BOTTOMLINE: The new rental law could yield returns

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The Model Tenancy Act could give a fillip to realty beyond the 10 million unoccupied homes coming to market

BOTTOMLINE: The new rental law could yield returns
Investing is about risks and rewards. Disproportionately high risk keeps many investors away, while greater certainty of outcomes attracts large, patient capital. The Model Tenancy Act aims to secure the interests of homeowners, like RERA did for home buyers, even while protecting tenants from landlord abuse. If the act isn’t diluted, and some tweaks are done to make it more implementable (we’ll get to that in a bit), it can go a long way in creating a vibrant rental market.
The big fear that keeps many realty investors and owners from renting out property is that of squatting (tenants refusing to move out) and a long winding process in civil courts spanning years to get an eviction order. This leads to many homes lying vacant. And the big message from the Government on the new tenancy law, is that it could help bring near 10 million of such homes to the rental market.
But there’s more. A framework law for renting and quicker dispute redress can work in several ways to expand interest in India’s residential realty market, quite like seen in developed markets like the US. We’ll get to that in a bit. First, let’s take a look at a few highlights of the new tenancy law.
A MODEL FOR RENTALS
The Model Tenancy Act spells out some very significant measures to protect the interests of owners looking to rent out their homes. Two of these are the penal rent provision and the time-bound, 60-day redressal mechanism, for disputes by special Rent Courts and the Rent Tribunal. These clauses are clearly aimed at increasing the confidence in homeowners to let out their properties.
PRICE FOR SQUATTING
23. Where the tenant fails to vacate the premises let out on rent in accordance with the tenancy agreement on the expiration of the period of tenancy or termination of tenancy by an order or notice under the provisions of this Act, such tenant shall be liable to pay the landlord ––
(a) twice the monthly rent for the first two months; and
(b) four times the monthly rent thereafter till the tenant continues to occupy the said premises.
TIME-BOUND REDRESSAL
35. (2) The Rent Court or, as the case may be, the Rent Tribunal shall endeavor to dispose the case as expeditiously as possible, not exceeding a period of sixty days from the date of receipt of the application or appeal:
Provided that where any such application or, as the case may be, appeal could not be disposed of within the said period of sixty days, the Rent Court or the Rent Tribunal shall record its reasons in writing for not disposing of the application or appeal within that period.
37. (1) Any person aggrieved by an order passed by the Rent Court, may prefer an appeal along with a certified copy of such order to the jurisdictional Rent Tribunal within the local limits of which the premises is situated, within a period of thirty days from the date of that order.
(2) The Rent Tribunal, upon filing an appeal under sub-section (1) shall serve notice, along with a copy of appeal to the respondent and fix a hearing not later than thirty days from the date of service of notice of appeal on the respondent and the appeal shall be disposed of within a period of sixty days from such date of service.
40. (1) Save as otherwise provided in this Act, no civil court shall entertain any suit or proceeding in so far as it relates to the provisions of this Act. There is also comfort offered to home owners on transferring ownership and possession to their kin in case of death.
The protection of inheritance interest is an important consideration for many.
INHERITANCE
22. (1) Notwithstanding anything contained in this Act or any other law for the time being in force, in case of death of the landlord, where there is a bonafide requirement of the premises let out on rent by the legal heirs of the landlord during the period of tenancy, such legal heirs may file an application in this behalf for eviction and recovery of possession of the said premises before the Rent Court in such form and manner, as may be prescribed.
(2) The Rent Court may, on an application made to it under subsection (1), if it is satisfied that the legal heirs of the deceased landlord are in bonafide requirement of the premises let out on rent, pass necessary orders against the tenant for handing over vacant possession of the said premises to the legal heirs of the deceased landlord.
But there are also some clauses like the one defining security caps that may need to be tweaked by State Government, who need to pass the final laws after removing any “difficulties”.
While not getting into the commercial realty cap, which could have implications for existing REITs, the cap of two month’s rent as security deposit for renting residential property could also prove to be a hurdle. In many cities like Bangalore and Mumbai, several home owners prefer higher deposits and lower rents. Besides, given that an owner will be weighing the total return, capping of security is bound to push up rental rates. Thus, it may be worth reconsidering this clause and leaving commercial negotiations to the two parties concerned. Since States can effect such changes before passing the final laws, one expects there will be industry representations in the run-up to address this and other issues.
SECURITY
11. (1) The security deposit to be paid by the tenant in advance shall be such as may be agreed upon between the landlord and the tenant in the tenancy agreement, which shall ––
(a) not exceed two months rent, in case of residential premises; and
(b) not exceed six months rent, in case of non-residential premises.
(2) The security deposit shall be refunded to the tenant on the date of taking over vacant possession of the premises from the tenant, after making due deduction of any liability of the tenant.
STATES CAN AMEND NORMS
46. (1) If any difficulty arises in giving effect to the provisions of this Act, the State Government/Union territory Administration may, by order published in the Official Gazette, not inconsistent with the provisions of this Act, remove the difficulty:
Provided that no such order shall be made after the expiry of a period of two years from the commencement of this Act.
(2) Every order made under this section shall, as soon as may be after it is made be laid before each House of State Legislature/Union territory Legislature.
1.(3) It shall come into force on such date as the State Government/Union territory Administration may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act.
All-in-all, though, the tenancy law is a good step in the right direction. And if implemented well, can open up new possibilities for India’s realty sector.
THE DRAW OF YIELDS
In India we’ve seen the recent advent of REITs (real estate investment trusts) as vehicles of investment in commercial real estate with private equity anchor investors. But institutional investment in residential realty has been almost absent. This could change.
The pandemic has seen a surge of investment in housing by private equity and pension funds in the US, following their quest for yields in a period of ultra-loose monetary policy and very low interest rates. A couple of recent headlines bring out this trend. The Wall Street Journal recently read: “If You Sell a House These Days, the Buyer Might Be a Pension Fund”. The New York Times announced: “A $60 billion housing grab by Wall Street”. Clearly institutional investors have invaded the single-home rental market, and in many parts of the US account for over 20% of all home purchases. Foreign investors too have joined this buying frenzy. The two extracts below from Wall Street Journal articles capture the mood:
a) “From individuals with smartphones and a few thousand dollars to pensions and private-equity firms with billions, yield chasing investors are snapping up single-family houses to rent out or flip. They are competing for houses with ordinary Americans, who are armed with the cheapest mortgage financing ever, and driving up home prices,” wrote Ryan Dezember in September last year.
b) A more recent report read: “The single-family rental (SFR) market is booming, and foreign investors now account for a third of institutional investment as private renters face higher prices and some stiff competition… institutional investors like American Homes 4 Rent, Invitation Homes and Tricon Residential, which own billions of dollars worth of assets, take up their fair share”.
Institutional ownership and private equity interest in the US residential market has been on the ascent since the early 2000s. This got a further impetus after the financial crisis with investors lapping up foreclosed properties at steep discounts and renting them out. Fannie Mae and Freddie Mac’s assets were auctioned off with private equity investors mopping up over 200,000 homes, according to media reports.
Today private equity presence is big in residential real estate. Blackstone with $378 billion in real estate assets, has a significant presence in rental housing. In fact, there are two residential funds in the list of top 10 REITs in the world, and only one commercial (malls) REIT, according to fool.com.
The top two are Equity Residential and Avalon Bay Communities. And while Equity Residential has grown through the acquisition of apartment properties (it today owns near 80,000 units), Avalon Bay also undertakes the development of assets. Typically, these REITs earn rentals from large apartment buildings and complexes.
Will the new rental law in India pique the interest of institutional investors in India’s realty market? Anarock’s Anuj Puri clearly thinks so. He told CNBC-TV18 that the new model law could draw foreign money into the residential sector. That could spell big gains for developers, who have already been deleveraging their balance sheets by hiving of commercial yielding assets via structured deal and REITs with institutional investor participation.
If institutional interest rises in the residential segment with an eye on earning rental yields, this could be a big development for the housing sector.
REALITY OF YIELDS
One often hears comments about real estate being a low-yielding asset and investors’ expectation of returns being focused mostly on capital gains. That’s not entirely a true picture. Real estate needs to be viewed as a long-term asset, and while the yield at any point of time may not look very attractive in relation to the capital value, the right way to look at it is by keeping the initial capital invested in mind. To give you a sense, rental yields on homes across top cities in India are not unattractive today—given that we’ve seen little capital appreciation over the past several years. A random sampling of rents and property values suggests annual yields in Mumbai, Bengaluru and NCR could be near 3-3.5%, 4-4.5% and 2.5-3%. That seems paltry. But look at it this way, the amount invested today will grow in value with capital appreciation, and a similar yield on the property value 5 years hence could spell a much higher return on the capital invested today.
Let’s use the RBI’s House Price Index data to get a sense. The index value has increased 2.5x since 2010. If we reduce today’s capital value to what it was in 2010, basis the index, the yield suddenly starts looking very different—at 8% for Mumbai, over 10% for Bengaluru and over 6.5% for NCR.
And given where we are today in terms of capital values and interest rates, there is much talk of upcoming appreciation ahead. If that is true, this might be a good time for institutional money to get into residential realty in India—more so, since most housing markets in the West are already booming on the back of high liquidity and record low mortgage rates.
STATES MUST NOT DITHER
The ball on the new Model Tenancy Act is now in the court of the States. They need to act swiftly, though with some necessary adjustments, to bring the new law into force. Such a move could trigger a fresh bout of investments, so vital to provide impetus to a pandemic-hurt economy.
For stock market investors, this could be one more reason to take a closer look at realty stocks.

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