As rents rise, here is what you can ask from your landlord for protection

Sign a long-term agreement that should have a reasonable escalation built in and a minimum guaranteed tenure

The upsurge in residential rents, which began after the Covid-19 lockdowns ended, continues unabated. Rents increased 4.9 per cent quarter-on-quarter (Q-o-Q) and 5.8 per cent year-on-year (Y-o-Y) across the country in the April-June 2023 quarter, according to Magicbricks’ rental index. Bengaluru (8.1 per cent), Navi Mumbai (7.3 per cent), and Gurugram (5.1 per cent) witnessed the highest increase in average rents Q-o-Q.

With most offices calling their employees back-to-work (at least in the hybrid model), there has been a spurt in rental demand over the past one-and-a-half years.

Supply lags demand

“Demand in a city like Bengaluru, for instance, has not only breached the pre-pandemic levels but has gone much above it. In many housing societies there is hardly any vacancy. Rentals have gone up by more than 40 per cent in a few sought-after societies compared to pre-pandemic levels,” says Anuj Puri, chairman, ANAROCK Group.

He says that post-Covid, when offices resumed physically, besides the old professionals who returned from their hometowns, there was also a large influx of new employees because hiring went up during Covid in Information Technology (IT) companies.

Educational activity also bounced back after Covid. “Schools, colleges, coaching classes, and other educational institutions began to run in full swing. That led to students and families coming back to cities,” says Siddharth Goel, head of research and editorial, Magicbricks.

The housing market witnessed a prolonged downturn during the previous decade, which led to a shrinking of supply. “Over the past two years, demand has picked up. Now, supply is also gathering pace. However, it takes at least three to four years for a project to get ready,” says Vivek Rathi, director-research, Knight Frank India.

Altogether, there is an unsold inventory of around 470,000 units in the country. “However, this unsold inventory is in the hands of developers and is not part of the rental market,” says Rathi.

A mismatch between demand and supply is also playing a part. In the primary market (developer market), customers are increasingly preferring bigger and better-quality apartments. They want three- or 3.5-BHK apartments. Supply is responding to demand. “However, in the rental market, there is greater demand for one- and two-BHK apartments. This discrepancy between demand and supply has also contributed to the escalation in rental rates,” says Rathi.

Customers defer purchase decision

Not only have interest rates moved up, property prices have also increased. Since developers are focusing on delivering their existing projects, the launch of new projects hasn’t picked up. While launches are up compared to a year ago, they are not yet at a level where they can match demand. This has led to an increase in home prices.

The high cost of raw materials has driven housing prices up. “This combination of high property prices and high interest rates has caused many potential buyers to defer their purchase decision. This has also contributed to the increased demand for rental housing,” says Goel.

Rising interest rates within the economy have driven home loan rates up. While the repo rate has increased by 2.5 percentage points, home loan rates have risen by about 1.8 percentage points on average since May 2022.

An increase in home loan rates also shapes the buy-versus-rent decision. “Buying a property makes more sense when the gap between home loan rates and rental yield is small. When home loan rates go up and the gap widens, people begin to favour renting,” says Rathi.

On the supply side, the increase in home loan rates and high cost of living have increased the return expectations of landlords.

How to deal with rising rentals

Rental rates may continue to rise for the next two to three years.

“In such a scenario, it is best to lock into rentals for a sufficiently long period, say, three years, with a reasonable escalation rate built into your agreement with the landlord,” says Rathi. Such an agreement – it should be registered – will safeguard tenants against steep hikes.

The agreement should also offer the tenant a minimum guaranteed tenure. It is typically six months. “You may opt for a longer minimum guaranteed tenure of 12-18 months. This will ensure that in a rising rental scenario, the landlord doesn't serve you a notice and ask you to vacate the property,” says Goel.

Rental rates, especially those near the IT industry belts and office hubs, have soared already. “One option is to scout for a house in nearby areas that are relatively less expensive,” says Puri.

Those who are looking to save on rent should avoid societies with limited supply because it is very likely that rents there will remain high. “Usually, large societies with all the amenities command a premium over a smaller society with just the basic amenities. The latter can be considered if one wants to save on rent,” says Puri.

Tenants can also go for a property that is five or 10 years old. “Older properties are usually available at a discount compared to newer ones,” says Rathi.

Compare rental rates across properties and markets. Get to know about the prevailing market rate and make sure what you pay is in line with market levels. Online platforms can help you carry out such comparisons easily. “If you depend on only one source of information, such as a local broker, you could be misled into paying more than the prevailing rates,” says Goel.

Finally, avoid going overboard on your budget. Doing so will reduce your disposable income and affect your entire finances.