4 strategies to build a successful Built‑To‑Rent (BTR) portfolio in India

“Success is where preparation and opportunity meet.”

The Indian residential sector has been languishing since 2015 on account of over-supply and scarcity of equity issues. The residential rental housing market is in our view a yet untapped market.

The Build to Rent (BTR) sub-market in private rented residential stock is designed specifically for renting rather than for sale. The product is in many ways synonymous with the multi-family sector in the United States which is typically owned by institutional investors and managed by specialist operators.

The Indian BTR market is worth an estimated USD 8 billion. As per our research, millennials and Gen Z prefer to rent than to buy real estate. This generation gives more importance to convenience, community than to be invested in long term. This trend has led to emergence of Co-Living segment and expected to graduate towards private residential segment.

The BTR / private residential rental development can generate a rental yield of 5% - 6% with annual escalations of 3% to 5%. Therefore, the annual return on Investment (RoI) can be expected to be in the range of 8% to 11%. This is a compelling proposition for investors considering the relatively low risk-return profile of this product.

In our opinion, India with significantly large Gen Y and Z population provides immense opportunity in Private Residential Rental development. However, India has not seen start of the BTR yet. Property owners/ developers needs to focus on 4 following parameters to get started on this:

1. Product. Firstly, the developer needs to define the product aligned to consumer and market needs. This product is in a matured state in developed countries including US, UK and other western European countries. So, developers can learn product attributes from them. However, Indian market has its own characteristics, and it is recommended to conduct in-depth market and consumer analysis.

   Defining product includes identification of suitable location, unit sizes, amenities, applied Proptech, operational requirements and solutions.

2. Financial. There is a saying “a company is born on the day it has got funding” and the same is true for all projects including BTR.

   In India, BTR is a new concept and currently financial institutions (Banks, NBFCs, HFCs and others) do not have the mandate to fund it. Moreover, it is not self-liquidating asset and not has any “proof of concept” on returns. Therefore, funding from financial institution is unlikely to happen in near future.

   BTR/ private residential rental development can start with retail investors. Developers needs to formulate an investment memo (IM) and find retail investors at planning stage itself. The IM needs to answer investors queries including replacement cost of fit-out, guaranteed return, partners, etc.

   Developers can also opt for another route, persuading Landowners (LOs) of Joint Development (JD) projects to do LOs shared in BTR model. Many LOs are looking to retain the property for annual income, so, they may agree.

   Post the success of a few projects across countries, specific institutional funds could be raised to invest in this product.

3. Procurement plan and implementation. In BTR, the developer needs to furnish the units and offer a plug and play residence to the end-users. To achieve this, one needs to identify multiple vendors/ suppliers for different scope of works.

   Also, technology partners need to be identified for planning and implementation of the same.

4. Operating plan. Post completion of the project, BTR project needs an operations team to manage the renting-out to end users and management of the project.

   The Developer has 2 options:
   

   • Outsource to operating firms likes of Co-Living operators or property management firms.
   • Develop in-house capability to operate the project post completion.

   It is recommended to outsource this function for a first few projects to avoid more variables at the beginning. Post initial success, developers can plan to grow this capability in-house.

This segment within the residential sector shows great promise as it responds to the changes within society and investor preferences. The (proposed) Model Tenancy Act, 2019 is a tenancy law proposed by the Government of India designed to overhaul the tenancy legislation in India. The Act draft is presently under review by the states and union territories. It is expected to be passed by authorities in 2021-22. Finalization of this Act will strengthen the attractiveness of BTR in India.

Meraqi can assist property owners and investors in different business areas for BTR:
A. Conduct Market Research and Development Feasibility;
B. Preparation of Business Plans & Investment Memo;
C. Identification of investors; D. Tie-ups with Operator’s

Further Read: Meraqi' Brief: Built To Rent (BTR), October 2020; Build-To-Rent (BTR) in India I Meraqi RE Alternative Assets Research (meraqiadvisors.com)