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Why developers prefer to sell and not to rent

realestate Updated: Jun 21, 2013 19:59 IST
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A rental housing policy can go a long way in encouraging development of rental housing in the affordable housing segment by setting up public housing associations that construct, own, operate and manage the rental housing units.

Firdose Vandrevala, chairman, CII National Committee on Real Estate and Housing, points out that there is a crying need to develop an institutionalised market for rental housing in India. Today, when private owners of apartment rent/lease their apartments the yield is in the range of just 5%, which is taxable. Therefore, most developers prefer to build and sell rather than build and rent.

Given the demographics of India with a growing young population and the urbanisation that is taking place, rental housing is a critical success factor for India’s growth and development. Any policy that will promote and encourage the development of this market is absolutely necessary.

Chintan Patel, director, transaction advisory services, Ernst & Young, says that the rental housing yield is far lower in India than in other countries where the cost of debt is less. In India the cost of debt is anything between 10% to 15% and the rental yield between 3% to 5%. This is not enough to incentivise the rental housing play into a revenue model. That gap needs to be reduced.

“Cities like Mumbai, Delhi NCR and Bengaluru will benefit from such schemes as these cities attract migrant workers who initially cannot afford to invest in their own houses. Moreover, the cost of a basic housing unit is very high compared to Tier II and III cities in India which makes it difficult for an average worker to own a house.

Hence, tenant housing becomes an easy option for such a segment. Extra FSI along with tax incentives for the developers should encourage more such projects which will enable tenants with more options,” adds Rohit Kumar, head of India Research, DTZ India.