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Mumbai steps into rental housing

By Pankaj Anup Toppo, Outlook Money
June 24, 2009 15:03 IST
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The unregulated housing market took a step ahead towards an organised future with a brand new concept -- rental housing.

Recently, Mumbai-based real estate developer Housing Development & Infrastructure and Mumbai Metropolitan Region Development Authority joined hands to provide rental housing to about 43,000 low-income families.

They will develop 525 acres of land in Virar, the northern suburb of Mumbai. HDIL will construct these houses and hand it free of cost to MMRDA, which in turn will rent them out at its terms and conditions.

What is rental housing?

These properties are built specifically for the purpose of renting and are owned by real estate investment trusts (REITs) or corporates, and not by individuals. In most developed countries, like the US, this market is organised. For India, this is the first initiative of its kind.

The specifications

The project, located around 2 km from Virar railway station, will be completed by 2015 in four phases. The first 10,000 units (160 sq. ft each) will be ready by March 2011.

The layout of the houses, which have 160 sq. ft carpet area, has been approved by the City and Industrial Development Corporation of Maharashtra (CIDCO) and meets all the standard norms for high rise structures. The 14-storey buildings will be quake-resistant.

Experts believe that the monthly rentals for these units would be around Rs 2,000. While the supply will not eat into the rental demand from the middle and upper middle class sections, it could eat into the demand for slums on rent.

Rental demand

According to a paper published by UN-Habitat and UNESCAP, 'Housing the Poor in Asian Cities', 87 per cent people in India own their own houses, 11 per cent are living on rent, while 3 per cent belong to the 'others' category.

However, the paper adds that rental housing is more common in cities than in rural areas and varies greatly among cities within the same country. For example, though the national average of people living on rent in India is only 11 per cent, the average in Bangalore is 55 per cent.

Says Pranay Vakil, chairman, Knight Frank India, a real estate consultancy firm: "In every city, there is a floating population of around 30-35 per cent. They may not necessarily want to own a house in the city but they want to rent out one."

The problems

Though the demand for rental housing is high, such projects have not been popular due to certain problems. "The Rent Control Act, whcih varies from state to state, was the major factor," says Vakil. The Act protects the interest of tenants but then there are many buildings in Mumbai where tenants are still paying rents at 1940 levels, says Vakil.

The hassle associated with evicting a tenant discourages investors. Besides, rental yields in residential units is low -- on an average, it is 5-6 per cent of the total market value of the house. For a person who wants to invest in rental housing, taking a loan at a higher rate than the yield from the home does not make financial sense.

"However, financially, it does make sense if the Floor Space Index is changed, and the government has done that," says Vakil.

FSI is the ratio of the total floor area of buildings on a certain location to the size of the land of that location. Since the FSI has been increased to four, it is worthwhile for a developer to construct houses for rental housing. Increase in FSI effectively increases the space available, bringing down the cost of construction per unit.

Says Vakil: "It should not end up like vertical slums." Proper emphasis on the development of infrastructure may solve the problem.

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Pankaj Anup Toppo, Outlook Money

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