It was perhaps inevitable that Mumbai’s rental market, battered in 2020 and early 2021, would eventually rebound. Landlords and brokers then had been desperate to rent properties out as COVID-19 forced many professionals to return to their home towns and stay there for long durations.

Rental rates in several markets dropped by 15-20 percent. Some premium micro-markets that were dependent on finance professionals and expats experienced an even deeper decline of 25-30 percent.

Apartment owners in many areas who had grown accustomed to free services from their neighbourhood brokers started incentivizing them with commissions. Brokers, who depended on commissions from tenants, started offering them free or discounted services so that they could close deals.

Momentum started returning to the market in the second half of 2021. By the beginning of 2022 rental rates were on the rampage. Rentals have jumped 20-25 percent across most micro-markets. The rental that paid for a 3BHK apartment in a particular building is enough now only for a 2BHK.

EXCEEDING PRE-COVID LEVELS

In a majority of areas, rental rates have zoomed to a degree that they are now higher than they even were during pre-COVID levels.

Two factors are driving this frenzy. The first reason is that there are now almost all professionals who returned to their hometowns during COVID are back in the city. Although many companies are still practicing Work From Home, they are asking employees to visit the office 2-3 times a week.

That means employees have to make Mumbai their base even though they may not visit their offices daily.

In itself, their return should not have caused a sharp rebound in the rental market, driven by a second and more critical factor: Redevelopment.

In 2021, the Maharashtra government announced a sharp discount to builders for undertaking housing projects. The response was electric as builders rushed to avail the benefit provided by the government. Approved projects in 2021 were 5x-6x of a normal year.

GAME-CHANGER

A majority of these were Redevelopment projects. What is Redevelopment? Redevelopment is the replacement of a small, old building with a big, new building, subject to municipal norms. The old building gets demolished and a new one comes up. Apartment owners in old buildings are promised apartments in newly constructed building. They are even given hefty transit rents by the builder for the period when their building is demolished and a new one has not come up.

This has been the game-changer for Mumbai’s rental market. As buildings go into Redevelopment, they have to get demolished. When they are demolished, the supply of apartments goes out of the system. Hence, if a tenant earlier had 20 buildings for choosing an apartment, due to the redevelopment frenzy, the tenant today has a choice of only 16 buildings.

That’s only one part of the story. The second part of the story is that the number of prospective tenants in the market has jumped meaningfully due to Redevelopment.

That’s because apartment owners have now become tenants temporarily as their buildings go for demolition and redevelopment. Today’s rental market in Mumbai has seen supply getting squeezed out and demand getting enhanced, resulting in a boom for landlords.

Will this party last? For the next 24 months at least, it seems that the party will continue. That’s because most buildings will take 24-36 months to be completed. The market will find a balance once the redeveloped buildings are complete. Then many of today’s tenants will go back to being apartment owners. Demand will be squeezed out and supply will get enhanced as newer and bigger buildings come up with greater inventory.

For the moment landlords are celebrating after a tough ride in 2020 and parts of 2021. The boom won't end in a hurry and they have the government and builders to thank for it.