India has always had a strong demand for rental residential real estate. It has been an important component in addressing housing shortages, especially in urban areas. Rental residential real estate has allowed dwellers access to quality housing without actually investing in it. But the absence of a sound and robust rental policy has been a deterrent for India’s rental residential real estate realising its full potential.
According to the latest research by Magicbricks, there are multiple reasons why landlords prefer to keep their properties locked rather than putting them on rent. In the absence of a robust rental law, landlords are worried about how to manage the expectations of tenants, tackle squatters, and how to evict a tenant, who chooses to overstay. And a low rental yield in the range of 1.5-3 percent further discourages landlords to open up their properties for tenants.
This has resulted in millions of houses lying vacant in urban India. The 2017-18 Economic Survey suggests that over 12 percent of the total urban housing stock is vacant and the numbers of vacant homes have shot up to 11.1 million in 2011 from 6.5 million a decade earlier.
It is high time for these vacant units to come into the market. And, a big enabler comes in the form of government’s proposed Model Tenancy Law. Going by the first look of it, the proposed law is a bold move and certainly the need of the hour that can change the contours of the rental housing industry for good. It attempts to address three primary challenges:
Firstly, it will bring in more transparency in the relationship between the landlord and tenant
Secondly, it would be to increase liquidity in the market among homeowners, and
Thirdly, it would address the huge demand from India’s 400-million millennial population. Comprising 30 percent of the total population, the millennial population in India is the key driver of rental homes demand
If implemented well, the law will play a crucial role in transforming the rental real estate market from what was worth Rs. 1.53 lakh crore market in 2017 to an estimated around Rs 3 lakh crore market by 2023.
The introduction of the proposed Law augurs well for the government’s Housing for All initiative as the time has come to expand its ambit to rental housing as well. India’s housing requirements have been complex and till now policies have been mostly focused on building homes and on home ownership. The government needs to take a more holistic approach that must not only take into account existing challenges but also create newer opportunities for the rental real estate segment to achieve its full potential.
Effective enforcement of the law: Policy-makers too need to pay more attention to contract enforcement and property rights. Also, taking lessons from how RERA was implemented, one must also be wary of the fact that housing is a state subject and any amendment of law by the states may dilute the purpose.
Reduce anxiety in the relationship: The Law must attempt to increase convenience and reduce anxiety in the relationship between the tenant and the landlord. It is much required since the current laws happen to be very archaic. The new law, which seeks to establish a fair relationship between these two parties, makes it easy to rent a house, to exit a house and smoothens the process of staying there.
Increase liquidity in the market: Once the confidence boosts, it would in turn increase liquidity in the market. While the average rental yield remains at 1.5 percent to 3 percent, rentals across the country have relatively increased by 5 to 6 percent on an annual basis in the last two years.
And with new models and tech disruptors invading the rental space with value added services, the effective rental yield can go up to 5-6 percent. Simultaneously if the interest rate inflation comes down it would lower the cost of debt, this would bring cheer among the landlords.
Encourage involvement of institutional investors: Keeping in mind that there are 11.1 million vacant homes in urban India, the law should open up a world of opportunities for institutional investors. Rental residential is a highly unorganised sector and the law is expected to create the much needed legal framework for institutionalising this sector. This will also lead to purpose built rental housing for urban migrants under various schemes paving way for institutional investors in the rental segment.
Rise of organised players in managed rentals: The draft law has provisions for Property Managers and it opens up a huge opportunity for a new bunch of players in the managed rentals category. Over the last few years, we have seen the rise of some disruptors in the field of student accommodation, co-living, and paying guests.
The addition of the role of Property Managers boosts the chances of these players for end-to-end property management solutions. These managers now would be duty-bound by law through a fair and transparent system to ensure collection of rent, getting repairs done, rental renewal, resolution of disputes or any other matter related to tenancy.
To harness the full potential of the rental segment, the Model Tenancy Law needs to address the needs of all the stakeholders. From enforcing the contract to making eviction easier, fixing rent/security deposit as per market rate and increasing rents periodically, the Model Tenancy Law needs to bring a structured and well-oiled system in place to deal with the highly unorganised rental segment.
It also needs to create new opportunities within the segment to expand the business of rental residential real estate.The author is CEO, Magicbricks