House owner: You are from Odisha, so you must be eating fish?
Prospective tenant: Yes.
House owner: Sorry, I can’t give my house on rent to people who eat fish.
This conversation took place in 2004, but Amarendra Sahu—a prospective tenant then—still recalls it with a mix of bemusement and indignation. Sahu had moved to Bengaluru on work and wasn’t prepared for the hostility that accompanied house-hunting in the city. “Nobody would give me a house! Thoroughly frustrated after a tedious three-month house-hunting mission, five of us got together and rented an entire independent house. It was the only way to get a roof over our heads,” says Sahu, then a fresh engineering graduate from the National Institute of Technology, Karnataka (NITK) in Surathkal.
It has been 12 years since Sahu, now co-founder and CEO of NestAway Technologies, was denied a house because he liked his hilsa, but not much has changed. House hunting in the city is still akin to looking for the proverbial needle in the haystack for single men and women. Take the case of 25-year-old Neetu Sophia Thomas. “Landlords seem to have a list of expectations for their tenants. No cooking of non-vegetarian food, no male friends, no partying, no music after 10 pm are part of the usual checklist. Recently a house owner even expressed her fear of men hanging around in the area more if she gives her house on rent to single women,” says Thomas, a sales executive with a Bengaluru-based media company. Currently looking for single accommodation, Thomas continues to live in shared paying guest (PG) digs where, among other things, her landlord thinks nothing of walking in post 10 pm without prior notice. “There is simply no privacy,” she says.
Taking note of these pain points of the single urban working population, Sahu, 33, started NestAway last year, a managed home rental services provider, along with Smruti Parida, 32, Deepak Dhar, 33, and Jitendra Jagadev, 33. The Bengaluru-based startup connects tenants with house owners and provides assistance throughout the rental process. It also manages rentals for its customers by providing fully furnished accommodations.
One of the opportunities it has tapped into is the ‘rent-a-bed’ business. With an increasing number of working professionals in the 20-25 age group in large cities looking for better accommodation in housing societies, beyond PGs, and a hassle-free rental process, the organised real estate market in the country has developed an appetite for the ‘rent-a-bed’ model.
Typically in a rent-a-bed accommodation, the tenant shares a flat along with others. While the concept has always existed (as PGs), experts point out that the differentiation is in the participation of real estate developers converting their apartments into shared accommodation facilities. This gives tenants access to all the amenities that are available in gated communities and housing societies, and not included in regular PG accommodations.
Currently, NestAway works with a network of 3,000 house owners and 10,000 tenants across Bengaluru, Hyderabad, Pune, Delhi and the national capital region (NCR). However, close to 60 percent of its new business comes from Bengaluru. Over the last year, the Ratan Tata-backed startup has garnered investor interest as well. So far, it has raised $44 million from investors such as Tiger Global Management, IDG Ventures India, Flipkart, Russian billionaire Yuri Milner and angel investor Naveen Tiwari, co-founder, InMobi.
“There is a migration of a large number of technology graduates to cities such as Bengaluru, Pune and Hyderabad and, consequently, a demand for economical and good quality accommodation. Of late, several startups, real estate developers and managed property operators have ventured into the rent-a-bed accommodation space,” says Bhushan Sawant, managing partner, Sawant Partners, a Mumbai-based real estate consulting firm.
Indeed, in the last one year, many home rental operators have started offering rent-a-bed accommodation seeing its immense market potential. Bengaluru-based real estate developer Shanders is set to launch its first rent-a-bed scheme in April with its new project in the Electronic City area, home to a large number of IT professionals. In its initial stage, the property would have about 110 apartments (6 beds per apartment) adding up to 660 beds. Shanders aims to operate about 3,000 beds in the next year largely focusing on Bengaluru’s tech population.
“In the shared accommodation facility, a maximum of six people can share a three-bedroom flat of about 1,800 square feet. Along with the host of common amenities within the apartment, we would also provide access to the club house, swimming pool and gym, concierge service, food delivery, on-call doctor and parent/guest accommodation. The tenants in the rent-a-bed accommodation can use all the facilities,” says Sriram Chitturi, CEO, Shanders. The rent per bed varies anywhere between Rs 6,000 and Rs 13,000 a month, depending on the space of the flat, area of the property, facilities and services.
“Most of the house owners don’t want to rent out to bachelors and single women, preferring families instead. But by providing the rent-a-bed format in a housing society, we are trying to institutionalise the space and bring in facility managers and third-party vendors to provide allied services,” says Chitturi.
Analysts believe that for developers, formats such as rent-a-bed are an effective channel to monetise unsold inventory. According to a report released earlier this year by industry body, Confederation of Real Estate Developers’ Associations of India (Credai) in association with international property consultant JLL, Bengaluru had 82,357 units of total unsold inventory as of December 2015. The inventory included both under-construction and completed projects.
“Clearly the rent-a-bed format can monetise inventory. However, it is important that the other parameters, such as location, are also maintained as also adding value-based services vis-a-vis luxuries. This remains, in the end, a price sensitive market,” says Sawant.
Typically in the Indian real estate market, the rental yield from residential properties is very low—on an average, between 2.5 and 3 percent—while the global average for countries similar to India in terms of economic development is about 4.5-5 percent. “One of the reasons why real estate developers and institutional investors don’t look at buying and renting out apartments is because of low rental yield. However, rental yield from a commercial property in India is between 8 and 9 percent. By working on a per bed concept, the rental yield can go up generously. It easily gives developers about 5-6 percent yield on their property,” says Ajay Kumar, founder and CEO, Cozee Homes, a Bengaluru-based home rental services startup.
By early May, Cozee Homes is geared to enter the per bed accommodation business. “We have taken up some inventory (about 100 properties, primarily apartments) in areas such as Electronic City, Whitefield and Kalyan Nagar in Bengaluru,” says Kumar.
For Bengaluru-based online rental platform Grabhouse, shared accommodation is a key vertical with 55 percent of its total listings in the shared accommodation space. With a presence in 11 cities, including Bengaluru, Delhi, Noida, Ghaziabad, Gurgaon, Pune and Hyderabad, 70 percent of its customer base is currently living in shared accommodation.
Not just tech populations, but students away from home are also a big potential market—and companies like WudStay, an online marketplace for budget accommodation, are entering this segment. Launched in April 2015, WudStay raised funding of $3 million from Mangrove Capital Partners and Vikas Saxena, CEO of Nimbuzz, a messaging application maker. In December last year, the startup, founded by 33-year-old Prafulla Mathur, said it would enter the branded PG space in cities like Kota, Delhi and Bengaluru, with large student populations.
Average monthly rentals for PGs in metros range between Rs 4,000 and Rs 6,000, offering a huge potential for organised players to grow. Compare that to the services provided, and the tenant’s preference seems obvious. “In Bengaluru alone, there would be at least 600,000 beds across paying guest accommodations. Bengaluru has the highest density of PGs in India followed by Gurgaon-Noida and Pune. Bengaluru as a city has grown very fast and there wasn’t enough housing available near tech parks where large IT-BPO companies are based, which led to the rapid growth of PG accommodations in the city,” says Nikhil Sikri, founder-CEO, Zelo, a branded PG platform with services in Bengaluru and Pune. Currently, Zelo manages about 1,000 beds across the two cities.
Amit Agarwal, co-founder, NoBroker, a Bengaluru-based home-rental portal that circumvents the broker, feels that the challenging part about this business is making the right choice on the property. “Get into properties where the demand from tenant is high, typically large IT parks, colleges and corporate centres. The price point and location of the property should match so that the occupancy level is always high. To make money, you have to aim for 100 percent occupancy in this business,” says Agarwal, who is also exploring the rent-a-bed space to expand his portfolio. On the face of it, the concept seems a win-win proposition for the house owner, tenant, developer and the service provider. Migrating students and professionals continue to struggle to find desirable accommodation, making them a large market ripe for the picking.
It is still, however, a nascent business. And till such time it gathers momentum, for people like Sahu, the choice continues to remain between hilsa and a house.
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(This story appears in the 13 May, 2016 issue of Forbes India. To visit our Archives, click here.)