Why BTR is the Future of Rental Housing in India?

Aswath Jayavel

| 17-01-2024



Why BTR is the Future of Rental Housing in India?


Rental housing in India is one of the oldest business of the civilization, people have shared their space to profit out of it for a long time now. Over the period of time, people rented the free space in their premises then bought pre-built houses to rent or rented their old house after they shift. But now is the era of built-to-rent (BTR) where the houses are built to suit the preferences of the renter and the houses will only be used for residential renting and nothing else.



PROBLEMS:



National challenges



Urbanization



Though Indian cities are home to a minority population, they contribute to 2/3 of the nation’s economic output. A total of 17 of the 20 fastest growing cities in the world between 2019 and 2035 will be Indian, an Oxford Economics report has said. The Indian middle-class population is expected to have a growth rate of 8.3% until 2030 doubling its middle-class population. So, the spending share (consumer spending) of the Indian middle class is expected to grow to 80% accounting to an additional $1 trillion in consumer spending by 2030. The Indian urban population is said to contribute about 75% of the total GDP of India by 2030.


A 2.5X increase in consumer spending and a 25% increase in the urban population results in a lot of people ready to spend a lot of money to get their needs fulfilled (housing), mainly in the urban areas of India leading to a huge increase in demand for urban housing.



Slow Infrastructure



According to a report by RICS and Knight Frank, ‘India will need an additional 25 million houses by 2030’ but ‘on an average only 0.45 million units of housing are built every year' according to a report by Anarock property consultants. Similarly, a World bank survey states that India needs about $55 billion in infrastructure every year to cope up with the growing needs of urbanization in India but the revised(increased) budget is just $10 billion allocated yearly by the Indian government as of 2022.



Another example stating demand for housing is that around 27000 average searches for flats and houses in Whitefield -Bangalore is recorded, while on an average, there are only 350 listings present in the property listing sites. Every year, Less than 10% of the demand is fulfilled in terms of units and investment. With infrastructure developments happening at this rate, by 2030 people will need a lot of houses and every affordable house in urban areas will have 2X applications resulting in housing scarcity.



Mismatched Preferences



Currently 34% of the Indian population are millennials, the millennials and Gen Z will double in the next 5 years accounting to 77% of the total Indian workforce. According to 99acres.com, ‘generation y (millennials) sees homeownership differently than their parents. Earlier, generations moved to outlying areas to their homeownership ambitions, but millennial refuse to do so. Connectivity to their workplace, convenience, and security are the primary criteria that comes first in their decision-making process, not property ownership. 

A good lifestyle is a pressing priority and an ongoing need. Adding to that people prefer managed and ready-to-move-in houses that are well managed by institutions therefore complications such as security deposit, notice periods and monthly lease are easily managed, social concerns of renting house to young people and single professionals are diminished and problems with housekeeping, utility bill payment, maintenance, furniture and fitting are no more the concerns of the renter. 

A housing crisis occurs when affordable housing becomes scares. Urbanization will bring in more people to the cities increasing demand. Slow infrastructure will further increase the unmet demand adding to the price, while all of this coupled with preferences of new age client will create the next housing crisis of India.



Sustainability Goals



Global carbon emission from the real-estate sector stands at 40%, and 70% of the total carbon emission from the real-estate is from urban areas. In a heavily growing population, carbon emission is listed among the most pressing concerns of the world in upcoming years. According to Mckinsey report (de-carbonization of industrial sectors), ’it is estimated that $21 trillion is needed just to decarbonize four industrial sectors by 2050’.
The basic criterion for a home is to have a habitable environment but as per TERI, ’half of the Indian urban population will face acute water scarcity by 2050.

According to the World Bank, ‘100% of the Indian population is said to be affected by PM2.5 levels in the air’. It is evident that managing of the environment and locality is vital for habitable living. According to Worldgbc, ’28% carbon emission is from operated heat, cool and performance’. Measures to reduce power consumption and maintain usage is needed to create a comfortable living.


63% of leading investors agree that green structures can drive higher occupancy, higher price, higher tenant retention and higher value. – JLL’s report on decarbonizing the built environment. 

150 million tons of construction and demolition(C&D) waste every year, India recycles only 1% of its C&D waste. Minimizing waste and building reusable inventory is essential to have a prolonged housing solution.



Financial Challenges



Real-estate being a limited resource needs heavy investments with an average of 6-7k/Sq.ft in urban localities of India, however people continue to invest because it is much safer than alternative investments such as stocks and crypto. But Investors nowadays face difficulties in continuing to invest due to fluctuating market trends resulting in 11.09 million vacant houses and it is difficult to cope with changing repo rates in India. As of November 2022, the repo rate has changed 4 times that year. More stable market is expected by the investors to get a safe haven for their investments.
 

According to 99acres.com, ’a well maintained household in urban areas is said to spend an average of Rs.3.5-4/Sq.ft per month to maintain the standards of the house’ . In addition to this, the house needs to be renovated every 8-10 years to meet the living standards of a tenant but only a negligible number of Indian landlords have maintenance and renovation cycles leading to vacant properties even in mega cities like Mumbai. Property maintenance acts as a pain point for lot of Indian landlords who rent.



Low Returns

Indian residential rental yields are among the lowest in the world at about 2-3% discouraging landlords. FDs and PPFs give better yields with more security compared to rental yields.

High investment combined with high maintenance makes Indian rental real-estate an expensive buy, not to mention the low returns that fear away investors and landlords, making Indian residential real-estate a tough nut to crack. This has drastically reduced the no of Landlords over the past decade resulting in an insufficient supply of rental properties.



  • Will people have a place to live?
  • Will the house be livable?
  • Are people ready to help build?


BTR is a rental model that focuses on giving people a place to live that is affordable, livable and making sure that investors are ready to help build those structures. BTR makes this possible by making sure that the model is organized, optimized and sustainable.

Real estate in India is an unorganized market and unorganized markets are bound to have information asymmetry. 10.2 million houses in the country are lying unoccupied. This statistic is in sharp contrast to the fact that there is in fact a grave shortage of 19 million houses in India. This information failure in the market is haunting builders and landlords as they have very limited knowledge about customer preferences. An organized model such as BTR will be able to gather adequate information and work towards bridging the gap in the market.

Ex: An informed decision on the house sizes will allow builders to be more Precise on their structural needs and address the changing demographics increasing the probability of occupancy.

Purpose driven products will help fill the gaps in value creation and optimize the value chain. BTR enables higher predictability, maintainability and better product-tenant-fit. Houses built in the BTR model could push the rental yield from 3% to 8%. Maintenance and refurbishing costs are also reduced by half. 

Finally, longevity and sustainability of the product can be significantly enhanced. Precocious preparedness is essential for longevity. ‘Bangalore is said to be the first city in India to run out of drinking water by 2030’. BTR can solve this problem because any builder or promoter has sale as his primary interest, while BTR is managing the property for years to come. So, it is in BTR’s interests to keep the property sustainable.

These characteristics of BTR makes it the appropriate solution for addressing the problems of residential renting in India.



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