Why Mumbai has few flats to rent

With a population of almost 21 million, a population density of 32,300 persons per sq km and an average of 909 people moving to the city every day to seek their fortunes, it is no wonder that the world’s sixth-largest city has some of the country’s highest real-estate prices. The grim reality is that it will only get worse.

By 2030, Mumbai is set to become the world’s fourth-largest city, with an estimated population of 27.7 million—an increase of 889% since 1950, and as more people fight for limited space, the costs of rental and housing could rise further.

The housing market in many of India’s cities has long been an attractive proposition for investors, but India’s gross rental yields are still low, which is why it often does not make sense in India to buy apartments to rent them out as opposed to selling them on.

Mumbai is no different—and while there is much demand for rented homes, the scarcity of such apartments means high prices. Housing rental costs in the megapolis are 140 percent of its per capita income, according to a MumbaiFirst/McKinsey report.

According to an annual report by the Ministry of Housing and Urban Poverty Alleviation 2013-13, India’s housing shortage was estimated to be 18.78 million units; of which an estimated 96% is for households falling in the Economically-Weaker Sections and Low-Income Group segments. The state of Maharashtra, of which Mumbai is the capital, tops the list in having a shortage of homes for its people which stands at 1.94 million or 10.31% of the total housing shortage in the country.

While mainstream residential rents in Mumbai have seen an increase of 27% since 2008, according to Savills’ World Cities Review H2 2013, it doesn’t help that the residential rental market in India is still nascent and informal.

Only 5-10% of Mumbai’s housing is available for rent, compared with 40-50% in big cities across the world, according to Mumbai’s City Development Plan 2005-2025. “In India there’s no market for rental housing,” said Ashutosh Limaye, Head, Research & REIS at Jones Lang LaSalle (JLL), a real-estate services and investment management company, “the space is all secondary markets — where a buyer purchases a home and sells it.”

“The capital gains in a market like Mumbai are so high that as an end user, one wants to buy a house for profit and not so much for renting out. Investors are more than happy to capitalise on the price growth and sell off apartments versus giving them out on rent,” said Limaye.

A comparison of residential income across world cities by Savills’ World Cities Review H2 2013 found that New York offered the strongest gross residential yields at 6.2%, while Mumbai’s was an unimpressive 3.4%. In fact, a 10-year Indian government bond would yield better returns.

If a comparison were to be made between the return from a rented residence and an Indian government bond over 10 years, the rented residence would yield 4.2% less. All this serves to show how rents in Mumbai have not kept pace with capital values. And, according to Savills, Mumbai’s housing rental market is unlikely to interest investors or lead to capital growth any time soon.

By: Arlene Chang