Low rental yields remain a key constraint in the development of the rental market in the country and the Model Tenancy Act is expected to support institutionalisation and improvement in rental yields over the medium-to-long term, an analysis by ICRA has said.
India has a large vacant housing stock of over 110 lakh units and on the other, it has a huge housing shortage. One of the key reasons behind this paradox is the low rental yield in the country, which is one of the lowest across global markets.
While the rental yields in India stand at 2-3%, the same in some key markets can go as high as 7-8%. Moreover, with the high taxation of 30% in India, the net benefit from rental income is low, especially when compared to housing finance costs of around 7-8%, the analysis said.
“While capital appreciation used to cover this gap earlier, such appreciation has been muted over the last few years, thereby making the gap between rental yields and interest costs more detrimental. Thus, in order for the rental market to develop, returns would need to increase,” said Mahi Agarwal, Sector Head & Assistant Vice President at ICRA.
Indonesia has a rental yield of 8.5%, amongst the highest in the world followed by Cost Rica at around 7%. Ireland and Columbia command a rental yield of around 6% and Bulgaria is around 5%, the analysis said.
Other issues that have impacted the development of the Indian rental market include high age and poor maintenance of the vacant stock. Given these concerns, the implementation of the MTA as an effective rental housing framework, with it clearly spelling out the obligations of landlords and tenants with regards to property maintenance and upkeep, would be a crucial step towards aiding the development of the Indian rental market.
India’s rental market is poised for a significant change and development, post the approval of the Model Tenancy Act (MTA) by the Union Cabinet last week.
The new act replaces the Rent Control Act, 1958 and aims at bringing about a balance of interests between tenants and landlords. Specifically, it attempts to address some of the key conflicting issues between the parties by bringing about certain important changes, including the establishment of a rent authority and the mandatory requirement for a written rent agreement; and registration of the same with the authority.
Moreover, it also provides clarification on the premise and process for eviction of tenants, maximum level of security deposit, rent revision and requires the establishment of rent courts for dispute resolution.
The successful roll-out of the MTA is expected to have a positive impact on market functioning by creating a balanced legal framework, which would improve transparency and protect the interests of all key stakeholders, it said.
Till now, the rental market has remained largely underdeveloped, despite the presence of vacant units in urban areas as well as the existence of a considerable housing shortage, primarily due to trust issues between landlords and tenants, low rental yields and lengthy dispute resolution mechanisms.
“With the MTA in place now, housing stock can be used more efficiently, which would, in turn, support greater formalization and institutional of the sector over the medium-to-long term. The consequent development of new business models would aid improvement in return metrics. However, effective and broad-based implementation of the act, along with continued government support and initiatives aimed at reforming the rental market would remain key,” Agarwal said.