Why Modi Govt's Model Tenancy Bill 2015 Will Improve Rental Yield

In the late 1970's when the American Economic Review, the world's most popular economics journal, surveyed 211 eminent economists across the political spectrum, they found that 98 per cent agreed with the statement “A ceiling on rents reduces the quantity and quality of homes available.” The truth is that virtually every economist of repute agrees that rent controls destroy the residential property market. The general public, most journalists and run-of-the-mill urban planners are yet to accept that this is no longer controversial among specialists.

But, the Housing and Urban Poverty Alleviation Ministry's draft of the Model Tenancy Bill, 2015, plans to facilitate development of real estate in India by ensuring that the law is not skewed in favour of tenants. The draft insists on an agreement to spell out annual increase in rents, and clearly specifying the tenure period. Landlords can evict a tenant on one month's notice for non-payment of rent or misuse of property. The draft bill also stipulates that there should be no arbitrary eviction before the rent period. According to the draft bill, tenants can claim rent deduction if the services deteriorate and the security deposit should not exceed the rent for three months. 

Though there is great room for improvement, these are good moves. One of the depressing aspects about the residential property markets in India is that rental yield in the country is very low and is often in the range of 1-2%. Even a rental yield of 2% is considered high in India, while in the United States, the gross rental yield is 3.91%, according to the Global Property Guide.

For instance, Mumbai's rental residential property markets are notorious for its inefficiency. But, before the World War II, Mumbai was a city of people who stayed in rented accommodation, like other large global cities were, and still are. The reason is that in most countries, governments recognize that well-functioning rental markets are important to provide shelter at a low cost. Other global cities had also formulated strategies to redevelop or renovate buildings that operated under stringent rent controls for long. But, Mumbai has not yet done so, though nearly one-third of the property in Mumbai's island city constitutes of rundown buildings.

If the new rules are implemented, rent ceiling will be inflation-indexed, and the tenancy period will end with the death of a tenant. This is an important legislation because under rent controls, the longer a tenant stays, lower will be the rent he pays. But, in an unregulated market, the rent would have been much higher because of inflation and market fluctuations. So, tenants tend not to move out, and after their death, relatives tend to occupy their homes. Moreover, while the landlord has the right to sell, the right to usage remains with the tenants who can sublet it to others. Landlords often cannot sell the property because the building generates negative income. Moreover, when the buildings become dilapidated, they have no incentive to maintain it because they cannot sell it, or profit from renovation. An economist was right when he said that there is no better way to destroy a city---except for bombing it.