India’s rental market is poised for a change post the approval of the Model Tenancy Act (MTA) by the Union cabinet last week.

It attempts to address some key areas of conflict between parties in tenancies by bringing about certain important changes, including the establishment of a rent authority and the mandatory requirement for a written rent agreement and registration of the same with the authority, rating agency ICRA said on Friday.

It also provides clarification on the premise and process for eviction of tenants, maximum level of security deposit, rent revision and requires the establishment of rent courts for dispute resolution.

On 2 June, the Union cabinet approved the MTA, which ensures a level-playing field for landlords and tenants. The new Act replaces the Rent Control Act, 1958, and aims at bringing about a balance of interests between tenants and landlords.

According to the ICRA note, the successful roll-out of MTA is expected to have a positive impact on market functioning by creating a balanced legal framework, which would improve transparency and protect the interests of all key stakeholders. Till now, the rental market has remained largely underdeveloped, despite the presence of vacant units in urban areas and the existence of a considerable housing shortage, primarily due to trust issues between landlords and tenants, low rental yields and lengthy dispute resolution mechanisms.

“On the one hand, India has a large vacant housing stock of over 110 lakh units and on the other, it has a huge housing shortage. One of the key reasons behind this paradox is the low rental yield in the country, which is one of the lowest across global markets. While here rental yields stand at 2-3%, the same in some key markets can go as high as 7-8%. Moreover, with the high taxation of 30% in India, the net benefit from rental income is low, especially when compared with housing finance costs of around 7-8%,” said Mahi Agarwal, sector head and assistant vice-president at ICRA.

“While capital appreciation used to cover this gap earlier, it has been muted over the last few years, making the gap between rental yields and interest costs more detrimental.

Thus, in order for the rental market to develop, returns would need to increase. With MTA in place, housing stock can be used more efficiently, which would, in turn, support greater formalization and institutionalization of the sector over the medium-to-long term. The consequent development of new business models would aid improvement in return metrics. Effective and broad-based implementation of the Act, with continued government support and initiatives aimed at reforming the rental market would be key,” Agarwal added.

Other factors that have impacted growth of the rental market include the age and poor maintenance of the vacant stock. The implementation of MTA as an effective rental housing framework, clearly spelling out the obligations of landlords and tenants with regard to property maintenance and upkeep, would be a crucial step.

Agarwal said, “While MTA is a move in the right direction, considerable challenges in implementation may arise from land and provision of housing being state subjects, with local governments having the right to modify rules at the state level. The extent of adoption by state governments would remain a critical factor in determining the overall efficacy of the Act. Moreover, with the Act being applicable on prospective basis, existing landlords and tenants would not see a near-term benefit in terms of resolution of key tenancy issues.”

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