A large segment of the population is unable to afford the cost of buying a home and prefers to rent. Rentals are either formally done through a written and registered lease agreement, or informally with little or no legal rights. While the rental housing market in India has the potential to provide affordable housing to meet peoples’ need and perhaps, even reduce the huge stock of vacant housing, the many stumbling blocks on this path have prevented it from happening.
In a two-part series, we will take a look at the main reasons why India’s rental housing system has failed to evolve and meet the rising demand for affordable housing. Factors such as archaic rental housing policies, structure of rental agreements, low rental yields, discrimination of tenants, tenancy disputes, and absence of a rental housing industry lobbying organisation have hindered the growth of the rental housing market in India.
Archaic Rental Housing Policies
The rent control legislation, in some form, has existed since the First World War when Mumbai (then Bombay) first introduced Rent Control Act (RCA) in 1918. Over the years, states and Union Territories across India have enacted and enforced rent control laws which continue to remain applicable even today. Although these RCAs have been revised considerably since their introduction, they remain severely flawed and heavily favour tenants.
RCAs not only limit the amount of rent a landlord or owner can charge, but also limit the percentage or intervals at which rent can be increased. While this may seem as a prudent measure on paper, it has severely restricted the growth of the rental housing market by limiting the rental yields (revenue returns) for landlords and owners. Furthermore, many of these RCAs were primarily for protecting tenants’ rights, to prevent eviction, making it difficult and time-consuming for landlords to evict tenants who violate the terms of the tenancy agreement.
Low Rental Yields
Rental yield is generally defined as the rate or the percentage of returns from the annual rental income of a property. It is essentially the amount of money an investor or landlord makes on a property, after measuring the gap between overall costs and the income received from renting out the said property. In real estate, rental yield is a widely used term which helps to determine the rate of return on the investment for commercial and residential properties. It is an important metric in property data and has a direct bearing on demand. For instance, the higher the rental yield of a property, the better is the income earned and, thus, higher is the popularity of such asset amongst investors.
Despite the fact that India’s residential rental market has immense potential to address the housing needs of a growing urban population, its rental yield is among the lowest in the world. According to Global Property Guide, India’s gross rental yield in 2017 was 2.32% and continues to remain among the lowest in Asian countries; Indonesia has the highest gross rental yield of 7.09%.
Having abysmally low rental yields has a demoralising effect on individual landlords and investors alike. Diminishing returns from rental property is one of the main reasons for the rental housing market in India remaining stagnant. As retired founder and former chairman of Knight Frank India Pvt Ltd, Pranay Vakil says, “the interest rate on a home loan taken by an individual in India is several percentages higher than what he/she would earn in income if they were to lease out their property. Add to this the cost of routine maintenance and other legal formalities; it is almost impossible for an owner to earn a sustainable return on their property.”
Structure of Rental Agreements
As it stands, the rental housing market in India works under two main types of legal rent agreements – lease (or rental) agreement and leave & licence agreement.
The former is covered by restrictive RCAs of each state, where the amount of rent that can be charged is based on a formula devised by the local executive or government, as the case may be. This agreement serves as an official contract between the owner of the property and the tenant who wishes to occupy the said property for a given period. The notice period and the tenure of the agreement are stated in the contract and are usually agreed upon by both parties.
Such a rental agreement, under the respective RCAs, strongly favours tenants by limiting the power of the landlord with respect to eviction. Any dispute between the two parties is handled by civil courts and, as expected, matters are not resolved in a timely manner. Tenants are further protected in case of disputes in payment of rent, where the landlord cannot legally disrupt the supply of any amenities provided as per the agreement.
Under such registered rental agreements, a tenant is also legally transferred certain rights to the property. Thus, in some cases, tenants may claim ownership of the property after staying in the same place for at least 10 years. They can claim it under the provisions of the RCA. In such cases, landlords have very limited options to evict the tenant or even increase the rent. In a city like Mumbai, there are many tenants who pay meagre amounts as rent and occupy properties in prime locations, taking advantage of such an agreement and the flaws of the RCA. As per their rental agreement, as long as the rent is paid on time, they cannot be evicted. This is one of the reasons that owners and landlords prefer executing a leave & licence agreement with their tenants.
A leave & licence agreement enables a tenant to temporarily occupy the owner’s property for a specific period, at an agreed upon fixed amount (called licence fee or rent), without any change in the ownership of the property. Such an agreement is governed by the Indian Easement Act, 1882. Since ownership rights are not transferred to a tenant under such an agreement, no property rights or heritable rights are created for the tenant. This serves as a major advantage for the owner, when it comes to evicting a tenant. The tenant, in such an agreement, is granted a licence to occupy the property for a minimum period of 11 months (since having an agreement for 12 months will require that it be registered as a rental agreement), with an option of periodic renewal. Since the archaic rent control laws are only applicable to rental agreements for a period of 12 months, establishing an 11 month leave & licence agreement serves as a pre-emptive measure.
Social Discrimination of Tenants
This is a very common problem faced by tenants in India. Landlords or, in some cases, cooperative housing societies, have stringent, but unlawful, rules barring tenants on the basis of religion, culture, marital status, profession, and other such social factors. Moneylife Foundation’s online survey (results of which are published in the
Rental Housing in India report) found that 28.27% of tenants (among the 1,196 respondents) faced some form of discrimination while living in rental accommodation.
There are innumerable examples of such discrimination, as is often seen in “For Rent” ads. ‘Non-vegetarians not allowed’ and ‘pets not allowed’ are some common terms seen in such ads. Although discrimination on such grounds is unconstitutional, it continues to be common practice in India. Landlords would prefer to keep their properties vacant rather than rent them out to a tenant who fails to pass their archaic discriminatory policies.
Several cooperative housing societies have (unwritten) rules to restrict renting of flats to bachelors, single women or individuals who do not conform to a traditional gender identity. The reasons given for such discrimination are often flimsy and unconventional. Such forms of social bias towards tenants are unfortunately common, even though many concerns of the landlord can easily be dispelled with a standard background check. Discrimination on such levels discourages prospective tenants from seeking out rental housing accommodation in a city.
Landlord-Tenant Disputes
Disputes between landlords and tenants can be on many grounds, from upkeep and repair issues to non-payment of rent and potential eviction. In India, unless such disputes are amicably resolved outside of courts, they invariably end up with both parties spending years in courts and an ever-increasing stack of legal expenses.
Disputes between landlord and tenants, which involve properties under a leave & licence agreement are governed by the Transfer of Property Act (1882), while those leased under a rental agreement are governed by RCAs of each state or region. Until recently, it was not legally possible for both parties to seek resolution through arbitration and they had to rely on the outcome of long-drawn legal battles.
Further, arbitration is possible only if the lease agreement carries an arbitration clause allowing for resolution of disputes through such alternate means. In the absence of such a clause in the agreement, disputes continue to be governed by the respective Property Acts. Long-drawn court battles not only drain the financial resources of both parties, they are also a demoralising factor for many landlords who might have, otherwise, considered leasing out their property.
Affordable rental housing in India, has become an urgent requirement for a growing population that largely resides in urban centres. For India to have a vibrant and successful rental housing market, each of the above factors will have to be considered and addressed separately. While options such as introducing a Model Tenancy Act or National Urban Rental Housing Policy have been put forward for discussion by the government, only time will tell whether these stop-gap measures are sufficient to reinvigorate the rental housing market.
