What is the reason behind the increasing rentals of the residential properties

Property indices in the past couple of years have unanimously noted that even if capital appreciation stagnates after a point, rental values keep on increasing. Every year, rental rates for a particular neighbourhood rise by 10 to 20 percent, depending on the added infrastructure made available or location. There are several reasons for rental rates to increase for properties even though corresponding capital rates remain the same.Rents in a neighbourhood are mostly decided by the demand of rental homes against the availability. This is when knowing the proportion of owner occupied houses becomes important. Almost 66 percent houses in Indian cities and roughly 90 percent houses in rural areas are occupied by owners. In international cities such as New York and Berlin, the occupation of homes by owners is far less, at 45 and 11 percent respectively. Therefore, the number of flats available on rent is quite low.

Most people seek to live close to their offices and property buyers are no different. The homes are mostly taken up by end-users and little is left to spare for tenants. The number of people forming the floating population of a city, looking for employment opportunities also determines the rent. In Bangalore, roughly 57 percent of houses are put out on rent. It is one of the cities where properties are more rented than bought and lived in. In other smaller towns and emerging cities like Pune, most of the properties are bought for end occupation rather than investment. The property rental market does not move freely as rental control laws are applied on them. Delhi and Mumbai control rents on properties which keep the market out of sync with the capital appreciation one. Ideally, housing prices and rents should move in a way that people are indifferent between renting and buying. However, in reality the process is not transparent at all. The supply of homes on rent greatly reduces as many people keep their houses locked up rather than sublet them for different factors such as wear and tear caused by tenants and the timeliness of the tenant in paying rent and evacuating when asked to. Rental disputes in cases of informal agreements may also arise. The Ministry of Housing has released data which shows that more than 1 crore urban homes were empty. This considerably brings down the supply of properties and inflates rents artificially. Localised factors often drive prices and rents in different directions. For instance, in Kolkata’s EM Bypass stretch, rental rates fell by 5 percent while capital rates increased by 13 percent almost. More people are interested to buy properties for end use rather than rent and hence this observation. In Nizampet of Hyderabad, the exact opposite was observed. Short term supply and demand mismatches in a locality may also force rents to climb upwards. For instance, villas in Bangalore had shown an upward trend for rent in 2007 because the expat community wanted to live here and there was limited supply. However, since 2012, the demand decreased which also led to a fall in rental rates. A similar phenomenon has been observed in Gurgaon’s rental market for ultra-luxury properties where empty flats and zero tenants are leading to a fall in rental rates.

 

courtsey:IndiaHomes

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Updated: May 8, 2015 — 6:51 pm

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