strategy can be instrumental in managing the stressed asset menace in India. At a later stage, a rent-to-own model can even be introduced, under which the tenant might get ownership after a fixed period of stay at a predefined value. This will further boost the marketability of the project and optimize future cash flow.
(By Ankit Kansal, Founder & MD, Axon Developers)
Disclaimer: This is the author’s personal opinion.
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