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MYTHS & TRUTHS OF RENTAL HOUSING

BY Sapna

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Finding a home on rent in any Indian city is no less than going through a maze where every decision takes us in a different direction. From identifying the right property and right landlord to mutually agreeable rent and security deposit, the task is indeed uphill. Not to mention the brokers, that are most of the time devoid of any detailed information about the property or its owners and their only obligation remains to themselves, to earn the brokerage – from landlord and tenant.

Vast majority of population still depends on brokers to find them an appropriate premises, and so do the homeowners to get their homes rented. Majority of ads for rental housing on online property platforms too are from brokers. Although, one can avoid using a broker by finding an apartment through reference or through classified posted by an owner, if you are a busy professional, you would still require an agent to do the tedious paperwork and coordination.

Reasons For This Conundrum

Indian cities lack formal rental housing market which remains fragmented and unorganized. Unlike the Western countries, where rental housing is a lucrative real estate segment with good returns and proper laws and regulations governing all the stakeholders, in India the build-to-rent model, practiced globally doesn’t exist.

As per Knight Frank's report, the rental housing market in India is projected to grow at a faster rate than the rate of urbanization over the next 20 years. But, only a part of the oversupplied premium houses enters the rental housing market, and in low-income housing, there is even larger shortfall. India has one of the lowest rentals to total housing ratios in the world mainly because of low rental yields, no proper regulations and lack of a stringent laws, that keep the homeowners from renting their homes and the tenants, for the lack of choices, settling to sometimes unreasonable demands of the homeowner.

An experience shared with me on the topic of renting in Delhi, was of refusal to rent to a student as the house could be rented to profes- sionals only, once he got a job, still had a hard time finding a suitable accommodation as house could be rented only to a family. After getting married and wanting to bring wife and kid to the city, the next home- owner he met, didn’t want to rent to a family and preferred single men or students. A funny yet poignant anecdote takes us to an even more alarming situation when there are religious or gender biases involved.

Time to Find Solutions

Of approximately 1,10,860 new units launched in Q1 2024 across the top 7 cities, around 28,020 units (or 25%) were luxury homes and just 19,980 units (18%) were in the affordable segment, as per Anarock survey. Furthermore, there is an underutilization of existing ready-to move-in units in affordable segment. G Hari Babu, National President, Naredco commenting on the situation had said, “On one hand, there is a shortage in the housing segment, and on the other, there are 1.14 crore vacant flats—it is a funny situation.

I think it is a national crime to keep assets without utilization. If today you pass a law that you should not keep your flat idle and that idle flats should be charged double or three times the property tax, owners will be forced to give flats for rent or otherwise sell them,” he said.

As per Dr Niranjan Hiranandani, in a developed country like USA, more than 50 per cent of its populace prefers to live on rent. If India has strong rental housing policy, it would become easier for those wanting a rental accommodation.

Formalizing The Informal Rental Market

Institutionalizing rental housing is the dire need of the hour. The reasons for renting can range from affordability, job location to flexibility. Many professionals relocating to different cities due to work or young professionals who yet not want to commit to buying a home form a huge chunk of the renting population.

However, due to disorderly pattern of the rental housing, many a times they have to deal with landlords’ highhandedness from high security deposit amount, arbitrary yearly rent escalation to even sudden eviction notice.

The Government to balance the interests of both the property owner and tenant in a judicious manner introduced draft Model Tenancy Act (MTA) in 2015 and it was approved by the Union Cabinet in 2021. The Act aims to create a framework for the regulation of tenancy for both commercial and residential properties by providing guidelines and registration of rental contracts and bring transparency and account- ability to the existing system.

  • The model law intends to replace the rent control act, implemented in different forms across the states that capped rentals, resulting in landlords getting a pittance for properties in prime localities.
  • It also lays down the rules for setting up of a ‘Rent Authority’, to fix accountability in all legal trans- actions between the landowner and the tenant.
  • The Act has capped the security deposit to two months for residen- tial properties, refundable within a month of vacating the property.
  • The Act further outlines a process for speedy dispute resolution between landowners and tenants within a given timeline.

Benefits of Model Tenancy Act

Data from Anarock states that on an average, there has been a 4-9 per cent jump in housing rent in just the first three months of 2024. The statistic goes out to show the current crisis of finding affordable rental accommodation in any city. To top it, high rental deposits de- manded, particularly in cities such as Bangalore, Chennai and Mumbai become an additional burden.

The biggest advantage of model tenancy act will be the opening up of residential supply in the country that will also regulate rental rates across cities. Its provisions for penalties on tenants will boost the confidence of the homeowners, who till

now felt apprehensive about renting their properties for fear of misuse or loss of asset or rental defaults by tenants, rental delays and overstays of tenants. Further reassuring for the landlords is the establishment of Rent Authority in every State and a separate court to handle rent-related matters to ensure speedy and timely resolution of any dispute.

These vital reforms in India's rental housing market, will also help unlock the properties of NRIs for renting. While NRI investment in Indian residential real estate in- creased over the years, in the ab- sence of sound rental laws, they have refrained from renting out their properties. With strong regulations, the residential rea estate investment will become even more sweeter for the Indians abroad.

Shortfalls Of Model Tenancy Act

As housing is the subject matter of State government, MTA implementation is not binding on states and they can also tweak the norms mentioned in Act as they deem fit, which may dilute the effectiveness in some cases. There is also no time frame for the states to adopt the Model Tenancy Act unlike RERA.

The ACT also fails to take into consideration certain unique rental arrangements that had been prevalent in many states till now and how to bring tenants and landlords of such properties within the gamut of the new act without hindering anyone’s interests.

The case in point is that of Mumbai where tenants who currently live  in a ‘cessed’ building (which pays a cess or tax towards a repair fund), are eligible to gain ownership rights to their rented premises once the building undergoes redevelopment under DCR (Development Control Regulation) 33(7).

Also, Leave & Licence Agree- ment’ rental arrangements are not intended to be covered by the Model Act. Legal experts further observe that instead of the prescribed three-tier system, just a Rent Authority and Rent Tribunal would have kept the process simpler.

The big question remains on the adoption of MTA by all states for streamlined rental regulations across the country and effective- ness of the regulations once im- plemented.

  • The Model Tenancy Act does not take into consideration the existing rent control legislation in different states
  • The Act does not provide respite to the existing Pagadi tenants who have already paid the market rate while taking possession of the premises.
  • There is no mention of leave and license premises.
  • Also, the Act is silent on alterna- tive dispute resolution and arbitra- tion agreements.

The New Age Answer to Rental Housing

  • Residential rentals in key micro markets in top cities increased 2-4 per cent in the second quarter of FY24.
  • Average rent in Noida's Sector-150 increased by 4 per cent
  • Sohna Road in Gurgaon and Dwarka in Delhi saw rents increase by 3 per cent and 2 per cent.
  • Chembur and Mulund in Mumbai saw average rents increased by 2 per cent.
  • Average rents in Hyderabad's HITECH City and Gachibowli in- creased by 3 per cent.

A veteran real estate expert describes the cat and mouse situation aptly. He says that unavailability of rental housing despite one crore units lying vacant is not because of lack of laws or regulations, but is a simple matter of economics. The rents are increasingly getting unfordable for a middle-class family especially in big cities. And on the other hand, housing prices are getting dearer by the day, so that rents are falling short of property price and its accompanying costs for the landlords.

In such a scenario, structured rental space providers such as Nest- Away, Stanza Living, Anyplace, zolostays, among others have made an entry. These home rental networks provide a single-party, single-window system for the tenants and landlords. The rental properties are sourced from property owners and they manage the property on behalf of the owner, while finding tenants using their online reach.

The renting space could range from furnished, semi furnished or unfurnished, shared living for bachelors to 1-4 BHK apartments and villas for families. Many of these providers have also tied up with agencies to provide zero deposit scheme, whereby tenants just need to pay the booking amount without any advance deposit. The usual lock-in period is minimum 6 months and rentals depend on size, location, condition of property and furnishings. The units are ready to move and one month's rent is charged in case of move out before the completion of lock-in period. The rental agreements are legal documents framed by lawyers and governed by arbitration.

For homeowners, these providers offer a one stop solution, without having to deal with multiple brokers or having to maintain the property and house repairs. The companies ensure rent on time, handle all the paperwork for agreement documents as well as provide on-demand and periodic house repairs to maintain the property.

Going a step further, a few of the rental home providers are partnering with developers for their unsold flats to be used for rental housing. These new rental space platforms seem to be the answer to the unnerving puzzle of rental housing. However, such platforms are far and few only operating in some areas of top metro cities. Also, some of these platforms are struggling to get operationally profitable, being a cashflow intensive business. Good news is many investors are now showing interest in these platforms. And rightly so, with government not able to create rental housing stock and traditional developers staying from the segment, this sector could be the next big business wave of the country.

Then there are platforms like No- Broker, Rentofy.in, Jugyah and Rent-MyStay, to name a few that connect renters and homeowners directly without any broker in-between. Some do not charge brokerage and make money mostly through subscriptions and with other financial offerings and home services.

Global Models To Follow

Build To Rent (BTR) refers to private rented residential properties, which are constructed specifically for the purpose of renting, rather than sale. As the name suggests, this is a purpose-built residential inventory for renters. As BTR is a service-driven housing solution, such developments can solve the housing shortage, especially in CBD locations, that would otherwise be unaffordable to end-users. Such developments are typically owned by institutional investors and are managed by rental operators. BTR model in partnership with urban local bodies or public sector bodies through PPP models or joint devel- opment agreements could see state government providing unutilized land parcels at competitive rates to private developers for large-scale BTR developments that can help generate long term returns for both the parties.

Rent To Own (RTO), also known as Rent To Buy is a legal contract for property wherein owner or devel- oper agrees to sell the house to the renter in future at a predetermined price within a time frame, of 1–3 years or 3–5 years. During the rental period, the renter lives in the house and makes rental payments, while also utilizing this time to save up for the down payment in future. Also, a portion of each monthly rental payment is credited to an escrow account which is utilized for down payment against the purchase price when the time comes. At the end of the lease term, if the tenant decides to not buy the property, the owner is then free to rent or sell the property to another buyer and forfeit the deposit already paid. RTO schemes work well in cities where developers are severely stressed due to lack of funding or due to high ready-to- move in unsold stock.

Seemingly An Unending Problem

Coming back to my acquaintance’s struggle of finding a decent accommodation in a decent location even at an insane rent, sadly is still ongoing. The rental housing problem too seems will continue till its fixed at all levels – from policy makers, local authorities to private players.

Surprisingly, while, in developed countries government plays a proactive role in the provision of affordable rental housing and provides assistance and subsidies to meet this goal. In developing countries, rental housing remains unexplored as a policy position. According to the World Bank, “It is amazing that rental housing as a critical com- ponent of any housing policy has remained virtually untouched in most if not all emerging economies, despite being the object of considerable attention and support in most developed economies.”

India, the most populous country of the world with youngest population and rapid rate of urbanization, will soon have to find an amenable answer to the rental housing crisis, if it wants to integrate the workforce market better and boost overall economic activity.

Take Heart Again; Put Your Dismal Fears Away. Rental Housing Problem Is Here To Stay

While, the rents are increasingly getting unfordable for a middle-class family, especially in big cities, on the other hand, housing prices are getting dearer by the day, so that rents are falling short of property price and its accompanying costs for the landlords.

Role Of Urban Local Bodies

  • The urban local bodies should identify the target demographic pool and their total re- quirement for rental housing with the support of state governments to arrive at different buckets of rental housing which will suit requirements of various categories of tenants since a “one size fits all” approach will not work for meeting all rental housing requirements.
  • Develop city level online portals focused on rental housing development, identifying vacant stock and promoting central and state level schemes pertaining to rental housing.
  • Allocate land at subsidized rates for market-based rental housing projects to incentivize private developers to venture in this much neglected area.
  • To develop innovative PPP models for creation of rental housing stock based on local dynamics.

Role Of Private Sector Participants

  • Greenfield developments - Besides the conven- tional thinking on sale only model for residential development business, they should also consider rental model in this segment of business.
  • Brownfield developments - Private developers should identify the ready-to-move unsold resi- dential stock in different projects and consider part of it, mainly near education hubs and em- ployment hubs such as IT corridors, industrial or manufacturing belts and newly identified urban agglomerations and market that exclusively for rental housing for a pre-defined time.

Creating the marketplace - Unsold properties

which are ready-to-move in, can be listed under a common portal at a city level by developers under a Rental Housing Authority. Such a portal can be maintained by the urban local bodies and they can act as intermediaries in helping to find tenants.

Source: Knight Frank

Stumbling blocks To Cross

  • Historically, the Indian housing policies have been mainly directed towards homebuying, with no policy interventions for rental housing.
  • Disparity In Rent & Property Price Ratio: Low net annual rental yields that hover around 2- 4% after deducting annual expenses such as property taxes, maintenance charges etc. are keeping off many investors from investing in residential property.
  • Pro- Tenant Laws: The Rent Control Act and other pro-tenant legislations disincentivize the homeowners to rent their property leading to a steady decline in supply of formal rental housing.
  • Lackadaisical Legal Recourse: Lack of clear and transparent legal framework, illegal possession by tenants and the risk of property litigation, have become major deterrents in increasing the rental housing supply.

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