Rents to go up in India

Property prices have been on a constant increase for the last decade in India. Even when faced with turbulent times wrought with sluggish sales and inflationary pressures crippling the national economy, home prices have increased by 10% to 12% in 2012 in major cities of India.

Although rising property prices imply that rent must have also been rising on a parallel line, it has not been so in reality. Even when properties are witnessing high increase, rental appreciation has not been proportionate in Indian metros. The ratio of rent to property value has actually gone down from 5% to 3%, much to the dismay of home owners.

Rent mechanism

It is not necessary that rent would always move in the same path as property values. One of the primary determinants of rent in a particular locality is the available number of houses for rent and the demand for rented homes. In India, almost 65% of urban homes are owner occupied as opposed to developed European cities, hence suggesting that population seeking for rented accommodation in India is significantly lower. The comparatively lower rent yield in India has its origin in the fact that the number of people seeking to rent a home is lower in case of Indian cities when compared to that of other international cities.

The rental yield can be measured in terms of gross annual rental income, expressed as a percentage of property purchase price. Gross rental income is what a landlord can expect as returns of his/her investment on a property rented out.

India lags behind most of its counterparts even in Asia as the gross annual rental income in India stands at 2.68%, which is quite lower than Indonesia (9.3%), Thailand (6.5%), Japan (4.4%) or Singapore (2.95%).

Another important factor determining rental yield in a city is the share of floating population the city has. Floating population is usually the number of individuals staying in a city to seek employment opportunity in a city. Bangalore has one of the biggest floating population, almost 20% of the city’s total population. Hence, number of homes up for rent is also higher in Bangalore, about 57% of houses are available for rent in the city.

However, due to some external forces rent may not yield as much as property prices rise up in an area or a city. In Mumbai, the state rent control mechanism is way out of sync with the recent price trend of the city, thus defying the yield otherwise promised.

Rental values in cities

The table below shows some of the areas with highest rental values in six major Indian cities.

The table shows that rental values is way higher in Mumbai than other metros. Perhaps, here lies the key to the fact that while rent has been going up in other metros, it has not been the same in case of Mumbai.

Rents expected to go up

Rental values are expected to grow at a higher rate in coming years. There are two basic premises for the assumption. First, rapid urbanisation is going to push up population influx into cities. AS per World Bank estimation, urban population may go up to 50% by 2050 in India. The increase in urban population would definitely cause high demand for housing space in cities.

The second premise is that expanding working population and higher mobility of employees would imply that demand for rented house would be going up, not only in metros but also in tier II and tier III cities.

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Lease to buy: A win-win option for buyers and sellers

Guidelines on how to lease out a house

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