Effective policy designing and implementation is the answer to rental policy in India, writes PANKAJ KAPOOR.
As urbanisation strengthens its foothold in India, the housing shortage problem becomes more prominent. The rural poor flocking to Tier-I cities and Tier-II cities turning home to many MNCs have propelled the floating population in India. Rental housing, and not house purchase, is the only solution to this problem. Irrespective of how the home sales market is performing, rental demand is always present. Unfortunately, there aren´t too many house owners who wish to rent out their houses. Also, there are fewer developers who look at rental housing as a potential market and build houses to cater to this demand.
Rental housing in India is still in its infancy compared to elsewhere in the world. Unfortunately, the ratio of owned to rented houses in India is substantially low at 11 per cent. Absence of a well-defined rental policy, lack of proper regulatory framework and low rental yield are some of the main factors at play.
The major reasons why rental housing in India has failed to take off are:
All states in India are governed by their respective Rent Control Acts (RCA), which are oriented towards tenant protection. Fixed rent with a cap on increasing them has rendered rental housing an economically unattractive option and created an informal market. Census 2011 stated that over 27 per cent of urban Indians are living on rent and most are informal in nature.
Renting of homes is considered a ´commercial´ activity, which increases property tax for individuals and service taxes for institutional rental housing operators. Higher outflow owing to commercial treatment naturally results in low rental yield.
Most policies in our country are focused on home ownership than renting. Since the First Five-Year Plan till the 1970s, the government focused on various schemes for providing housing for the weaker sections of society. In the late 80s and early 90s, it aimed to bring in private participation and widen the base of housing finance.
Lack of strong rental housing aggravates housing shortage
The result is an ironical situation where millions of formal housing units lie vacant in cities while slums continue to thrive. As per data from the 2011 census, 11.09 million houses are vacant in urban areas and the housing shortage is about 19 million units. This is the point where the missing link lies. Despite rising inventory and adequate supply, current yearly consumption only caters to 1.6 per cent of the total shortage. While providing housing units to the economically weaker section (EWS) and low-income group (LIG) and mid-income group (MIG) segment or enabling its ownership is definitely the responsibility of the government, house ownership alone cannot solve the housing shortage problem in India. If vacant houses in urban India are made available for rental housing, a major element of the problem could be addressed. Not only this, lack of formal housing in the existing pace of urbanisation causes proliferation of slums - a major hazard to the urban landscape. As we are now focusing on providing Housing for All by 2022, it is imperative to promote rental housing. In fact, rental housing has the potential to minimise the capital requirement on part of government as well as promote inclusive growth.
NURHP 2015: First step to revival in rental housing
The NDA government´s push for the Draft Model Tenancy Act 2015 comes as a ray of hope. The current Rent Control Act is obsolete and needs to be replaced with a more impactful one. The draft National Urban Rental Housing Policy (NURHP) 2015 has, therefore, been constructed to tackle the problem through five main approaches. Apart from this, the draft provides fiscal and non-fiscal incentives to tenants such as tax exemptions and housing vouchers enabling income tax concessions.
Meanwhile, the landlords who plan on building mass rental housing, either for socially vulnerable residents or their own employees, will receive 100 per cent deduction of capital expenditure. A certain percentage of dwelling units under local housing schemes will also be backed for need-based rental housing.
It is noteworthy that the policy also facilitates modifications in the legal and regulatory mechanism of the lease or rent agreement, building permissions, etc. The Ministry envisages public-private partnerships (PPPs), residential real-estate investment trusts (REITs), residential rental management companies, special purpose vehicles (SPVs) and need-based rental housing to encourage investment in the housing sector. The draft further propagates incorporating strategies for fast arbitration of rental property disputes and creating online portals for rental housing stock database.
A rocky path ahead
The draft is outlined with the right intent. But like most policies in the making, this too has its share of challenges. While the policy encourages the creation of residential rental management companies, residential REITs and PPP, there is a cloud of ambiguity about the implementation of these proposals as well as its feasibility. At present in India, corporate REITs offer lower yield. Residential yield is even lower, and ranges between 2 per cent and 3 per cent. Thus, it remains to be seen if, with such low returns, residential REITs would be viable enough to promote private participation.
Rather than constructing new units for social or need-based rental housing, the Ministry should first promote rental occupancy in existing vacant units. According to Ministry of Housing and Urban Poverty Alleviation, 2.37 lakh units built for urban poor under the Jawaharlal Nehru National Urban Renewable Mission (JNNURM) is still lying unoccupied. If there is continuous addition of stock instead of utilisation of existing one, the real-estate market will slip into a risky zone leading to imbalance in the economy.
Correct identification of the target beneficiaries is also quite a big challenge. An infallible system has to be designed and continued quality control must be ensured for effective implementation. Assessment of target groups and profiling them is the first step in solving the issue and any loophole in the system will have cascading effects.
Effective implementation at grassroots level is the key
Although the path is speckled with challenges, its time the rental policy in India evolves according to the present scenario. The government still has miles to go with regards to the implementation of the policy and calibrating it as per requirement. But once this starts yielding results, Indian real-estate will have innumerable reasons to cheer. Effective policy designing and implementation is the answer.
About the author:
Pankaj Kapoor, Founder and Managing Director, Liases Foras, has over 15 years of experience in the real estate industry, particularly in the fields of valuation, risk assessment and forecast of price behaviour.
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