Soaring house rents: Secure longer-tenure lease agreement of 3 to 5 years

Incorporating an annual 5-7% rent hike clause in rent agreement will ease concerns

Rental rates in major cities increased 10 per cent to 31 per cent year-on-year in 2023, according to a study by Housing.com. With the market unlikely to cool soon, prospective tenants need to adopt smart strategies to mitigate the impact of rising rents.

Experts attribute the rise in rentals to a variety of factors. “The recent surge may be attributed to a strong desire for urban living, supply constraints due to construction delays, and price rise,” says Anshuman Magazine, chairman & chief executive officer (CEO) for India, South-East Asia, Middle East & Africa, CBRE.

In Covid-19, the supply of new projects stopped when construction work was suspended. Meanwhile, urbanisation, while not visible, continued. “Students continued to graduate and find jobs in cities, though they worked from their homes in smaller towns during Covid. Once offices recalled workers, demand surged amid stagnant supply,” says Amit Kumar Agarwal, founder and CEO, NoBroker.com.

The demand-supply gap is acute in some locations and property types. “It is steep in desirable locations near central business districts (CBDs),” says Ankita Sood, head of research, Housing.com, PropTiger.com & Makaan.com. Agarwal, too, says that in cities like Bengaluru rents have increased in places where there are new age jobs – in information technology and startups.

Tenants prefer newly constructed, ready-to-move-in (RTMI) properties. “Only a limited percentage of the available inventory belongs to this category,” says Sood.

Rising property prices are a factor, too. “The increase in capital values by 7-9 per cent per annum over the past three years has created space for rental values to catch up,” says Vivek Rathi, national director for research, Knight Frank India. Sood adds that many potential homebuyers, priced out of the market, are compelled to opt for renting.

The redevelopment of old residential buildings in Mumbai is adding to the pool of individuals seeking rental housing, says Rathi.

Will the pace moderate?

Opinion is divided on this count and much will depend on how quickly new supply enters a micro-market. “New completions are unlikely to enter the market for another two to three years, intensifying the existing bottleneck,” says Sood.

Adds Rathi: “Considering we are still three to four years away from a meaningful ramp-up in the availability of ready property, the growth in rentals is likely to continue in 2024 and 2025, albeit at a moderating pace compared to 2022 and 2023.”

Agarwal, however, argues that rental rates have already moved beyond the affordability range of many. “Moreover, delivery of projects launched in the past couple of years will begin in the next year or so,” he says. According to him, 2024 will be the last year when rents increase in double digits. Next year onwards, he expects rents to increase in the customary range of 4-8 per cent.

What should tenants do?

While tenants cannot escape the impact of rising rentals entirely, they can adopt a few strategies to reduce the impact. Rathi suggests going for a longer-tenure agreement of three to five years with an annual rent escalation clause of 5-7 per cent per year built in. Agarwal says specifying the rate of hike will remove the anxiety around this issue.

Be flexible about the location. “Exploring different neighbourhoods, sometimes just outside prime areas, may lead to more affordable options,” says Magazine.

Living farther from the city centre may reduce rent, but consider the trade-offs. Sood notes that a longer commute consumes more time, affecting work-life balance and leisure time. Moreover, commuting costs like fuel, public transport fares and vehicle upkeep also add up.

In the current supply-constrained scenario, Agarwal suggests negotiating for a longer notice period to vacate a house than the customary one month so that you get sufficient time to hunt for another house. Magazine suggests exploring options like shared accommodation or co-living spaces, which could be more cost-effective.