What's Behind Rising Rent Prices In India?

India’s most hated sector. If you thought about real estate, many would agree with you.

The real estate sector has seen it all – from demonetization, the NBFC crisis, to the introduction of new regulations like RERA and the GST.

The real estate upcycle, which went on until 2014, led to a lot of over-supply in the market. Since then, there has been a prolonged period of slowdown in the sector. But it has been more than three years since the pandemic hit us. And during this time, we have seen multiple waves of COVID come and go. These waves brought about some significant changes in the Indian economy that are expected to endure over time.

One such trend is the resurgence of the real estate sector, which had been struggling for several years.

Click Here to know how you can efficiently track and invest in the Indian realty sector. This turnaround can be attributed to several factors. Coming from multi-year lows, the uptrend has come back due to low interest rates, a need for good housing after the pandemic, and better affordability.

This turnaround can be attributed to several factors. Coming from multi-year lows, the uptrend has come back due to low interest rates, a need for good housing after the pandemic, and better affordability.

The Story…

Despite the prevalent discussion around the abundance of unsold real estate inventory, many would assume that housing and rent prices would be declining.

The latest data released on Bengaluru’s rent prices suggests otherwise. Contrary to what you would have thought or expected, houses, or rent for that matter, isn’t getting cheaper.

Remember when a brand-new iPhone used to get launched, and what followed was a flurry of memes on how you could buy that latest edition with your kidney? Rent prices have increased to such an extent in Bengaluru that a man reportedly offered to sell his left kidney to rent a house in the city.

Rents in Bangalore, India's technology hub, have almost doubled since the beginning of last year, making it the country's hottest residential market.

Market researchers revealed that the landlords in the city are now charging the highest proportion of their property's value as rent, surpassing Mumbai.

Why could this be happening suddenly?

During the pandemic, many workers, including those for large global firms like Google, Amazon, among others, left the city, leading to a decline in rental prices. However, with the economy and private sector returning to normal in Bangalore, landlords are now looking to recover their lost revenue, resulting in a seller's market and higher rental prices.

With property values increasing every passing year, more and more buyers are looking to invest in the real estate market. That’s another reason why rent prices continue to go up. If you take a look at the current demand-supply dynamics, supply isn't growing like it used to. But demand is very much present. People still need office space in Bengaluru or apartments in Mumbai. With supply reducing and demand expected to return, it's palpable that rent and property prices will go up.

The Connecting Dots

In several cities, the number of real estate developers has decreased over the past decade. This has resulted in higher transparency, accountability, and cleaner transactions in the sector. While these changes have been underway for some years, the benefits are only now becoming visible, particularly in the residential housing segment, where demand is increasing.

As we said, several factors are fueling this demand, including low-interest rates, better affordability, urbanization, nuclear families, and the need for better quality housing. The other day, I was strolling around on a sunny afternoon house-hunting, and I was surprised to see that many developers offered unique residential apartments. The organized players, having the first mover advantage, have taken an innovative approach by offering work-from-home templates.

The idea of constructing new homes that cater to the needs of work-from-home executives is an excellent one. This approach attracts new buyers since these are new constructions, which means real estate developers no longer have to depend solely on existing homebuyers. Overall, real estate players remain in a sweet spot as the industry is expected to cross the trillion-dollar mark in 2030, up from $200 billion in 2021. More importantly, it will contribute around 13% to India’s GDP.

Here’s a fun fact, around 77% of Indians' wealth is invested in real estate. This could be because it's a tangible asset that provides peace of mind. Also, unlike trading in stocks, real estate is likely to hold some value, even if prices fluctuate.

##In Conclusion

It is safe to say that a real estate revival is due. Economic indicators certainly suggest so, with home prices expected to rise by 7.5% nationally this year, the fastest growth in 5 years.

The sector is currently experiencing a significant turning point. As the less competitive companies are being pushed out, there is a great chance for established players (like Godrej Properties) with strong financial positions and successful track records to take advantage of the growing economy.

Why we say established players is because they get the lowest bank funding rates, which further helps in acquiring land at a low price.

There’s an old saying that goes something like this - Profit is made when you buy, not when you sell. This statement means that when investing in real estate, the investor need not worry about the price at which they may sell it if they have done their** due diligence** and made an informed investment decision.

Also, wealth preservation is a goal of many big investors. A strong wealth preservation strategy involves acquiring passive income generating assets. And currently, one of the most popular assets are real estate and rental properties.

Rental properties are real cash flow generating assets that offer some protection against volatility. In addition to generating cash flow, properties appreciate in value as demand in their respective marketplaces increases.

With property values steadily increasing each year, the market is attracting more and more buyers. Be it property or real estate stocks, now is the time if you want to dip your toes.

Check out this short video to know more on factors that led to a rise in real estate stocks: