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Model Tenancy Act 2019 may impact co-living and student housing segments

While it still needs to be seen how the Act impacts the co-living and student housing space, the parity in the rent deposit structure may bring co-living and traditional leases in line with each other

Vandana Ramnani @vandanaramnani1

An important component of the government’s 100-day agenda is the promotion of rental housing with as many as 11 lakh houses are lying vacant across the country. To encourage people to rent out their premises, the government has drafted the Model Tenancy Act, 2019.

It proposes to overhaul the legal framework that governs rental housing and provide a fillip to private participation in the segment, especially in the form of co-living and student housing, thus reducing the housing gap across the country.

The intention is to create adequate quality rental housing supply for those who do not wish to buy property but to rent it out, especially migrants, formal and informal sector workers, professionals, students. The Act calls for setting up a Rent Authority in every state and Union Territory and even a separate court to handle rent-related matters.

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The safety net

It has been proposed to cap the security deposit equal to a maximum of two month’s rent in case of residential properties and, minimum of one month’s rent in case of non-residential property. After the Act comes into force, no person will let or take on rent any premises except by an agreement in writing. Within two months of executing the rental agreement both landowner and tenant are required to intimate to the Rent Authority about the agreement and within seven days a unique identification number will be issued by the authority to both parties.

The Act also proposes heavy penalties for failure to vacate a residential unit. The landlord is entitled to receive a compensation double the monthly rent for two months and four times the monthly rent if a tenant does not vacate the premises after tenancy has been terminated by order, notice or as per agreement.

The landlord cannot indulge in mid-term hike in rentals. A landlord cannot cut off or withhold essential supplies or services under the new Act. The draft also makes it the landlord's responsibility to rectify structural damages and undertake measures like whitewashing walls and painting doors and windows.

Anuj Puri, Chairman, ANAROCK Property Consultants, said the distorted property rights for lack of a sound rental policy, weak rental contract implementation and low rental yields is what prompts property vacancies. The biggest challenge going forward is like RERA, the Model Tenancy Act, 2019 may lose its real purpose if states do not follow the basic guidelines and dilute them.

Proposes an enabling framework for co-living and student housing

Developing policies to promote balanced rental housing through options like student housing and co-living is one of the stated objectives of the Model Tenancy Act, 2019.

“While the draft helps create an enabling framework, the government must address specific issues to increase procedural transparency and enhance investor interest. For instance, the Model Act caps security deposit to two months for residential property and minimum one month for non-residential property. However, there is ambiguity in case of co-living and student housing operators, which essentially involve use of residential property for non-residential purposes,” Aashish Agarwal, Senior Director, Valuation & Advisory (Head- Consulting) at Colliers International India, said.

Provisions for subletting the property should also be looked into from the perspective of aggregators and emerging business models like homestays. While RERA was intentionally consumer-centric, the Centre should try and balance the interests of both landlords and tenants in the Tenancy Act. The penal provisions of the Act are stringent, but weak contract implementation remains one of the key concerns for all stakeholders and might limit its effectiveness, he added.

“The new Model Tenancy Act is a welcome move for the real estate players. It simplifies the complex rules for the rental system as well as is a boost to developers’ trust in the system. Our country has a millennial population of 400 million who prefer access over ownership when it comes to housing solutions. The latest amendment is a lucrative proposition for developers, who up till now had very little incentive to build rental housing for co-living purpose,” Deepak Anand, Founder and CEO, Housr, said.

Proposes reduction in rent deposits

One of the advantages of the Act is that it reduces the deposit amount. Since lower deposits are one of the key advantages of the co-living industry compared to traditional leasing, it brings co-living and traditional leases more in line with each other.

“It may also actually reduce the competitive advantage of co-living from a tenant perspective as it reduces the deposit, which has been one of the USPs of the co-living sector. Traditional landlords may find it difficult to operate in an environment with only two months' deposit as the time and cost of evicting tenants is quite high. So, this may give them an incentive to deal with co-living operators instead of trying to manage tenants themselves,” Vikram Chari, founder and CEO of SmartOwner, said.

At present, many traditional landlords ask for a 10-month deposit. This may pose an issue for youngsters at an early stage in their careers. Co-living typically has no deposit or only one months' deposit, so one of the attractions of co-living is the lower deposit. Whereas, if the new law is implemented in all the states, then traditional leases will also have a lower deposit, thus removing one of the benefits of co-living, he explained.

Another issue here is that in most states, especially Haryana, co-living players have a management contract with the owners. They charge a management fee for the units. The liability of the property continues to be with the landlord.

“One may have wait and watch to see how the co-living segment takes to the Model Tenancy Act because currently it is utilising the management fee structure rather than the traditional house rent structure,” Mudassir Zaidi, Executive Director (North), Knight Frank (India), said.

In the serviced apartments' space, operators utilise commercial FSI and the charges should therefore be looked at from the hospitality industry perspective. Leasing guest house space is allowed only if the plot size is over 1,000 sq yards in Haryana. Most co-living players retrofit these spaces.

It is expected that down the line, co-living players may take up towers in a residential housing complex and rent them out to students as part of student housing, he said.

But these players would still have to follow existing norms when it comes to the purpose for which these spaces are put to use. Regular housing units cannot be occupied as service apartments. Serviced apartments will continue to come under the commercial category, he explained.

Will housing REITs become a reality?

Technically yes. But in India the rental yield for residential is as low as 1.5-2 percent compared to the commercial segment where the yield is 7-8 percent.

Even if rental yields increase, with additional facilities provided by co-living players or student housing players, the maximum this yield can go up is by a few percentage points. It may not be a reality anytime soon unless there is a bull run in the market, Zaidi said, adding there have been cases where owners first lease out a property to a co-living player and then sell it off as a pre-leased property for capital gains but that still does not offer yields matching the commercial segment.

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First Published on Jul 18, 2019 12:31 pm
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