The rental housing market in India is a significant sector of the real estate industry, with approximately 27% of households opting for rented accommodations, especially in urban centres. The International Monetary Fund (IMF) estimated the value of India’s residential rental market to be around USD 20 billion in 2016, highlighting its substantial economic contribution. Today, with urban areas accommodating nearly 500 million residents, the rental housing market in India presents a lucrative opportunity for investors and stakeholders.
Influential Factors Shaping Rental Dynamics
A multitude of factors influences the dynamics of rental demand, pricing, and returns in India’s housing market. These factors encompass economic conditions, policy fluctuations, demographic trends, migration patterns, property valuations, interest rates, geographical considerations, and the availability of housing stock. Unlike more mature markets such as the United States, where lower interest rates often surpass rental yields, India faces a unique challenge with interest rates outpacing rental returns, impacting the profitability of investments in the sector.
Evolving Trends
The emergence of the COVID-19 pandemic has brought about significant shifts in the rental housing landscape. Escalating property prices have compelled many prospective buyers to explore renting as a viable alternative. Notably, online rental search activity has surged, surpassing buying activity, signalling a discernible trend change. At present, the rental index is trending 23 points higher than the buying index, clearly outstripping the buying index and indicating a growing preference for rental accommodations among Indian residents.
Urban Hotspots and Rental Activity
India's top eight cities, including Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai (MMR), and Pune, serve as major economic hubs, attracting a considerable migrant populace. Reflecting the socio-economic fabric, residential activity is notably concentrated in these eight major urban centres. Following the pandemic, these cities have experienced a surge in both purchasing and renting demand, with the latter witnessing a more pronounced increase. This trend is substantiated by our IRIS Index, which monitors high-intent buying and renting search activity on our platforms. This upward trajectory extends to monthly rental rates, demonstrating a significant escalation since 2021.
Cities like Gurugram, Bengaluru, Pune, and Hyderabad lead in high-intent online search activity for rentals, with Gurugram and Bengaluru emerging as frontrunners in monthly rent growth, with certain micro-markets recording double-digit increases. Notably, Bengaluru also boasts the highest rental yield (3.5–4.0 percent) among major cities alongside Hyderabad.
These urban centres have witnessed significant rejuvenation in their rental markets, buoyed by robust demand.
Post-Pandemic Growth Momentum
The resurgence of office-based work and the return of professionals to physical workplaces, alongside a considerable student population, have fuelled the demand for rental housing. Cities with a strong presence in the IT sector, such as Bengaluru, have observed heightened competition for rental properties, leading to substantial rent hikes. To add to it, the lag in the supply of new residential units, coupled with rising demand, has resulted in a rapid escalation of rents.
While property values in the top eight cities have grown by 15–20 percent compared to pre-pandemic levels in 2019, average monthly rental rates have surged by 25–30 percent in 2023, with specific key areas in service-oriented cities witnessing even more substantial spikes exceeding 30 percent during the same period.
Thus, despite global trends indicating lower rental yields, recent increases in rents offer promising returns for investors.
Future Outlook
Looking ahead, the rental housing market in India's key cities is expected to remain robust. Changing preferences for larger living spaces due to hybrid work arrangements, limited availability of ready-to-move homes, and high investment potential will continue to drive demand. While city centres command the highest rents, there's a noticeable shift towards peripheral areas due to affordability concerns. Overall, the rental housing market in India is poised for resilience and sustained growth in the foreseeable future.
