With Rents Surging, Opt For Longer Lease

'Negotiate a longer agreement with the escalation clause fixed now.'
'This will enable you to control future cost increases,'

Rental rates in prime areas of the country's seven largest cities have surged between 10 and 24 per cent between the first quarter of fiscal year 2021-22 and the same period of 2022-2023, according to a recent report by ANAROCK Research.

The steepest uptick was witnessed in Bengaluru's neighbourhoods. Analysts predict this fast-paced increase may persist in the near term.

Widening demand-supply gap

Rental rates have shot up across cities over the past year because demand is up, while the availability of houses, especially in housing societies situated in the proximity of commercial districts, and those having high-end features and amenities, is limited.

"With most offices now calling their employees back to work, at least under the hybrid model, there has been a spurt in rental demand in the past several months," says Prashant Thakur, senior director & head-research, Anarock Group.

Educational institutions also resumed in-person classes in 2022.

"Landlords, who had taken a hit during the pandemic due to migration out of cities, capitalised on this opportunity to hike rentals," says Siddhart Goel, head of research, Magicbricks.

Supply, too, was affected during the pandemic.

"The pandemic-induced mobility restrictions resulted in a decline in construction activity. Rising construction costs also caused developers to push forward the completion dates of their projects," says Vivek Rathi, director research, Knight Frank India.

Thakur informs that in the most sought-after societies of Bengaluru rental rates have risen by as much as 30-40 per cent over the past year.

Rathi adds that in Mumbai there has been an increase in the level of redevelopment activity over the past two-three years, resulting in a spurt in demand for rental housing.

"The natural increase in population due to urbanisation has also increased the demand pressure," says Saurabh Tyagi, CEO, propcheck.in.

Rapid rise may continue

Rental rates tend to grow 4-5 per cent annually over the long term. Rathi expects them to grow at a faster pace for a couple of years.

"Only after two-three years will the growth in rental rates moderate as new supply comes into the market," he says.

One caveat is affordability: If prospective tenants are not able to shell out the kind of money that landlords demand, rental rates may grow at a pace closer to the long-term rate.

Thakur expects residential rentals in prominent markets to go up anywhere between 5 and 12 per cent in 2023.

"The exact rate of growth will depend on the location, property, type of builder, and other specifications. In housing societies with limited supply and high demand, rentals could rise at a higher rate than 12 per cent," he says.

Rental rates are also influenced by capital values.

"We expect capital values to increase by 5-7 per cent this year. Rental rates will also grow at a similar or slightly higher level," says Rathi.

Home loan rates are currently at high levels. Besides, some sectors are experiencing layoffs.

"Due to these factors, many people may defer the decision to buy. As a result, the pressure on rental rates may continue for some time," says Goel.

Lock in rates for long term

Most tenants enter into annual leases with their landlords.

"Negotiate a longer agreement with the escalation clause fixed now. This will enable you to control future cost increases," says Goel.

Another option is to increase the security deposit.

"The landlord may, in that case, agree to keep the rent stable or even reduce it," says Goel.

Yet another option is to shift. "Tenants seeking affordable rentals can explore alternative neighbourhoods that are well connected by public transport. By focusing their search a few stations away from their preferred locations, they may be able to find more budget-friendly options," says Tyagi.

Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers, suggests that those who don't want to compromise on location may consider moving to a smaller house.

Tenants may also consider putting their house hunting on hold for a few months.

"Between October and December, rental demand is not as high as in the other months. Hiring in offices is relatively low and schools also don't admit new students during these months," says Thakur.

Better bargains may be available during the lean season.

Tyagi suggests that tenants should avoid spending more than 20-30 per cent of their income on rent.

Thinking of buying?

Check affordability.

Rapidly rising rentals should not automatically prompt tenants to think of buying a property.

"The rental yield on housing continues to be around 3 per cent while home loan rates are at above 8 per cent. The difference continues to be in the range of 5 percentage points or more. Buying a house becomes more attractive when this difference shrinks," says Tyagi.

Several sectors are witnessing layoffs.

"People in such sectors, or anyone at risk of losing his job, must think hard before taking on leverage," says Dhawan.

Taking a massive loan, he adds, will also affect the borrower's ability to take a sabbatical to study, start a family, look after the elderly, and so on.

Consider buying a house only if you have the financial wherewithal.

Tyagi points out that you must have the money to fund the down payment.

Adds Dhawan: "The EMI shouldn't exceed 40 per cent of the take home salary of one partner (in case of a double-income couple). You should also have 6-12 months' worth of EMIs in your emergency corpus."

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