A Strong Case for Chennai’s Rental Housing Markets

  Simon Selvaraj, Local Director - Strategic Consulting (Chennai) JLL India

Chennai has grown exponentially in recent decades. It attracts an endless sea of people who keep moving in to the city, primarily for career and educational prospects. Employment, education, opportunities and lifestyle are magnets that keep pulling people into Chennai from all directions of the country.

This naturally has a profound impact on the demand for rental housing in the city.

·         High Levels of migration: Massive churn in urban area has turned out to be an intrinsic part of life for most of the city’s residents today. The total migrants into the urban areas of Tamil Nadu, as per 2011 census, accounts to 12.3 million - of this around 47% have duration of residence between 0-9 years. Thus, a fair portion of citizens in Chennai are tenants who do not necessarily want to buy a flat to live in the city.

·         Better quality of living: Rental housing allows residents to opt for a higher standard of living than their property purchasing power. A new apartment in the CBD of Chennai would cost around Rs. 75 lakh, while a person earning about Rs. 10 lakh per annum can afford a home costing Rs. 60 lakh in the more affordable suburban location. However, such an individual can afford a CBD-based home on rent within the same annual income. This makes it possible for a denizen of the MIG (middle-income group) to live in a HIG (higher-income group) flat, while the and LIG (lower-income group) individuals can comfortably afford to live in a MIG flat.

·         Increased affordability: Chennai continues to be an expensive city to buy a property. An average increase in property prices by 6-7% from last year has further constrained the affordability of owning a house. However, the rental trends in Chennai have seen only 2.5-5% annual increase over the past 4-5 years.

·         Tax benefits: Rental paid saves taxable income, as almost the whole portion of the rent paid can be saved by claiming it under Section 10 as HRA.

·         Flexibility: Offering greater flexibility and requiring less of a financial stretch than homeownership, renting is most common among young adults in whose lives changes in work and relationships are frequent.

·         Lower additional costs: Owning a house involves a down payment for the loan to the tune of almost 20% of the property value, and the EMI to be paid is often 40-50% of the monthly income. Property taxes are at about 1.5% of the property value and the regular maintenance and repair costs which account for 40% additional charges, as compared to a simple monthly rental for the same property.

However, hunting for a suitable rental house does come with its own set of challenges – not only to outsiders but also locals. Accessibility to work place, quality of neighbourhood, connectivity to other parts of the city, adequate living space, amenities, owners’ rulebooks and also certainly the budget and value for money being paid play a significant role in sound decision-making while searching for a good rental flat.

Narrowed down to the important rental housing hotspots of the city, here are the trends being currently observed in Chennai:

IT Corridor – Old Mahabalipuram Road

OMR continues to thrive as one of the preferred destination for the city’s Infotech population due to its proximity to various IT business parks and dedicated SEZs. With a slew of residential apartments and studios for singles coming up along this corridor, the burgeoning population of IT professionals has a logical influence on real estate and rental accommodations in this locality. Being majorly occupied by bachelors (sharing accommodations) as well as families of 4 to 5 members on average, Shollinganallur, Perumbakkam, Perungudi, Siruseri and Taramani retain average residential rental values ranging from Rs.12,000-18,000/month for 2BHK flats and Rs.15,000-30,000/month for 3BHK individual houses.

Contrasting GST and GNT corridors

Dotted with apartment complexes, educational institutions, SEZs and retail outlets, Grand Southern Trunk (GST) Road - the stretch between Perungalathur and Guduvanchery - is densely populated by a mix of working people and students. Being well-connected by road and rail to the southern cities of Tamil Nadu, this stretch also witnesses tremendous infrastructure activities with rail overbridges, a proposed new mofussil bus terminus and a planned elevated 8-lane corridor.

The average rental values of spacious houses in this residential neighbourhood with quality educational and healthcare institutions in close proximity range from Rs. 7,000-12,000/month for 2BHK flats and Rs. 10,000-20,000 for 3BHKs.

Grand Northern Trunk Road - a 10 km drive down the stretch from Madhavaram Bypass to Red Hills - is strikingly dissimilar to the GST Road. This corridor is more about container terminals, warehouses and some realty activity. The steady growth in infrastructure and connectivity as well as availability of water resources has encouraged leading industries to set up their bases along GNT Road.

However, there is currently lack of road infrastructure projects, and a perception of North Chennai and the IT hub at Ambattur as having very little impact on this stretch. This has led to comparatively less enthusiasm among people to move in to this location. As a result, employees working in the industries along this stretch can find more affordable rental housing in the range of Rs.5,000-8,000/month for 2BHK flats and Rs.10,000-16,000/month for 3BHKs.

Pulsating Pallavaram–Thoraipakkam Road

Connecting the key corridors of OMR and GST, the Pallavaram-Thoraipakkam Road has vast employment opportunities and residential rental affordability. 1BHK developments (average unit size 550 sq.ft) account for about 8% of the total housing supply in this area. The yield rate in this micro market is 2-3%. Offering a number of rental options ranging from studio-type apartments to 3BHK flats, villas, and row houses, the average rental values in this micro-market falls between Rs.10,000-15,000/month for 2BHK flats while 3BHK options are rented out for Rs.12,000-25,000/month on an average.

Moving Westward

The peaking residential rental values in city’s central locations have led people to turn to the west for affordable living. The western quadrant is predominantly driven by business people as well as industrial and IT employees due to its excellent connectivity to Central Chennai, Mount-Poonamallee Road and Ambattur office districts. After construction of Outer Ring Road, connectivity has improved significantly.

Expected infrastructure projects, including completion of the Metro Rail Corridors, revival of the Maduravoyal flyover, etc. will keep drawing occupants towards the west. Premium residential developments and the presence of multi-national companies in Sriperumbudur and Oragadam have also been major demand drivers in these localities.

The west zone including Porur, Maduravoyal, Manapakkam, Thiruverkadu and Poonamalle offers decent houses with average rents in the range of Rs.10,000-12,000/month for 2BHK flats and 3BHKs between Rs.15,000-25,000/month.

A Winning Scenario

Rental housing not only addresses housing needs but also helps to reduce the completed unsold residential inventory on the market. The reduction in this number is a clear indicator that the market is maturing. With this in mind, the recent Union Budget has levied tax on developers on the notional rental income on completed unsold inventory after 1 year.

Apart from the fact that rental Housing is affordable and offers a better living standard, it is also correctly viewed as a solution to achieve the Government’s vision of Housing for All by 2022. The growing shortfall in housing is a serious challenge, and its scale makes the success of any single approach like buying/owning a house difficult.

On the other hand, housing situated far away from employment hubs and social infrastructure is unlikely to induce much demand. Through rental housing schemes, PPP model and Government subsidies, housing for the EWS (economically weaker sections) and LIG can even be made available to people drawing monthly income below Rs. 7000 per month.

With budget provisions, residential REITs and the growing demand for rental housing 2017 will witness the rental market finding its place in the real estate scenario, opening more options for the rental occupiers and assured returns for owners.