The rental housing approach for India

The potential of rental housing to meet the housing conundrum of a rapidly urbanizing India should not be ignored

Anecdotal evidence suggests that the majority of rental housing is accommodated in the informal sector. Photo: Aniruddha Chowdhury/Mint
Anecdotal evidence suggests that the majority of rental housing is accommodated in the informal sector. Photo: Aniruddha Chowdhury/Mint

The Economic Survey 2016-17 describes an India on the move. Migration has almost doubled, to an annual flow of nine million a year for 2011-16, from 5.5-6 million a year between 2001-11. Though the survey shows the highest migration to Delhi, there were well over 90 cities in India with annual population growth rates of 3% or more. Against this, in 2012, the urban housing shortage in India was estimated to be almost 19 million homes, with the vast majority required for lower-income households.

Rental housing is a critical component of the housing response in urbanizing countries. Across the income spectrum, rental housing allows greater labour mobility. For low-income households that often work in the informal sector, rental housing better suits their income volatility and risk profile. Home ownership requires fixed monthly payments, for an illiquid asset that is subject to market risk and constrains mobility for those who can least afford to be unemployed. It is access to housing, not ownership, that is of primary importance.

The limited data available for India reinforces the migration-rental hypothesis. Union territories and more urbanized states e.g. Gujarat, Maharashtra and Andhra Pradesh have a higher percentage of rental housing. Across size classes, small, medium and large cities had 28%, 36% and 40% of rental housing, respectively. This pattern plays out within cities too. In Bengaluru, where 60% of households rent, the highest share of rental housing is in wards dominated by industrial corridors and those with large-scale construction.

Anecdotal evidence suggests that the majority of rental housing is accommodated in the informal sector; National Sample Survey 2012 reports that 71% of households living in rental accommodation did so with no written contract. Part of this is due to the underlying informality of the accommodation itself i.e. slums. As a result, top line numbers on the share of rental vary. Census shows rental share declined from 54% in 1961 to 28% in 2011 while the sample survey shows a marginal increase from 34% to 35% between 1991 and 2011.

An enduring paradox in the Indian context is that 11 million units lie vacant and unused. While not all of this housing may be matched to demand, a better use of existing housing stock would certainly alleviate some of the housing pressure. Our forthcoming report looks at some of the key elements holding back the development of a vibrant rental market.

One, the legacy of several state-enacted Rent Control Acts (RCAs) casts a long shadow that has disincentivized landlords from renting out their houses. The pro-tenant RCA froze rents and made eviction difficult. Over time, landlords found it unviable to maintain properties and allowed them to deteriorate. As a direct result of rental control, almost half of all rental units in Mumbai are now either condemned or beyond repair. The lasting repercussions of rent control have damaged market sentiments significantly.

Repealing RCAs coupled with a fast-track court mechanism to handle eviction disputes can potentially reinvigorate market confidence in rental housing. A long litigation time period for eviction acts as a major disincentive for individuals who want to let out their premises.

Second, low rental yields offer little incentive to undertake the risk of renting apartments. Our analysis shows that rental yields of 2-4% in India is one of the lowest in the world. These are lower than the prevailing risk-free market investments like the 10-year yield on government bonds. To bring the vast available stock of vacant housing into the rental market, there is considerable space for the emergence of rental management companies (RMCs) that can professionally manage and rent out properties on behalf of the owners. This will be possible if policy measures create an enabling environment.

The success of RMCs and housing associations in Europe was partly because rental income was sufficient to offer returns to investors, which are often pension funds with long-term horizons and fixed income requirements. Yields notwithstanding, housing associations in Europe are confident of their ability to increase rent or evict tenants in case of non-payment. This flexibility as well as price is absent in the Indian rental market.

Actors closely resembling RMCs in India are hostel providers. In Hyderabad, with its booming IT sector, over 6,500 rental operators offer dormitory and hostel housing to students, young professionals and blue-collar workers at rates upwards of Rs2,500 a month. Yet, only a few providers operate formally due to higher costs, which include commercial rates for water and electricity along with a trade licence fee.

Addressing the rental housing market in a comprehensive manner will require multiple reforms. Repeal of rent control creates confidence in the sector, but as global evidence has shown, decontrol in a supply constrained market can raise rents. Moreover, there are structural incentives to invest in housing, with large benefits to purchasers and not renters.

Today, 377 million urban residents live in over 7,900 urban settlements; every year, millions move to towns and cities, or dense linear settlements along national and state highways. It is imperative that as the country urbanizes further, viable solutions to the housing conundrum are addressed. The potential of rental housing to meet these challenges should not be ignored.

Pritika Hingorani, Rohan Shridhar and Meenaz Munshi are, respectively, deputy director, associate and senior associate at the IDFC Institute.

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