Behind the surprising rebound in rental housing

In October 2020, Ganguly, 31, decided to move into a spacious two-bedroom apartment at Prestige Shantiniketan, a large gated community in east Bengaluru. Her rent went up by ₹2,000 but the deal was worth it—the eighth-floor apartment was well-lit and furnished; the community had landscaped gardens and walking paths.

Prestige Shantiniketan was 12 km away from her office but that didn’t really matter. Ganguly’s multi-national technology employer had promised work-from-home indefinitely.

Her landlord didn’t increase the rent for the whole of 2021. In fact, landlords across India’s largest cities doled out ‘covid discounts’ to retain tenants. As many reverse- migrated to their hometowns during the pandemic, a large number of apartments lay vacant at Prestige Shantiniketan—the township has 23 residential towers; more than 50% of its residents are on rent, many of them young women professionals.

But then, in the world of business and economy, things do change surprisingly fast. More so in the world of real estate, dominated by speculators and investors.

Early in 2022, it became clear that vaccinations and natural immunity were resulting in less severe cases. Schools reopened; offices called back employees; those who left for their hometowns returned; rents rebounded.

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“I was paying ₹12,000 rent, plus ₹2000 maintenance every month, and another ₹4,000 for a cook and a domestic help. In July, the rent was up for renewal—my share went upto ₹14,000 excluding maintenance," Ganguly said. She shared the apartment with another professional.

“The house helps also wanted a salary hike. I would have spent well and beyond what I had budgeted for," she added.

Ganguly moved out. She now lives in a smaller apartment complex on Outer Ring Road, where she shares a three-bedroom space with two other women—she pays 15% less than her outgo at Prestige Shantiniketan.

Several trends that emerged during and due to Covid are on the reverse now. People are once again looking to rent a property within the city, and close to their workplace. This has resulted in an inventory crunch in key micro-markets, particularly areas that surround a commercial hub. The demand-supply mismatch has led to rent inflation—upwards of 12% across major cities. In Bengaluru, rents have shot through the roof, appreciating nearly 17% for a two-bedroom apartment in the first half of 2022 compared to the year-ago period.

While this is challenging for tenants, it is great news for landlords and investors who were stuck with low yields for several years. In real estate, rental yields are the rate of returns on investment.

More demand, less supply

Mustafa Khan is a resident of Mumbai’s upscale Bandra west neighbourhood, dotted with the houses of popular Bollywood actors. He is also a landlord. Recently, he renewed the rental agreements for three of his apartments—at rents that are 25-30% higher. All the three flats are in buildings that are more than 50 years old. Yet, the demand remains robust.

“Nearly 40 buildings in the Bandra-Khar area are under redevelopment. So, the rental stock is very limited. The demand for one-bedroom apartments is huge. I leased out a 490 sq ft one-bedroom flat for ₹62,000 a month and the other two-bedroom flats (980-1,000 sq ft) for ₹80,000-85,000," Khan said.

Rents in newer buildings are, of course, far higher in Mumbai. In Shiv Asthan in Bandra west, a new property, rents for a two-bedroom apartment are ranging between ₹1 lakh and ₹1.5 lakh.

Let’s delve deeper into the data, which narrates this story of rebound. After seven long years, both sales and home prices seem to be on an upward curve. The rub-off impact has been on rental housing.

Rental housing demand—in terms of searches—grew 29.4% in the June quarter of 2022 compared to the March quarter. Searches grew 84.4% on a year-on-year basis, Magicbricks’ India Rental Housing Update stated. Magicbricks, a division of Times Internet Ltd, is an online real estate platform.

The search volumes in Bengaluru, Hyderabad and Pune—cities with a sizeable population of information technology workers—witnessed high sequential growth of 54.5%, 42%, and 39.6%, respectively. In sharp contrast, the cumulative rental housing supply or listings, increased merely by 3% sequentially and 28.1% over the year-ago period across 13 Indian cities the company mapped.

“With not much new supply coming in, and most properties occupied by end-users, there is a demand-supply mismatch. This can get a little more acute, going forward. This has also resulted in the spike in rental values," said Siddhart Goel, head-research and editorial, Magicbricks.

Apart from Bengaluru, where rents jumped 16.5%, Pune saw the second highest growth of 15.9% for a two-bedroom apartment—from ₹14,876 in the first half of last year to ₹17,240 this year. Hyderabad witnessed a 14.6% rise to ₹18,588, data from NoBroker, a zero-brokerage real estate platform, shows.

“Demand is the highest we have seen in many, many years and has caused 12-18% rental inflation in most cities compared to even six months ago. Typically, pre-covid, we saw rents increase by 3-5% in a year," Saurabh Garg, cofounder and chief business officer at NoBroker said.

Rents have shot up faster in locations and gated communities that are closer to offices, he added. In some gated communities near prominent office hubs, if a property is listed, one can rent out an apartment even in five hours—that’s how strong the demand is. “The owner would have three-four offers," Garg said.

“March onwards, the apartments slowly started getting occupied. The demand has further increased in the last two months. People are asking for two-three-four bedrooms to rent. But they are unable to find any vacant homes in our property," Anurag Sharma, a representative of the management committee of Prestige Shantiniketan Apartment Owners Welfare Association, said.

Moving forward, home rents will increase at a faster pace in prime pockets, and at a slower pace in non-prime locations. Cities such as Hyderabad, Pune, Bengaluru, and parts of NCR like Noida and Gurugram will see higher rental increase than Chennai or a Greater Noida, Magicbricks’ Goel said.

To rent or buy?

Given the demand, what are investors planning? There is no one answer.

According to property advisory Savills India, a large part of the high net-worth (HNI) population is increasingly showing a preference for renting rather than deploying significant capital for the acquisition of a self-use apartment. Delhi and Gurugram have seen a sharp rise in rental values, which are expected to rise further. In Golf Course Road, Gurugram, average rentals for a 2,500-3,000 sq ft apartment is trending at about ₹2 lakh.

“Capital values (of homes) are firing up, and rental values are higher than pre-covid times. Until 2012-13, when home prices were soaring, rents didn’t escalate much. But because of limited availability and high demand, rents have gone up substantially in many cities. With capital values going up, the next batch of homes that are ready will see rents going up further," said Shveta Jain, managing director, residential services, Savills India.

Rental yields, which had been hovering at 1.5-3%, have risen.

However, NoBroker’s Garg believes that there is a growing propensity to buy.

“Covid led to forced savings. We are seeing a lot of demand from tenants saying we want to explore buying a place. As per our survey, 72% of the tenants want to explore buying," he said.

“In many places, the rental yield is now at 4.5-5%. Then why not pay 7-7.5% as EMI and own the place?" Garg asks.

Return of co-living

When covid hit in March 2020, the sharing economy was written off—everything from shared mobility to co-living. Turns out, the sceptics were wrong.

Shared living startup Colive recently leased four studio rooms—180 sq ft each at ₹30,000 a month— at its building in Marathahalli, a bustling and congested suburb of Bengaluru. The neighbourhood circles some of the more prominent commercial office campuses. Pre-covid, it leased similar rooms at the same property for ₹26,000.

“We are leasing rooms—or beds as we call them—like airline tickets. It’s a question of demand and supply," said founder and CEO Suresh Rangarajan. “Right now, the demand is so high that supply will not catch up soon, particularly in sought after locations. But it’s important to note that while some micro-markets such as Koramangala, HSR Layout, Sarjapur Road and Marathahalli have waitlists, certain pockets are still vacant because large IT companies are still mostly working remotely and employees are yet to return," he added.

Colive, which has 28,000 beds across Bengaluru, Hyderabad, Chennai and Pune, witnessed rents crashing by at least 40-50% during covid, as people packed their bags and left for their hometowns.

Rents have now not just recovered but also surpassed pre-covid levels.

A double occupancy room went for ₹8,000 a month pre-covid. Rents dipped to a low of ₹5,000 in the past two years. Now, it is back up to ₹9,500-10,000 a month. Rents for a single occupancy room slipped to ₹10,000 during the covid years from ₹16,000 earlier. Now, they attract an eye-popping rental of ₹18,000-20,000.

Colive plans to add 120 properties in the next one year, with about 70-80% single occupancy rooms. Earlier this year, the company launched rentX, a marketplace model that connects owners and potential renters, for a fee. The platform has around 500,000 beds across 7,000 properties.

Zolo, another co-living platform, says the demand could shoot up further once all IT employees get back to office.

Banking, financial services and insurance (BFSI) companies were the first to call back employees to office. Data privacy and client facing firms followed. Manufacturing, infrastructure sector companies and startups soon joined the back-to-office bandwagon.

“There is a strong recovery in demand and rental values in the last six months. But we are now waiting for IT services companies to call employees back (to office). In the months to come, demand will be strong and rents may increase by another 5-7%," Nikhil Sikri, co-founder and CEO at Zolo, said.

While rents have shot up, expenses are up, too. Because of inflation, many services have become more expensive. Sikri said that the cost of garbage collection is up 30%; food costs have swelled. Excluding food, Zolo charges around ₹15,000-16,000 a month for a single occupancy room.

To address this demand, Zolo plans to double its co-living portfolio in next six-nine months, from 25,000 beds to 45,000-50,000 beds. Its student housing portfolio, which now has 20,000 beds, could expand to 40,000 beds.

Gurugram-based co-living company Housr recently acquired Bengaluru-based Staybode to enter the southern city. It plans to add 10,000 beds by March 2023—in Gurugram, Bengaluru, Hyderabad and Pune, among other cities, to address the rising demand for managed rental homes.

“The maximum demand comeback has been in Gurugram, followed by Pune, Hyderabad and Bengaluru. In the last six months, if we got a property operational and launched, it took less than 30 days to get 90% occupancy. Rents have escalated 15-20% above pre-covid levels, but the supply has to be near the demand hubs," said Deepak Anand, co-founder and CEO, Housr.

A single occupancy room in a Housr property, in Gurugram’s Golf Course Road, today attracts a rent of ₹35,000-50,000 a month. “The outlook for co-living is better than even 2019," Anand stressed.

Those are reassuring words—for home owners, land owners, and developers.

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