Rental Property Shortage Leaves Salaried Class Struggling

The demand for luxury housing in the country of homes priced above Rs 50 crores has shot up 1.5x in the past year, and that of homes priced above Rs 4 crore has increased by 75%, according to a report by JLL India. The takers of these homes are affluent people, who are buying two, three, or four properties. However, they are not willing to lease the extra ones out.

According to G Haribabu, president of the National Real Estate Development Council, over 11 million or 1.1 crore homes in India are lying idle despite being sold. These properties are fit for rentals but the owners would rather leave them vacant and part with rental incomes. Taxes on rental income, escalation in housing prices, and legal troubles with leasing are pushing homeowners to not rent out their properties.

The costs of most real estate components - land, construction, and labour are shooting up. According to JLL’s Construction Cost Guide, the construction costs are expected to rise by 6% within this year, as prices of materials like cement, reinforcement steel, structural steel, and stones surge. According to Hari Babu, land costs are also rising by 15-20% and this has pushed overall residential prices up.

This escalation in housing prices is giving property owners enough confidence to hold onto their properties. “In the 20 years of the life of an apartment, the appreciation is around 5-6%, and in some places it is 7-8%,” Hari Babu said. Along with this, the urban population increasingly signals more demand for housing in the coming years, making investments in residential real estate lucrative.

Retain Not Rent

When it comes to leasing your residential property, Hari Babu said that the rental value vs capital value in India today is as little as 3%, and even this is not the actual income. For a house that is leased for five years, the property tax levied by municipal authorities turns out to be around one month to one month and ten days’ rent. In addition to this, landlords need to pay an income tax of 21% on their rental income, meaning another year’s rent is forgone in the five-year rental period.

“The other reason for owners being wary of renting their residential properties is the wear and tear of the apartment and expense of renovation every time the licensee vacates and whether it is commensurate with the rental earnings for that unit,” Reshmi Panicker, Executive Director ‑ Land Services and Residential, Knight Frank India, a real estate consultancy firm told The Core.

All of these costs add to the yield of the rented property coming down from 3% to just 1.5-1.65%, according to Hari Babu. Therefore, what owners prefer is holding onto their fresh flats and keeping them vacant, so that they can fetch a better price later. “The moment you give (the house) for rent the value comes down,” Hari Babu said.

Stuck In The Middle

Of the three broad categories of occupants, the high net-worth individuals can afford houses while the economically weaker sections (EWS) have government schemes to depend on. Under the Pradhan Mantri Awas Yojana, the Centre will assist in the building of 3 crore homes for rural and urban population.

It is the lower middle-income group, salaried persons who are bearing the brunt of shortage in rental residential properties. As fewer flats go up on rent and demand burgeoning because of urban population growth, rents are skyrocketing. In cities like Mumbai, redevelopment of old buildings is also adding to the demand for rental homes.

Buying affordable homes on EMI has also ceased to be an option for the lower income groups as the stock for affordable housing is dwindling with land and construction costs going up. “A person, a joint family, husband and wife together earning Rs 50,000 can pay Rs 15,000 EMI. They are eligible for a one-year loan of 15 lakhs. With 15 lakhs loan and five lakhs of their own, even one room is not possible,” Hari Babu said.

What Can Be Done?

Restoring owners’ confidence in leasing will require a uniform law, Panicker said. “We need to protect the landlords with adequate laws and speedy redressal, to reassure them that they will not lose their apartment/unit, in case the lessee/licensee violates the terms of lease/licence and can be evicted,” she said.

The Model Tenancy Act, 2019 is a step towards giving more power to lessors. However, it is up to the states to implement it, and only four states in the country - Tamil Nadu, Andhra Pradesh, Uttar Pradesh, and Assam have enforced it yet. In the absence of the provision of this law, it is difficult for landlords to evict tenants who refuse to vacate. The only option available then is to seek legal recourse which is a taxing and time-consuming process making renting an unattractive proposition for owners.