Impact of Model Tenancy Act on Co-living Economy

With the opening of MTA, student housing and co-living sectors will become attractive for foreign capital
Impact of Model Tenancy Act on Co-living Economy
Impact of Model Tenancy Act on Co-living Economy

The Model Tenancy Act which was approved by the Union Cabinet on June 2, 2021, will further strengthen the organised rental housing such as student housing and co-living in India. The large rental housing demand coupled with such laws that protect the interests of the stakeholders will ensure that the space is given industry status and recognition it deserves. Housing is a basic need and rental homes in metros are fuelled by the continuing urban migration. Institutional investors will now start looking at this sector positively with such a formal act coming into effect.

India’s residential rental market touched annual figures of over $20 billion, or more than Rs 1.45 lakh crore (IMF). Of this, 68 per cent ($13.5 billion) is in urban areas & more than two-thirds of the urban rental housing market is unorganised. MTA will help bridge the trust deficit between tenants and landlords by clearly delineating their obligations and will eventually help. The organised co-living sector is already a boon for the young migrants in the urban markets. MTA caps the security deposit to two months of rent and this liberates tenants from being forced to pay high and random deposit amounts to landlords. Besides, being the operator of the property co-living players helps tenants stay away from bothersome owners in case of disputes, with an organised communication approach and for the sake of brand name, co-living companies make sure to communicate well before carrying out repair work.

The Act makes the role of co-living players stronger than ever by becoming the face of the property by giving its brand to it, this avoids landlord hiking rentals in mid-term, cut off or withhold essential supplies or services. The draft also makes it the landlord's responsibility to rectify structural damages and undertake measures like whitewashing walls and painting doors and windows. On the other hand, co-living is saviour to landowners in terms of collection of rent, vacating of property by end of term of the agreement. In this regard, the Act also proposes heavy penalties for failure to vacate a residential unit. The landlord is entitled to receive a compensation double the monthly rent for two months and four times the monthly rent if a tenant does not vacate the premises after tenancy has been terminated

Traditional landlords may find it difficult to operate in an environment with only two months' deposit as the time and cost of evicting tenants is quite high. So, this may give them an incentive to deal with co-living operators instead of trying to manage tenants themselves. At present, many traditional landlords ask for a 10-month deposit. This may pose an issue for youngsters at an early stage in their careers. Co-living typically have one to two months of deposit, so one of the attractions of co-living is the lower deposit. 

In India the rental yield for residential is as low as 1.5-2 per cent compared to the commercial segment where the yield is 7-8 per cent. The yields are up for an increase, with additional facilities provided by co-living players or student housing players. The blending of services with real estate will ensure improvement of overall yields in the segment. 

With the pandemic and the realisation of the various uncertainties that the migrants had to face during the last 15 months, rental housing will further get a massive boost. Not just students and gig workers, young professionals and young couples too would prefer safe rental housing that provides flexibility to their lifestyle.  

Organised rental market will give confidence to all stakeholders and ensure smoother operations. MTA will be the first step in attracting institutional capital for rental housing that includes student housing and co-living. Institutional capital that has been sitting on the fence thus far waiting for archaic laws to be modified will now begin to take the plunge. Investors have always been convinced about the demand drivers in the market, but lack of framework had made them sceptical in writing cheques. With the opening of MTA, such notions in the minds of investors will be sorted and will fuel growth. Overall, with the introduction of the organised MTA, student housing and co-living sectors will become attractive for foreign capital. 

The author is Founder and CEO, Colive

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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