Driven by quick urbanization, migration to urban communities and the increasing expense of home-ownership, rental lodging in India is probably going to see a blast in the following two years, as indicated by a report by Savills India.
As per the 2011 census, urban families on rent held at over 21 million, which is about 20% of the total number of houses in urban India. Approximately 80% of the rental housing market in the nation is concentrated in metropolitan cities.
While India’s metropolitan population share has increased more than threefold in above a century at about 10% in the 1900s to the current levels of more than 34%, annual inter-state migration is expected to be increasing at around 9-10 million yearly. Meanwhile, the cost of house ownership across India presents a CAGR of approximately 5% in the past few years, according to the report.
The events and policy initiatives across the last few years that include the demonstration of RERA, PMAY, Model Tenancy Law, and others have set the foundation for the development of rental housing. The lost piece of the puzzle was concerning making it viable and sustainable for the construction and sharing process. This is because the profits from residential real estate have continued very low.
It fails to bring capital, or, long-term operations-interest. This missing-part got a notable boost through the Central government’s declaration of the creation of rental housing for poor urban migrants during the pandemic coronavirus caused the lockdown.
Amid the lockdown, the migrant workers, and economically-weaker sections generally highlighted the situation, specially because impermanent housing and the attendant economic distress forced them into reverse-migration. This section of society has, for long, been the most significant potential demand-segment for such a house.
However, high land costs in towns (coupled with overall project costs) have historically provided any solution inefficient, as rent-paying capacities of the subject demand section did not give any resilience to project cashflows. Moreover, lack of proper operational mechanisms for long-term, made it difficult to discuss this matter in the past.
The Affordable Rental Housing Complexes (ARHCs), Operational Guidelines July 2020 released by the Ministry of Housing and Urban Affairs, has presently planned a roadmap. “This is a conspicuous effort in this drift. We may say that this could show to be a possible watershed improvement in the direction of filing housing distress of urban poor,” states the report.
Operational Guidelines for ARHCs have set down two models – while the first model (M-1) visualizes the operation of vacant government-funded houses as ARHCs by a concessionaire for 25 years, the second model (M-2) gives for public & private entities to build ARHCs on their own idle lands.
ARHCs can, arguably, be called the most prominent of all the policy measures since 2005, since it can improve liveability in the most current time as compared to other actions which demand longer implementation-timeframes. If executed via one of the two models, the rental housing availability can start in less than two years.
As per the report, the guidelines have set a clear roadmap for investors seeming at durable long-term returns. ARHCs can meet the risk-return profiles of offshore wealth, insurance and sovereign funds, and give them a strong foothold in the huge domestic market of the nation. ARHCs also open the possibility of having a residential REIT in the nation.
“Rental housing is another market that is yet to be touched, especially in the urban areas that have noticed prices of homes go beyond the cusp of most of the town residents. The newly issued operational guidelines on Affordable Rental Housing Complexes (ARHC) are a long-awaited enormous leap in the right direction,” says Anurag Mathur, Chief Executive Officer, Savills India.
Rental housing in India is in its origin. However, there is enormous upside potential for the market associates to explore. Much like REITs, India can take a coat out of the tremendous learning experience across the world.
Singapore, UK, Germany, Hongkong, etc., have significantly developed rental housing markets. In the planned course, the Indian market should examine some of the concepts in these countries, such as
- 99-year contract model
- More inclusive private and community ownership of assets
- Negative Gearing, an opinion used in Australia
- Utilization of central sponsored savings schemes to finance buying or leasing of rental houses, among others.
Interestingly, superior living and co-living sections have also commoditized the monthly rentals procured from households. Only, their target sections are different, since they focus on the aged population and the millennial age bracket, preferably of the low-income group focus on affordable rental housing schemes.
These classes of rental houses are complementary, and can well be stepping-stones for investors to obtain higher returns and diversification of the domestic portfolio.