01 Nov 2019 20:07 IST

Will the Model Tenancy Act give housing segment a fillip?

It is expected to address the issues of oversupply, low yields and absence of a strong regulator

The Indian residential market is faced with the issue of large unsold housing units, and is also grappling with a huge housing shortage of nearly 20 million units. While the Centre is encouraging home ownership, rental solutions could hold the key to addressing the challenges in the residential segment.

However, low rental yields, lack of proper house rental regulations, absence of a regulatory authority to resolve disputes, and informal rental agreements between landlord and tenants are some factors hindering the growth in the rental segment.

With the introduction of the draft Model Tenancy Act 2019, there are expectations of the housing rental segment getting a fillip. While the Act seeks to ensure a balance between the interests of landlords and tenants, whether it can bring a sea-change in the market remains to be seen.

Challenges in rental housing

A key issue with the rental market has been low yields from property. When the housing market was booming, purchases were made for capital appreciation. But as the market slowed, property prices grew less than 2 per cent. Minimal gains from capital appreciation, coupled with low rental yield — annual rent as a ratio of the property price after deducting all expenses — have dissuaded people from buying property for investment purposes. The net rental yield, as per the Knight Frank report, is currently hovering in the 2-3 per cent range across most Indian cities. This is one of the lowest in the world.

The fragile and often complex relationship between landlords and tenants has been another major deterrent for home-owners in exploring the rental housing market. Fear of frequent demands from tenants with respect to structural maintenance, and illegal possession by tenants deters home owners from renting their asset. For tenants, issues such as fear of untimely eviction, ad hoc security deposit demands and other restrictions, have been dampeners.

Thus, in the event of conflicts, there is a long-drawn legal battle involving high costs. Though there are tenancy and rent-related laws across States, the grounds for legal eviction of tenants by landlords vary with each State. For instance, in Mumbai, the State-enacted Rent Control Act prevents landlords from charging market-based rents.

According to the Knight Frank report, the financial capital pays rents at rates that were frozen years ago, unable to evict defaulting tenants. Landlords have allowed their buildings to either deteriorate or collapse. The rental yield in the city is around 2.3 per cent according to MagicBricks data, while it is about 4 per cent in Bengaluru.

Possible solutions

The Model Tenancy Act addresses some of these issues related to rental housing. The Act is beneficial to both tenants and landlords. For starters, all agreements need to be registered within two months.

For home-owners, there is no ceiling on rent charged — market forces are left to determine the prices. If the tenant does not vacate the premises after the rent agreement term expires, the landlord can charge a higher monthly rent. The lessee is not allowed to sub-let property without the written permission of landlord. The circumstances under which an occupant can be evicted are, among others, rental defaults for two consecutive months or misuse of property.

For tenants, rent reduction can be requested if the building or structure has deteriorated and there is no renovation. Landlords must give a written receipt for any payment made by tenants; failing to provide this is a punishable offence. Deposits are capped at two months’ rent for residential property, and one month’s rent in the case of non-residential property.

In case of any dispute between the parties, a rent authority will handle the cases instead of civil courts. New rent courts and a rent tribunal are to be formed. The Act stipulates that cases must be resolved in 60 days.

What’s next?

As per an Anarock report, the rental housing market has a huge untapped potential with over 6.65 lakh housing units unsold, with 12 per cent being ready-to-move-in properties. The Model Tenancy Act, if implemented, could attract private players. However, it may take a long time for ground-level changes to take place.

Magicbricks data suggests that rental yields from mid and affordable housing are higher compared to the luxury segment. Thus, properties priced below ₹6,000 per sq ft have an average rental yield of more than 3 per cent, while those capped above have rental yields between 2.4 and 3 per cent.

Other modern housing solutions, such as co-living, are gaining traction. It is a housing unit which is fully furnished and rented to groups. It allows residents to mingle and interact, while providing privacy. These are fully managed spaces where tenants can choose private or shared bedrooms. It usually has a common kitchen, dining area and recreational units.

Start-ups such as Oyo Living, Nestaway, CoHo Living have entered the market and are making the segment more organised. Similarly, student housing is gaining ground in the market as well.