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Brief Build To Rent
Brief Build To Rent
Brief Build To Rent
“ Build-To-Rent
”
(BTR)
Private Residential Rental Developments in India is a potentially
and untapped substantial market awaiting investment
October 2020
Executive Summary
The Indian residential sector has been languishing since 2015 on
account of over-supply and reduced availability of equity issues.
The residential rental housing market, is in our view an as yet
untapped market, for these reasons:
Build-To-Rent (“BTR”)
Table of Contents
1. Introduction 04
3 The Residential
Rental Market in India 10
4. Private Residential
Rental development in India 16
Build-To-Rent (“BTR”) 05
2
Build to Rent “BTR”
(Private Residential
Rental Development)
A. Residential Rental Property B. How Residential Rental
Property Works
Residential rental property refers to
homes that are purchased by an investor Residential rental property can be an
and inhabited by tenants on a lease or attractive investment. Unlike stocks,
rental agreement basis. futures, and other financial investments,
many people have firsthand experience
Residential real estate is represented with both the rental market as tenants
across many formats: single-family and the residential real estate market as
homes, condominium units, apartments, homeowners. This familiarity with the
townhouses and duplexes. The term process and the investment makes
residential rental property distinguishes residential rental properties less
this class of rental real estate investment intimidating than other investments. On
from commercial properties where the top of the familiarity factor, residential
tenant will generally be a corporate rental properties can offer monthly cash
entity rather than a person or family, as flow, long-term appreciation, leverage
well as hotels and motels where a tenant using borrowed money, and the
does not live in the property long term. aforementioned tax advantages on the
income the investment produces.
Build-To-Rent (“BTR”) 07
C. Benefits of BTR known as equity REITs. REITs that invest
in mortgages, mortgage-backed securities,
and similar assets are known as mortgage
BTR developments are specifically REITs. Generally, the term "REIT" is used
focused on the priorities and in reference to an equity REIT.
requirements of modern tenants.
To qualify as a REIT, a company must
Many of the major players in the BTR meet some strict requirements, including
market are concentrating on the quality distributing at least 70% (90% in the
of the service on offer and in particular, USA) of taxable income to shareholders
the wide range of amenities available, as dividends and investing at least three
which rival some 5-star hotels, such as on quarters of its assets in real estate.
site restaurants, resident lounges, If a REIT meets all the applicable
cinemas, rooftop swimming pools, health requirements, a real estate company
clubs, work-zones (for the increasing won’t pay corporate income tax on its
number of individuals that need the profits. The only taxation of REIT
option to work from home),‘chill-out’ dividends takes place after they're
spaces, and ultra- fast broadband. distributed to shareholders. The lack of
corporate tax liability is still a big perk
BTR Developments are being constructed for investors.
which are tailored to tenants at all stages
of their lives. Many are aimed at young What's a residential REIT?
professionals in cities, but there has also
been a focus on families, with some BTR A residential REIT is a real estate
developments providing large communal investment trust that owns and operates
spaces and play areas for children. rental property. Segmental specialization
Well-being is paramount (There is a includes: apartment blocks, high-rise
magic formula that applies: “happy blocks, social and affordable housing,
tenants = lower turnover = consistent student housing and family-rentals.
rent”) and those in the BTR sector are
aware of this, organizing social events or Residential REITs comprise some 10-15%
virtual exercise classes for their residents (by number of REITs listed) on the
in a bid to encourage networking and try Australian, UK, USA and RSA bourses.
to combat loneliness. Some residential REITs primarily grow
through development -- that is, by building
new properties from the ground up.
D. What is happening in other
Others choose to grow through acquisitions.
developed economies in this They create value by purchasing (and
segment, including residential often improving) existing properties.
REITS?
The route-map to listing a residential
property is varied:
Firstly, a REIT primer
Private Investor builds a residential
A real estate investment trust, or “REIT”, building, stabilizes the letting and then
is a specialized type of company that sells the income-earning property into
invests in real estate assets. REITs that the REIT
invest in commercial properties are
Build-To-Rent (“BTR”) 08
A pension fund, seeking exposure to Housing market risk
affordable or social housing develops Most housing investments fall into two
a residential rental pool, that is sold basic categories -- renting or owning. As
into the REIT the homeownership rate climbs, there is
less demand for rental housing.
A luxury developer builds a luxury
complex including an affordable and How do residential REITs hold up during
social housing segment, stabilizes the recessions and tough economies?
income flow and then sells the
property into the REIT. Residential real estate isn’t a very cyclical
industry. When times get tough, some
Most REITs do a combination of these. renters may move in with relatives to save
money, but generally speaking, residential
real estate is a pretty recession-resistant
Risks of investing in residential REITs:
business. Think of it like this: when times
Residential REITs can produce impressive get tough, people can cut back on discre-
total returns over time, but they aren’t tionary expenses like shopping at the mall
without risk. While there are dozens of and going on vacation. Rent is typically
potential risk factors when it comes to last on the list when it comes to cutting
stock investing, here are four in particular expenses.
that residential REIT investors should
know. Unlike Commercial REIT leases, residential
leases usually use a structure called a
gross lease. This means tenants pay rent,
Interest rate risk but the landlord pays the property taxes,
No discussion of REIT investing would be building maintenance, and insurance. In
complete without mentioning interest residential properties, the REIT may be
rates, especially as rising interest rates responsible for paying certain utilities on
negatively affect REIT stock prices as behalf of its residents as well. (Residential
investors expect a "risk premium" when REITs have several variable expenses to
investing in income-based stocks and worry about that tenants take care of in
bonds. other types of commercial real estate.)
Build-To-Rent (“BTR”) 9
3 The Residential
Rental Market in India
A. Market Size of BTR in India As per our consumer behavior research,
millennials and Gen Z prefer to rent than
to buy real estate. This generation gives
India’s real estate sector is expected more importance to convenience,
to touch a market size of USD 1 community than to be invested in long
trillion by 2030 and will contribute term. This trend has given popularity to
over 13% of the Gross Domestic Co-Living segment and expected to spill
Product (GDP) by 2025. towards private residential segment as
well; India provides immense
As per the International Monetary opportunity in Private Residential Rental
Fund’s (IMF) last estimates, India’s development, in our view.
residential rental market was worth
more than USD 20 billion, of which
68% or USD 13.5 billion is in urban B. Current Status of the
areas. Residential Rental market
As per Meraqi Research, 40% to 60%
in India
of the occupied residential units are
rented; the remaining units are In India, investors buy units within
owner-occupied. residential projects and then rent them
out to their individual tenants.
The Indian BTR market is worth an
estimated USD 8 billion
Build-To-Rent (“BTR”) 11
Key market norms for this existing C. Tax on Rental Income as
residential segment:
per IT Indian Rules
Rental Yield: Villas (2% -3%); Luxury The annual taxable value of the
residential units: 2%-2.5%; mid property is calculated by deducting
segment residential units: 3%. municipal taxes paid, and any further
deductions under section 24 from
Security deposit: 6 to 10 months the actual rent received.
Build-To-Rent (“BTR”) 12
Table 1: Difference between a Leave and License and a Rental Agreement
Section 52 of Indian
Governing Act States’ Rent Control Act
Easement Act, 1882
Eviction, Termination
Easily achievable Not easily achievable
or Cancellation
Currently, many owners are protecting their (ownership) rights by adopting leave
and license agreements (over regular leases) which gives limited rights to tenants.
Residential rental is governed by the Rent are some properties that have been let
Control Act 1948. This Act has been out that are still paying the same amount
modified by several states in 1990s but it of rent since 1948, disregarding inflation
is still in favour of tenant and this has and increased property valuations.
impacted investments in rental housing in
India. In 1992 the Central Government tried to
bring about amendments to the Act via a
1. Rent Control Act proposed model to ensure that the
property is not devalued. Unfortunately,
A Central Rent Control Act was passed by the changes were opposed by the
the Indian legislature in 1948. It regulates constituency represented by the sitting
the rules of letting out a property and tenants and therefore failed to take effect.
ensures that neither the landlord’s nor the
tenants’ rights are exploited by the other. In order to improve private participation
in the residential rental segment, the
It should also be noted that currently, Government of India presented the Model
each state has its own Rent Control Act, Tenancy ACT in 2019.
though largely similar to each other, they
carry some minor differences. Due to the
1948 Act being extremely stringent and
pro-tenant, the real estate market has had
difficulty in growing in some areas. There
Build-To-Rent (“BTR”) 13
2. Proposed Model Tenancy Act 2019
The Model Tenancy Act, 2019 is a tenancy 4. Landlord must provide access to basic
law proposed by the Government of India essentials and utilities, and cannot hike
designed to overhaul the tenancy the property rent in the middle of an
legislation in India. The Act draft is ongoing tenancy term.
presently under review by the states and
union territories 5. Every executed tenancy agreement has
to be reported to the Rent Authority
The Model Tenancy Act seeks to within two months, and a unique
implement the following rules: identification number will be issued.
Build-To-Rent (“BTR”) 14
Affordable Rental Housing Complexes (“ARHC”s) Scheme
Build-To-Rent (“BTR”) 15
4
Private Residential
Rental development
in India
This section outlines expected path of emergence of private residential rental
development from investment structure, product type, target segment, return
profile,
A. Product Definition
Table 2: Product Definition
Parameter Definition
Build-To-Rent (“BTR”) 17
B. Return Profile
In India, 40% -60% of the occupied of units, size and prevailing rental yield
residential units in apartment projects are across major cities in India for compact
leased. The table below captures the type apartment projects.
As per our research, with efficient Post the application of improved area
design management, developers can optimization and the provision of furni
achieve the following SBA for different ture, the annual rental yield would be
types of residential units: between 5% and 6%.
Studio: 300 sqft
1 BHK: 420sqft – 450 sqft (Note: As per our research, investors are
2 BHK: 650 sqft – 800 sqft able to achieve up to 20% higher rentals
for fully furnished apartments as com-
The function of these units can be pared to apartments that are partly or
improved by providing some furniture unfurnished)
for these units. The furnishing cost
would be INR 450 – 600 per sqft
(which is 7% to 10% of current capital
value of residential units)
Build-To-Rent (“BTR”) 18
C. Business Model providing services (where agreed)
The residential units are sold to retail including community kitchen, laundry,
investors and leased back from them with private storage and providing in-house
at least a guaranteed rental yield of 6% housekeeping, margin on facilitating extra
with a 3%-5% annual escalation. furniture/ home appliances through other
parties. (expected income for the
Scope of Developer: property management company)
The developer develops the property,
sells it to investors and also signs off the
lease-back agreement between the
D. Comparison of current
developer, rental housing firm and the residential rental units and
investor. proposed private model:
Scope of rental housing firm: The table below compares different
Manages the property as agreed and aspects of ongoing residential rental units
earns its income by renting out the units, and proposed private residential rental
earning itself a brokerage fee and also projects.
managing the common area and
Rent to Owner;
CAM: INR 2.5/ sqft to Rent to Owner and CAM Charges;
Rentals &
9 INR 4.0/ sqft; invests in for all availed services it will be
Other Charges
capital expenses for pro-rata basis.
furniture and others
Build-To-Rent (“BTR”) 19
E. Proposed investment F. Comparison between
structure different real estate investment
Stage 1: The project needs to be devel-
assets for retail investors
oped by selling units to retail investors.
The owner’s rights can be protected by HNI’s have been investing in the real
the adoption and application of suitable estate sector, mostly in the commercial,
legal documentation; we suggest that a land and residential segments; the
leave and license agreement is used. Co-Living segment is also emerging as an
option for investment. The table below
Stage 2: Post approval of the Model compares rental yielding assets available
Tenancy Act 2019, institutional fund for HNI investment: Commercial, Co-Liv-
houses may invest in this segment. ing and proposed private residential
rental development. It also captures key
Stage 3: Post maturity of this segment, investment attributes important for HNI
residential REITs may be possible for this as well.
segment.
Table 5 : Comparison of Real Estate Rental Yield Assets for HNI investors
Alternative Living
Proposed Private
Particulars Commercial Space (Purpose
Residential Rental
Built Co-Living/
Development
Student Housing)
Independence of
No No Yes
investment
Management Managed by developer Managed by operator Managed by operator
Hassle
Guaranteed Return Yes Yes Yes
The proposed private residential rental development looks promising segment for HNI
investments from availability, returns and investment attributes aspects.
Build-To-Rent (“BTR”) 20
G. Benefit for different stakeholders of rental private residential
developments
Convenience
5 Steady Income End-use investment / REIT Professionally Managed
Minimal Management
6 Economies of Scale involved lesser Risk through Guaranteed Tenure
forward funding (Leverage)
Build-To-Rent (“BTR”) 21
H. 8 Guiding Principles for successful development of residential
rental or Built To Rent (BTR) properties
Build-To-Rent (“BTR”) 22
6. Blend. Design a mix of apartment team will use the spaces. For instance, it’s
layouts: small, medium and large to suit important to use durable finishes in
different budgets. Multifamily operators rooms with high usage, such as the postal
needs to appeal to sharers, young families room, to minimize ongoing maintenance
and downsizers. costs and replacement rates.
Housing standards today are not 8. Season with amenities that cater to
compatible with the perfect ingredients your target audience. Shift some the
for Residential Rental developments such amenity space from private to shared use.
as the number of apartments per core, as There are primary shared amenities that
they don’t account for the professional every residential rental project should
full time operator on site 24/7. have (mail delivery, lounge area, back of
house for storage, loading bay for move
7. Don’t overcook it. Specifications in and move out, refuse collection
should be simple, to optimize facilities) and there are secondary
maintenance, durability and replacement amenities to reflect the brand. These can
strategies. It’s not a hotel, so it is of vital be refreshed as needed, as building usage
importance that residents can customise, data is generated and analyzed.
paint, fix items to the walls and
personalize the space. The more they can The building has to perform as an asset
make it feel like their home the longer for both the investors and residents. This
they are likely to stay. means that facilities such as gyms and
swimming pools must be continuously
Generally, there is a shift of developer assessed both in terms of what they add
spend from the apartments to the to the community and their operational
amenity areas. costs.
Build-To-Rent (“BTR”) 23
5 Conclusion/
Way Forward
The residential sector has been We expect premium and mid segments
languishing since 2015 on account of will enjoy interest from developers
over-supply and reduced availability of knowing investors’ interest.
equity. The residential rental housing
market is in our view a yet untapped MTA 2019 will pave the path for
market. institutional investment in this
segment.
The opportunity lies across all price
segments, from premium, mid segment Only after the segment’s rise to
and through to affordable housing. maturity can we expect to see REITs to
Government has already announced an invest in this segment.
incentive scheme for the affordable
segment (AHRC 2020). However,
private participation is yet to be seen
for this initiative.
A. Advisory Services
1. Project Feasibility
2. Location Analysis
3. Investor’s pitch
4. Product Development
5. Business Plan
6. SOPs for the project & Scope documentation
B. Capital Market
C. Land Advisory: Deal Structuring with land owner
D. Sales of units to retail investors
E. Operator connection for managing the facility
F. Asset Management
Build-To-Rent (“BTR”) 25
References
Lloyd Anderson, “A place for residential REIT in the RSA REIT market”, Nov 9
2015
Kingsley Napley, “The basics of Build to Rent”, published in Lexology (July 16,
2018)
Angelica Krystle Donati, “The 8 Ingredients For A Perfect Build To Rent Recipe”,
published in Forbes, (October 30, 2018)
Glossary
Build-To-Rent (“BTR”) 26
Authors Gorakh Jhunjhunwala, MRICS Jonathan Yach, MRICS
gorakh@meraqiadvisors.com jonathan@meraqiadvisors.com
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Build-To-Rent (“BTR”) 27
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