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Millennials prefer renting homes to buying. Here’s why…

Written by Samantak Das

 

As you drive through any Indian metropolis, you are bound to come across giant billboards selling the dream of living in swanky highrises with all modern amenities, but millennials, of late, are not too keen on buying homes. There are several reasons for such behaviour and these include personal preference and economic considerations

The millennial mindset

Interestingly, with the new generation has come a shift in values and culture. Millennials are not so keen on home ownership as their previous generations. Typically, millennials, or GenY, include people born between the early-’80s and 2000s. The traditional yardsticks of success — buying a house, having a fixed retirement plan, marrying at a certain age, or having children — do not apply to this group. Instead, they are more focussed on their jobs, time to find a life partner and finding financial freedom rather than ownership of assets.

This paradigm shift in mindset compared to that in the previous generations also means that millennials shy away from long-term financial obligations that come with buying a home. Connectivity to the workplace, convenience and security are important, but owning their own home not that much.

Moreover, because of the nature of their jobs, millennials seek mobility and do not want to stick to one geography or location. Renting offers more flexibility and freedom of moving base when a more exciting job opportunity presents itself. Millennials also prefer staying close to business districts on rent and residential apartments are relatively costlier there.

 

 

 The EMI:rent ratio

One of the considerations while buying property is, of course, affordability. The rent of a certain property is always less than the EMI one would be paying. But when the difference between EMI and rent is not very much, there is a case for buying, because, unlike rent, EMIs help build assets. In India, due to relatively higher prices, the EMI:rent ratio is very high.

Rent vs EMI (2 BHK flat)

Cities Micro-market Rent
(Rs/Month)
Price (Rs lakh) EMI (Rs) EMI:Rent
Mumbai Andheri 30,000-40,000 189 132,654 3.4:4.5
Pune Hinjewadi 20,000-23,000 70-75 52,640 2.3:2.7
Hyderabad Kondapur 25,000-30,000 80 56,150  1.9:2.3

Source: JLL Research

 

Let us take the example of Andheri (West), a posh, suburban locality in Mumbai. A two BHK apartment would cost around Rs 1.8 crore. Assuming a down payment of 20% (Rs 36 lakh), one has to take a loan of Rs 1.44 crore. If we consider a tenure of 20 years and an interest rate of 9% per annum, the EMI comes to Rs 132,654. The monthly rent for a similar property would be in the range of Rs 30,000-Rs 40,000.

That is a pretty high EMI:rent ratio — greater than 3. The ratio in similar localities in other major cities would be relatively lower, but still quite high. Also, millennials prefer to stay near their workplaces, because it cuts down on commuting time and improves quality of life, but property prices in upmarket areas are well beyond reach, making renting the only option.

This is a definite reason why millennials prefer renting instead of buying. JLL Research estimates the demand for rental housing in three major cities — Delhi-NCR, Bengaluru and Mumbai — to grow to 4.4 million in 2021 up from 2.9 million in 2011, at CAGR 4.3%.

 

Co-living spaces, a new trend

While rental housing is getting more organised, the fact that millennials prefer sharing to ownership and are shying away from home ownership in favour of renting has also given rise to the concept of co-living spaces. Based on the ‘plug-and-play’ model, co-living helps residents share amenities, such as Wi-Fi, phone, housekeeping, laundry, water, entertainment and so forth. Also, they share kitchen, bathroom, living areas and pantry. It is like a home away from home.

 

 

With property prices rising in gateway cities, co-living offers residents shorter and more flexible lease terms compared to condominiums, as well as ‘ready-to-move in’ convenience. Along with that comes the convenience of surplus benefits, such electricity, water, gas, all included in the rent. Hence, millennials are willing to pay a premium for their stay in an organised set-up as this saves them from such chores as separate bill payments.

Players in a co-living space, such as Zolostays, CoLive, Stanza Living and CoHo, have operations in such cities as Delhi-NCR, Bengaluru, Pune and Hyderabad. Investors have also shown an interest in these start-ups, sensing a growth in demand. While, in a traditional rental set-up, investors get a yield of around 2%-3.5%, in case of co-living, the yields can almost double, or even increase to 2.5-3 times in case of customised co-living spaces.

Given that demand is increasing and there is relevant supply, too, JLL-India believes that co-living spaces are set to grow significantly in future. ‘Generation rent’ is thus a phrase that is apt for millennials and the real estate industry needs to be well-equipped to adjust to this new paradigm.

 (Samantak Das is Chief Economist & Head, Research & REIS, JLL-India)

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