High potential for institutional rental housing, with 11.09 million vacant houses in India: Report

[ecis2016.org] The institutionalisation of rental housing in India, can help create large, purpose-built rental stock, which can also attract institutional investments in the long run, says a report by Knight Frank India and Khaitan & Co

India has nearly 11.09 million vacant urban housing units, of which 10 states and union territories (UTs) contribute to 78% (8.64 million) of total vacancy levels, says a report titled ‘Institutionalising the Rental Housing Market in India – 2019’ by property consultancy Knight Frank India and law firm Khaitan & Co. These vacant houses have a huge potential of being brought under the purview of several rental housing models in the country, it adds. The report estimates that the Draft Model Tenancy Act 2019 (MTA), will be instrumental in institutionalising rental housing, which is largely unorganised in India.

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If rental housing is institutionalised, with the introduction of a legal framework as envisaged, it would help in creating large, purpose-built rental stock, which can also attract institutional investments in the long run, the report says.

The report advocates that the Draft Model Tenancy Act, 2019, when implemented, will ensure the growth of institutional rental housing in India, especially in its megapolises and metropolises. Currently, there are 21.72 million urban rented households in India. Tamil Nadu (16.5%), Andhra Pradesh (13.8%), Maharashtra (13.5%), Karnataka (11.3%), Gujarat (6.1%), West Bengal (5.9%), Uttar Pradesh (5.1%) and the National Capital Territory (NCT) of Delhi (4.3%) together command a substantial 76.5% of total urban rented households.

Commenting on the report, Shishir Baijal, chairman and managing director of Knight Frank India, said: “As we move towards a more flexible work environment, globally, there is need for the Indian real estate sector too to envisage itself as a service, rather than a product. The addition of over 223 million new urban residents to cities by 2031, will not be feasible if the rental housing market is not developed. However, in order to truly institutionalise and revive the rental market, more thought and debate is required, to evolve the Model Tenancy Act (MTA) into a meaningful, holistic and comprehensive piece of legislation.”

Sudip Mullick, partner of Khaitan & Co, added: “Limited policy relating to rental housing and existing legislations that are unfriendly to landlords / owners of premises, have been a big deterrent for the creation of rental housing stock in the country. The MTA provides a much-needed independent mechanism, specially engineered to deal with issues pertaining to rental premises. The MTA will provide for speedy remedies to both, owners and occupiers, of rental properties and will enable the court to deal with more legal factors, which require evaluation of various issues arising out of changing environment of complex commercial transactions, government policies and new laws.”

The Draft Model Tenancy Act, 2019 proposes to create a legal framework to bring harmony to the landlord-tenant relationships and balance the scale for both parties. However, there are several areas from the perspective of both the parties, where the Act provides no or limited clarity, which can create challenges in its implementation. This Act aims to bring stakeholders together and bring rental housing reforms, to create an effective rental housing ecosystem in the country.

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Current rental housing scenario in India

• As per Census 2011, there are a total of 27.37 million rented households in India, of which 79.4% (21.72 million) are urban rented households.
• Nearly half of 21.72 million urban rented households are occupied by three or four-member nuclear families. The fact that 50% of typical nuclear families in urban households live with a rented roof over their head, dispels the myth of home ownership being a priority in an average Indian family’s scheme of things.

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Total number of urban rented households in India by household size 

Source: Knight Frank Research, Census 2011

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States and union territories with the highest share of rental households in India

Of 21.72 million rented households in urban India, eight states and union territories comprise the highest percentage share of rented households in India. These eight regions alone comprise 16.63 million or 76.57% of the total urban rented households. Tamil Nadu, with 16.5%, has the highest percentage share of rented households in India followed by Andhra Pradesh and Maharashtra.

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Source: Knight Frank Research, Census 2011

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[ecis2016.org] All you need to know about the Draft Model Tenancy Act 2019

As per the Census 2011, 11.09 million houses remain vacant in urban areas despite the massive housing shortage due to various factors such as low rental yield, poor maintenance of vacant stock, fear of repossession, dilapidated state of buildings and lack of incentives. As an extension of these market realities, the potential of converting urban land into investment and providing a steady source of income to landlords remains nil.

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Factors influencing the growing need for rental housing in India

• Ownership focus of government housing policies: With the launch of the ‘Housing for All by 2022’ mission in 2015, an initial provision for creation of 20% stock of the upcoming 20 million homes under this scheme was meant exclusively for rental housing. However, the subsequent rollout of this mission, now popularly known as the Pradhan Mantri Awas Yojana (PMAY), focussed and promoted only home ownership and the rental housing cause was lost somewhere in between. The home ownership approach of the government policies does not consider the key role that rental housing can play in easing labour mobility and social mobility.

• Stagnant residential prices in many cities: During the past four years, the growth in residential capital values in most of the top eight cities of India has been below retail inflation growth and the gap has sequentially increased since H1 2016.
• Housing unaffordability: Although there has been a reduction in prices and ticket sizes and the focus on affordable housing has improved housing affordability across the country, home ownership still largely remains out of reach for many aspiring homebuyers, given the income levels of prospective end-users.
• Urbanisation trends: During the decadal period of 2001–2011, there was an absolute increase in urban population by nearly 91.0 million, taking the total urban population to 377.1 million in 2011. As per the Economic Survey 2018-2019, it is projected to increase to 600 million by 2031. Adding a huge 223 million new urban residents to cities by 2031 will not be feasible, if the rental housing market is not developed.

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Stumbling blocks to rental housing in India

• Low rental yields in residential asset class: Low rental yields have kept landlords away from investing in property. While there have been a few signs of the residential real estate sector’s recovery, gross rental yields have been hovering in the range of 3%-4.5%.

• Archaic rent control acts: The Rent Control Act, first introduced in India in 1948, with the objective to counteract the inequality of bargaining power between landlords and tenants, created many market distortions which proved detrimental for the rental housing market to flourish in India. The Act and other pro-tenant legislations have disincentivised rental housing for landlords in India and they have started distrusting the state machinery to protect their rights. As a result, there has been a decline in the supply of formal rental housing and increase in informal housing arrangements.

• No regulatory backbone to formalise rental housing: The central government, through interventions by the Ministry of Housing and Urban Affairs (MoHUA) has been trying to persuade state governments to bring about rental reforms and as part of that three different model tenancy agreements were proposed in 1992, 2011 and again in 2015. Due to the state-level policies and local political climate, reforms in the rental housing sector remained a work in progress since, nearly, the past 25 years.
• Landlord-tenant disputes: The risk of property litigations in cases of conflicts is a major deterrent which has made the rental market unattractive for property owners.

• No rental housing industry body: In the absence of a national rental housing industry body to govern all rental housing related matters and bring stakeholders together, encourage dialogue with government, enhance awareness on rental housing matters, there is no organised marketplace for rental housing in India. As there is no organised rental housing industry body per se, the vacant properties available for rent do not get documented or enlisted centrally, which reduces the net annual rental income for landlords and there is no concentrated effort between private players to work on a mandate to promote the rental housing cause in the country.

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The way forward

Since rental housing has been a much-neglected sphere, India does not have any residential stock specifically developed to incentivise investments in this space. With the impending rollout of the Model Tenancy Act, 2019, there are bright chances for the rental housing market to not only get regulated but also attract institutional investors to participate in quality assets in form of BTR (build to rent) or RTO (rent to own) stock. This will provide a new asset class to diversity investment risk too. Rental housing reforms in India will help develop a large residential stock to cater to all categories of renters – luxury, mid-segment and affordable. During prosperous times of the economy, the landlords/developers benefit from raising rents, whereas, during tough economic conditions, home purchases decline, which is again, good news for apartment owners. During recessionary periods, credit gets tight or expensive making it difficult to buy a home, which again works in the landlord/owner’s favour. Rented residential properties offer a nice combination of cyclicity and safety and once a critical mass of this stock develops in India, it can develop in the long-term, as an income yielding asset class for establishing Apartment Real Estate Investment Trusts, as well.

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