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New tenancy law to spur renting, impact housing sales in short run: Experts

As people's preference moves towards renting over owning, the already tepid housing market may see a further dip with the implementation of the proposed Model Tenancy Act

Rashmi Pratap | July 27, 2019 | Updated 23:59 IST
New tenancy law to spur renting, impact housing sales in short run: Experts

Deepa Nair, a freelance writer, lives in a rented accommodation in Mumbai. While the 31-year-old can easily buy a house jointly with her entrepreneur husband, the duo prefers to live on rent as it gives them workplace flexibility. They have already lived in Kota and Pune for their professional assignments and don't want to be tied down to a city by owning an accommodation.

For 36-year-old Manish Singhal, renting a 3-bedroom apartment in Greater Noida for just Rs 15,000 per month is far more economically viable than paying an EMI of Rs 50,000 per month for a house with similar configuration. Plus, he gets to use all the allied facilities, like the society's gym, swimming pool and club, as the rent is inclusive of maintenance charges.

As people's preference moves towards renting over owning, the already tepid housing market may see a further dip with the implementation of the proposed Model Tenancy Act. The Act, which proposes to regulate rental housing, will give more confidence to owners to put up their houses on, adding to the stock of 11 million vacant homes (as per 2011 census).

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"If more (rental housing) supply comes, it will push down rent in the market. This, in turn, will put pressure on real estate projects because the yields will reduce further, hurting capital value," says Pankaj Kapoor, founder and MD at Liases Foras, a real estate consultancy firm.

Already, unsold inventory in India stands at 40 months, with the stock at an all-time high of 12.76 lakh in India's top 30 cities. If more people prefer to rent, sales will decline further, increasing this unsold inventory.

Nair says buying a house with a price tag of over Rs 1 crore in Mumbai will entail a monthly EMI of at least Rs 85,000 if a loan of Rs 85 lakh is taken for the purchase. "The outgo on buying (principal plus interest on a loan) will be very high. We will be better off investing our savings in a fixed deposit and paying much lower rent," she says.

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If double-income families like that of Nair and Singhal postpone purchases due to the financial upside in renting, the sales are bound to be impacted. Already, housing sales have been in the slow lane for the last five years, having grown just 7 per cent last fiscal.

Harinder Singh Hora, MD, Reach Group, says with India becoming a real estate investment hub, many NRIs are buying residential properties. "But they have been avoiding renting out due to the fear that they might face problems when they ask the tenants to vacate the property. This new Act will certainly help bring many lakhs of unsold units to the rental market after it is implemented by all states," he says.

While the Centre has proposed the Act, its implementation will be in the hands of each state government as land is a state subject.

Globally, rental returns on residential properties are five to six per cent while it is between 1.5 and 3 per cent in India. "As it is, the disparity between capital value and rental is so high that people now prefer to rent. Moreover, income tax deduction on rent paid is also an incentive," says Samir Jasuja, founder and CEO, PropEquity.

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Samantak Das, Chief Economist and Executive Director - Research & REIS at JLL India, said the new rental act will bring the required institutional framework and make the rental market more organised. "Moreover, millennials believe in experiencing without owning. So the rental market will get a further boost," he says.

Another trend giving a fillip to renting over owning is co-living, where people jointly take a property on lease. This is the preferred mode of renting by students and young professionals. According to JLL-FICCI report on 'Co-Living - Reshaping Rental Housing in India', the rising demand for shared renting will propel the market and offer a business opportunity of Rs one lakh crore by 2023, up from Rs 45,000 crore in 2018.

"Renting offers flexibility and savings," adds Das.

However, Anuj Puri, Chairman, ANAROCK Property Consultants, says the rental properties that will open up for the market are largely in city centres where no new supply is possible in any case. "Moreover, the property is not bought solely for accommodation but as an investment in a valuable asset that will appreciate over time, and to achieve freedom from rent, security and peace of mind," he says.

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So renters are potential buyers as well, he says. To that extent, the Act may impact sales in the short to medium term only.

But for now, buying decisions can wait as low rentals will lead to household savings, which will help future buyers bring down their loan component and reduce EMIs.

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