Can 10 Million Vacant Units Help Resolve The Housing Crisis?

While our government struggles to provide housing to all by 2020 by building 20 million homes, there are nearly 10 million homes lying vacant in the country. Most strangely, these vacant homes are not even making their way as a rental stock. This puzzling fact offers us two insights. First, the real estate dynamics in the country is investor driven where property, despite all its seemingly lost essence, never goes out of fashion. Second, in the absence of clarity and regulation within the sector, landlords may sometimes find it difficult to give their homes on rent for the fear of tarnishing, illegal occupancy, lack of documentation etc.

Some hard facts

According to a KPMG-NAREDCO report titled Bridging the Urban Housing Shortage in India, 10 states contribute to three-fourth of the housing shortage in India. These are Uttar Pradesh, Maharashtra, West Bengal, Andhra Pradesh, Tamil Nadu, Bihar, Rajasthan, Madhya Pradesh, Gujarat and Jharkhand. As of 2012, Uttar Pradesh had a housing shortage of 3.07 million homes while Maharashtra was close second with 1.97 million homes, followed by West Bengal with 1.33 million homes.

Let's take a look at the vacant homes in these states.

*Data as per Census 2011

According to the Census data of 2011, total percentage of vacant homes in urban areas stood at 10.10 per cent while in rural areas, it stood at 6.20 per cent.

Rental yields too low to appeal?

According to researches, rental yield in India is shamefully low which means it acts as a deterrent for landlords, especially in cases where the landlord may think that the benefit of letting his house on lease is far less. These may be better off when locked and sealed and used only for family-related purposes.

For example, in India, the rental yield is anywhere between two and four per cent annually ─ the rate of interest on a fixed deposit (FD) is far higher at 7.5-8.5 per cent. In developed countries such as the US the rate in much higher. In New York, for instance, the annual rental yield is 6.2 per cent while the interest on an FD is one per cent only. In cities such as Tokyo, Hong Kong, London, Sydney, Singapore, Beijing, Jakarta, Manila, the FD yield ranges between 0.70-4 per cent.

Far away and missing out on leasing?

Non-resident Indians (NRIs) often fail to make the most of their investment in their home countries. They find it hard to get tenants because they stay far off and may not be in a position to monitor things from there. Things are slowly changing. Now, if you do not have family/friends to help you put your house on rent, you may seek professional help. Property management services help you with this.

This would also help you save on taxes. For example, where an NRI has not leased his house for an entire year, a notional value of the rent is taxable. However, if it had been let out for at least some part of the financial year (even a single day), only the actual rent received during the part of the year where property was let out will be taxable, and not the notional rent for the entire year. 

Abhinav Gulechha, CA, NRI Tax and Investment Advisor, says, “Since the rental yields in India are abysmally low, irrespective of the location in India, NRI clients do not let their properties out. Two reasons for this: lack of good and professional property managers (this space is slowly building up) and second is poor tenacy laws, highly favouring the tenants and associated risks that come with keeping tenants. From a taxation standpoint, I bring to the notice of my NRI clients the fact that taxation of house property as per Indian tax law is on a notional basis. So, even if you keep it vacant, it is deemed to be let out, and you have to pay tax (provided overall income is above exemption limit). Many NRIs are blissfully unaware of this provision.”

Landmark moves

• The Central government is planning on making Aadhaar authentication mandatory before registering property documents such as agreement of sale, wills, power of attorney and other documents.

• In Hyderabad, 60,000 plot owners have been asked to pay vacant land tax (VLT) amounting to 0.5 per cent of the property value at the time of registration.

• The Nagpur Municipal Corporation (NMC) has approved a proposal to appoint a private company to study and prepare a report on tapping source of revenues through value capture financing (VCF). VLT is a shoot of the VCF.

• The Goods and Services Tax (GST) does not subsume VLT.

Also note

• Most of the urban housing shortage is in the economically weaker sections and the low-income group category, but most of the real estate asset that we can boast today is beyond the reach of these segments.

• The affordable housing projects launched by private developers have significantly contributed to the 25 per cent decline in urban housing shortage in the past five years.

• Besides those living in obsolescent houses, 80 per cent of these households are living in congested houses and are in requirement of new houses.

• One million households are living in non-serviceable katcha houses, while over half a million households are in homeless conditions.