Indian real estate market is dominated by commercial real estate and housing in low end and medium end segments. However, real estate rentals have played a major part in real estate market in the Western world, in India, rental real estate market has a lot of complications. A review by Anarock Property Consultants follows....

Over the years, the evolution of the Indian rental housing market has been curiously lop-sided, even as the trends driving it have changed considerably.

The demand for rental properties is mainly driven by the salaried population. A large percentage of tenants in cities like Bengaluru, Hyderabad, Pune and Mumbai are from the salaried segment and belong to industries such as IT/ITeS, BFSI, Pharma and services. In fact, the IT/ITeS and the BPO sectors - the key drivers for commercial space in cities such as Bengaluru, Hyderabad, Pune and Chennai - has caused a steady migration to these cities. Resultantly, demand for rental housing has been rising steadily.

Performance as an investment asset class

One would think that increasing demand for rental housing would also improve its performance as an investment asset class. Even as the rental market grew steadily across major cities, rental yield (the annual rate of return an investor can earn from his capital invested in a property) has long since stagnated to a national average of 3%.

However, the lower the property cost, the higher is the rental yield. Therefore, investing in affordable or mid-segment properties will yield better rental returns (depending on external factors like location, project type, developer‘s brand, etc.) For the same reason, luxury and super-luxury homes are not at all rewarding from a rental yield point of view.

Despite the relatively low rental yields, residential property investors increasingly prefer to earn a steady rental income over selling the property (after appropriate appreciation). ANAROCK’s consumer survey found that more than 53% respondents looking to invest in real estate in 2019 preferred to earn a steady rental income while only 39% would sell the property.

If we look at the city-wise performance for rental yields, Hyderabad tops the list with a rental yield of 3.7%. In Bengaluru it is 3.6%, Pune 3.3 % and in entire MMR - surprisingly – it is just 3%.

Interestingly, residential rental yields in India are higher than in Beijing, Singapore and Hong Kong but lower than cities like Manila and Jakarta. However, the Indian rental yield average of 3% is lower than that of other Asian countries that are pegged at 3.5 - 4% and European countries at 4.5%-5%.

Evolving tenant preferences

With more exposure to international housing standards, high disposable income and frequent movement across cities, Indian tenants are seeking more amenities like open spaces, swimming pools, power back-up and multiple parking from rental properties. Most tenants rely on property portals to find and shortlist rental properties and finalise after personal visits.

The average tenancy duration sits in a rather schizophrenic grey area of preferences. Most tenants want stable options but simultaneously the possibility of moving out at short notice. One year is the average tenancy duration observed in Tier 1 and 2 cities. In terms of configurations, compact homes are definitely the top preference - studio apartments, 1 & 2 BHK apartments find the most takers, thanks to relatively lower rent, easier upkeep and lower maintenance charges.

Nevertheless, there is still demand for larger independent houses from the corporate sector - especially in Delhi, Gurgaon and Mumbai, where landlords with such properties can attract long corporate leases (the Indian landlord's 'gold standard').

Rental rights

The leasing and renting of residential property currently still fall under the purview of the Rent Control Act, but each state has its own version. The Act primarily secures the rights of tenants while curbing the power of the landlord to evict tenants.

Some of the basic rights of tenants and duties of landlords in India:

A tenant has the right to a safe and secure house and the onus to ensure basic standards of accommodation is on the landlord.
The landlord cannot bar essential services such as power and water to recover rental dues. In such a situation, a tenant can register a complaint against the landlord with the Rent Control Court.
In order to evict a tenant, the landlord must file a petition before the Rent Control Court. Eviction can only be under specific grounds such as wilful default in rent payment, subletting without prior consent, causing nuisance or when the landlord requires premises for personal occupation.
The tenant has the right to privacy and the landlord cannot enter the premises without prior permission or intimation.
The landlord must reimburse the tenant for any repairs that he/she carries out.
The tenant must be served notice of the termination of tenancy and is entitled to receive the deposit at the end of the lease term.
Legal heirs of the tenant are also considered tenants and are covered by the Rent Control Act of various states.