Covid-19 could lead to increased demand for rental units

According to a report titled ‘Brick By Brick—Development of Renting Housing in India’ released by RICS (Royal Institution of Chartered Surveyors) in association with Knight Frank—which analyzed the rental market in India—although there are many vacant homes available across the major cities, they are not listed as rental units, despite the demand.

According to the report, Mumbai has the highest number of vacant homes in the country at five lakh, followed by Delhi and Bengaluru with three lakh units each. Pune (two lakh), Ahmedabad (two lakh), Jaipur (1.2 lakh) and Hyderabad (one lakh), among others, also feature on the list. But why the gap?

WHO’S RENTING?

What the report terms as “floating population" in a city, which includes students, households with transferable jobs and people in the early stages of their career who haven’t decided where they want to settle, make up the main body of tenants in urban centers. The report states that in a socio-economic environment where people are not assured of their future employment prospects, there is limited willingness to purchase a property, and therefore, the demand for rental units may go up.

“The pandemic has created a lot of questions marks about the economy and jobs. Real estate is a sentiment-driven market, so low sentiment means a lot of people will put their home-buying decisions on hold, so there will be a further increase in the demand for rental housing. On the supply side, strained income might mean that more homeowners will list their homes as rentals as an additional source of income, even at a low rental yield," said Saurabh Mehrotra, national director, valuation and Advisory, Knight Frank India.

WHY OWNERS DON’T RENT

The pandemic might result in some fresh listings. But why are so many owners unwilling to rent out their vacant homes despite a healthy demand? According to the report, rental yields in most of the cities continue to be very low, going up to a maximum of around 5%, which is seen by property owners to be insufficient to cover the risk of renting the property. The risk of renting also extends to possible litigation due to disputes with the tenant, which can be long-drawn-out and very expensive.

Other issues include the cost of transactions, including brokerage, which is high in urban areas. Renting homes is treated as a commercial activity, which increases property tax for landlords and further reduces their net realization. Another problem is the absence of an organized marketplace to rent properties.

THE WAY FORWARD

According to Mehrotra, the biggest hurdle for the rental market in India is the fractures and disorganized nature of it, which allows for mismanagement. “The way to ease transactions would be to organize and corporatize the market. If rental management companies and online platforms come in and regulate the market, it will make things transparent and the hassles for both landlords and tenants by eliminating the intermediaries. It will also reduce the risk perception for landlords, as rental management companies can provide insurance against litigation, etc.," he said. Such companies pool private properties and regulate rent, agreements, etc. to streamline the renting process.

The pandemic might push the demand for rental units in India, but whether the supply rises to meet it, despite the hurdles, remains to be seen.