Very low returns make rental housing a wishful thinking: Ind

Even as the government is taking initiatives to streamline the real estate sector with the latest addition of the Model Tenancy law, the vision of creating adequate housing stock for this segment is far from reality, say experts. Finance minister Nirmala Sitharaman had announced a Model Tenancy law in the budget to promote rental housing.

Since then, the Union housing and urban affairs ministry has put the draft Model Tenancy Bill, 2019' in the public domain for consultation and feedback. "There is a massive demand for rental housing as we have a huge migratory population who need affordable rented homes. But the main problem is who will make these houses, given the very low returns?" ATS Infrastructure chairman and former Credai chairman Getamber Anand told PTI.

From the returns for developers perspective, Ozone group chief executive Srinivasan Gopalan says, "from a developer's point of view, renting a residential unit does not make sense as the yield is only 2-3 percent, whereas his borrowing cost is 11-13 percent. So, selling the units makes better business sense for him." Gopalan further says even from an investment perspective it does not make sense, because an investor will be paying 8-9 percent interest on the loan and will be getting a paltry 2-3 percent returns on renting it out. Therefore, this market does not exist. In 2008, the Mumbai Metropolitan Region Development Authority began a rental housing scheme but did not get any traction forcing it to replace the scheme with an affordable housing scheme in 2014. To make the scheme attractive, it doubled the area offered under the scheme to 320 sqft.

Nearly 9,000 units were constructed and handed over to urban local bodies of Thane and Kalyan and also to Mhada, as there was no response for the rental scheme. A recent Knight Frank reprot said rental yields in most cities continue to be very low, with the maximum being about 5 percent and the lowest around 1.5 percent.

"Such low yields are insufficient to cover the risk of renting out a property. Home developers do not build units across the price range, but focus mainly on the upper price brackets," the report said. Another important aspect of rental housing, especially from a user's perspective, is that the average cost of renting works out to almost 20 percent higher for a tenant as the cost of relocation, brokerage, and the deposit amount which is interest-free are significant.

"Though the income tax law allows 40 percent of the rental income to be deducted from basic income, the urban poor with informal income pay as high 30 percent of their income towards rentals," the report said. Nardeco president Niranjan Hiranandani say in a rich country like the US, 50 percent of the people live in rental housing but not in a poor country like ours.

"We expect even the poorest of the poor to own a house here. So what is needed to create systems by which people, institutions, companies, charitable trusts, everyone should construct houses for renting out," he said. Hiranandani further says concepts like co-living and student living in affordable rental housing space are taking shape, which should be encouraged.

Already over 40 co-living start-ups have come up in the past few years and the segment has been attracting significant interest from venture capitalists..