MTA a step towards formalisation of rental market: ICRA

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

The new act replaces the Rent Control Act, 1958 and aims at bringing about a balance of interests between tenants and landlords. Specifically, it 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.

As per ICRA note, with such measures, the successful rollout of the 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 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.

Giving more insight, Ms. Mahi Agarwal, Sector Head & Assistant Vice-President at ICRA, said, “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. 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.”