There’s a new trend emerging in Mumbai where developers- who have been unable to find buyers for flats worth Rs 4 Cr and more – are instead focusing on leasing out their units to improve cash flows. Top developers who are using this model include Sunteck Realty, Kalpataru and Ekta World.
How Does The Lease Model Work?
Here’s how this model works. A developer with huge unsold inventory allows the customer to take a flat on an 11-month lease, earning a monthly rental. For instance, a 3-bedroom unit in a location like Bandra can earn a developer anywhere between Rs 2 lakhs to Rs 2.5 lakhs as rent, bringing in much-needed cash liquidity.
“Developers at this moment are facing a cash crunch. There is a mismatch between the demand and supply. These leases that we get out of the apartment usually help us to take care of our administration cost, our office expenditure and it really helps with the cash flows.” claims Ashok Mohnani, chairman and MD of Ekta World.
This makes sense as the luxury market has been the hardest hit in the ongoing real estate slowdown. According to data from PropEquity, out of over 28,000 luxury units launched, only about 11,000 have been sold, leaving a whopping 17,000 units unsold. No wonder then that developers are perhaps left with no choice but to lease their units in order to beat the real estate blues.
“We do have instances overseas where we find institutional buyers who do the same thing. In that sense it’s a relatively new phenomenon for India because rental returns are still low compared to your matured markets. But I think it’s a good way to trying to deal with the slowdown in the market right now.” says Shveta Jain, MD of residential services at Cushman &Wakefield
Are There Takers For The Lease Model?
Real estate experts say the lease model is best suited for who are looking for transit accommodation and don’t mind investing for a short term.
“We have investors who would prefer a pre-lease apartment as it is convenient. There are NRIs who don’t want to stay in India permanently and so prefer to take an apartment on lease. The rate of interest abroad is much less than what is in India. So for them it does look lucrative.” claims Ashok Mohnani.
With rental yields as low as 2% to 3% especially in the luxury segment, experts feel it makes more financial sense for home seekers to lease an apartment than buy one outright.
“A bank fix deposit will easily get you 8% as returns. Even if you are at the highest income bracket of 30%, you would still get 5.6% returns post tax and flats are available for you today between 2% to 3% in terms of value of the flat. So if I have Rs. 10 crore to spend, it doesn’t make sense for me to buy a flat because with 2% of that cost I can rent that particular flat.” explains property expert Vinay Singh.
Leasing an apartment is a win-win for home seekers because it also means you don’t have to deal with the hassles of property and other taxes. But the benefits are far less for developers, who view leasing as a short-term solution to tide over the cash crunch. Once the real estate market picks up – this trend will come to an end.
Reporter : Ashwini Priolker, NDTV
Web Editor : Nikhil Narayan Sivadas, NDTV