The successful roll-out of the Model Tenancy Act (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, according to ICRA.
Union Cabinet approved the model tenancy act last week replacing the Rent Control Act, 1958. The act aims at bringing about a balance of interests between tenants and landlords.
Till now, the rental market has remained largely underdeveloped, despite the presence of vacant units in urban areas as well as the existence of a considerable housing shortage, primarily due to trust issues between landlords and tenants, low rental yields and lengthy dispute resolution mechanisms.
The act attempts to address some of the key conflicting issues between the parties 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.
Moreover, 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.
Mahi Agarwal, sector head & assistant vice president at ICRA said, "With the MTA in place now, housing stock can be used more efficiently, which would, in turn, support greater formalization and institutional of the sector over the medium-to-long term. The consequent development of new business models would aid improvement in return metrics. However, effective and broad-based implementation of the act, along with continued Government support and initiatives aimed at reforming the rental market would remain key."
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 to housing finance costs of around 7-8%. While capital appreciation used to cover this gap earlier, such appreciation has been muted over the last few years, thereby 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.
Other issues that have impacted the development of the Indian rental market include the high age and poor maintenance of the vacant stock. Given these concerns, the implementation of the MTA as an effective rental housing framework, with it clearly spelling out the obligations of landlords and tenants with regards to property maintenance and upkeep, would be a crucial step towards aiding the development of the Indian rental market.
"While the 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," concluded Agarwal.