Foreign investors are pushing into India’s rental housing market, with a big recent deal highlighting the potential for a shift away from mom-and-pop dominance in the sector.
Budget hotel operator Oyo Rooms, backed by Soft Bank, announced in late October its entry into the multifamily sector with a portfolio of 36 properties.
Oyo Living, the new entity, plans to expand the current capacity of 2000 beds to 50,000 beds in the next year across 10 Indian cities. The group will work with hotel owners and large developers to lease out properties.
“The entry of Oyo Rooms could be the beginning of a potentially huge market,” says Ramesh Nair, CEO and Country Head, JLL India. While many challenges remain, “this is the direction we seem to be moving.”
India’s rental housing market is still in its infancy. And it’s not alone. Referred to as “multifamily”, the sector in the U.S. has been institutionalized, but markets in other countries around the world remain fragmented and under-regulated, with independent homeowners still dominating.
This could be changing in India. WeWork is also keen to bring its brand WeLive to India, offering serviced apartments in the co-living format.
“It’s likely that other institutional investors, corporates and development firms will follow, bringing a structured approach to an informal market primarily governed by independent property owners,” Nair says.
Rental housing gets organised
Oyo Living plans to target the workforce that comes to these cities for employment and are in a constant search for affordable accommodation. WeLive plans to tap into the co-working community present across its centres.
Both are being driven by a common theme: A rising cost of housing that is driving more people to rent.
“The high cost of properties across big metros is making renting a more viable and affordable option for many. A large section of the workforce migrating to these metros prefer to take the accommodation on rent instead of buying. And foreign investors would like to tap into this segment,” says Nair.
Companies entering this market will need to address maintenance costs, documentation and facilitation in the signing of tenancy contracts etc. For example, Bengaluru-based Nestaway, a rental housing company that manages a large network of rental properties across 11 cities is already helping prospective tenants with these services.
Challenges and hurdles remain
The industry, and the government, still need to address a number of challenges if this market is going to reach any sort of scale.
The rental housing market in India until now has not been a priority for investors or developers. Institutional level funding hasn’t come into large formats into this segment due to these challenges.
“There is often a question of the viability of such projects. Low rental yields, in the range of 1.5 to 2.5 percent coupled with a forecast dip in capital values have made it difficult for developers to take interest in such projects. In fact, rental yields are one of the lowest in the world,” Samantak Das, Head of Research, JLL India says.
“With an increase in affordable housing supply, the problem may be solved to some extent,” he says. The Government is working on an Urban Rental Housing Policy to regularise the rental market in the country. The current affordable housing ownership scheme prohibits rental of the properties.
Moreover, landlords in the country are often dis-incentivised due to state-governed Rent Control Acts (RCAs). The Indian Government introduced a Draft Model Tenancy Act in 2015 with an intent to replace the archaic Rent Control Act 1948. The Draft Model Tenancy Act 2015, aims to bring a structure for the regulation and obligation of landlords and tenants. “But this being in the draft stage is far from becoming a reality anytime soon,” adds Das.
Also, with a majority of rental housing in the informal sector, most transactions are done without any legal contract. “Moreover, there is an ambiguity over these contracts and the applicable tax. With the implementation of the Goods and Services Tax (GST) last year, it is unclear if operators would levy a GST on the rental. In case a GST is charged as part of the entire service offering, tenants will incur extra cost,” he adds.