The announcement of the Model Tenancy Act 2020 by the Modi Government after a lot of dilly-dallying has created a lot of noise in the corridors of real estate and in minds of investors. The act when crystallized will initiate transparency, bring accountability, and promote fairness in the rental housing segment, which it so dearly needs.
The rental housing market in India is a multi-billion-dollar untapped opportunity. Decades of negligence has rendered the market to be fragmented and underdeveloped while putting invariable pressure on the primary real estate market. Governed by the archaic Rent Control Act which in itself is replete with shortcomings, the residential rental market is perennially plagued with lengthy litigations, low rental yields, and trust deficit which has usurped the ability of the sector in realizing its true potential.
India needs more than 25 million homes in the next 10 years to meet the surging rental demand. Still a lower-middle-income country, most Indians cannot muster the courage to buy a home even in their thirties owing to higher property rates, unavailability of affordable homes near to their workplace and high-interest rates. Due to this housing shortage, especially in urban and metropolitan areas, Indians prefer the more accessible rental route.
But if housing shortage is really the case, why are 11.9 million homes lying vacant in urban areas? A straight answer to this will be the absence of a sound rental policy and an underlying disparity between rental affordability and rental prices. The Model Tenancy Act 2020 is thus the magic bullet to bridge the gaping trust deficit between tenants and landlords by clearly mapping out their obligations and to institutionalize the rental housing market.
Rental Legislation to amend tenant-landlord equation
The dark underbelly of the housing sector was exposed when lakhs of migrant workers took the long walk back home during the nationwide lockdown due to the unavailability of affordable rental housing and evictions. While the government fast-tracked the AHRC scheme for the urban poor, it had to do its part for the urban millennials and quadragenerians to allow them access to quality housing and ease the housing shortage.
With the Model Tenancy Act 2020 accommodating provisions that make renting a viable option for both tenants and landlords, the rental housing market will pick up pace. Since the rental contract will now be monitored by a rent control authority, it will prevent tenants from falling prey to abrupt and oblivious rental hikes.
The capping of security deposit to a maximum of two months for residential housing will also bring rousing cheers in the minds of tenants and usher them towards rental housing. Landlords aren’t left empty-handed though. They are entitled to levying hefty penalty charges to tenants for overstaying on their property. Disputes if any, will be sorted out within two months. Both landlords and tenants will be buoyed up by this initiative as the interests of both parties are taken care of.
Door leading to a multi-billion opportunity opens, if implemented well
It is no secret that the demand for rental housing in India is an unstoppable force with a colossal urban population that wants to enjoy the pleasures of healthy living and maintain a respectable lifestyle till they financially mature to make the final home buying plunge. The absence of a reliable rental policy is a deterrent.
The Model Tenancy Law is set to push away those barriers and change the topography of the rental housing industry for good by ushering a transparent relationship between landlords and tenants, increase liquidity in the market among homeowners, and turn the fortunes of the estimated Rs 3 lakh crore rental market by 2023.
Since millennials constitute almost 30% of India’s urban population, sound implementation of the law will lead to the tapping of this huge millennial rental demand. It will ease the pressure on realtors to accommodate this young populace through affordable housing. The law will also provide a good push to the government’s Housing For All initiative by expanding its ambit to rental housing as well. This will boost the government’s aim to house the masses by 2022 and also open new doorways for the rental housing market.
Investors & realtors to get new ground for good ROI
The Rental law will open a new avenue for investors and real estate developers to invest in rental housing and get handsome ROI. With the arrival of new rental models and property management solutions, rental yield is expected to increase by a significant margin as more people will prefer affordable rental homes that come integrated with efficient and transparent modules for collection of rent, getting repairs done and management of the property.
Realtors can add rental housing to their portfolio and put up unsold inventory on the rental market and earn cash flows from them. It will make economic sense to them as they can charge maintenance costs on those rented-out units, keep the units usable and stop the bleeding that has happened due to the lockdown.
Investors can also put their money in residential and non-residential rental real estate since the law will institutionalize the rental market with a sound legal framework, paving the way for rental yields to the tune of 5-6%. And with 12% of the total urban housing stock still lying vacant, one can get a good bang for the buck if investment in rental housing is done right.
On a concluding note, the Act can bring a mountain of change to the real estate industry if enacted and executed in a proper manner. It will act as a huge relief for the realty sector and promote the overall growth of the economy. The much-needed standardization of the rental housing market will lead to utilization of stressed assets with no takers, create a boom in Build To Rent (BTR) rental housing models that can solve the housing shortage in well-developed locations, and also build an efficient rental ecosystem that can absorb the huge millennial population for whom job mobility and location flexibility is a priority.
