India's real estate market is said to grow to INR 65,000 crore (US$ 9.30 billion) by 2040 from INR 12,000 crore (US$ 1.72 billion) in 2019. Real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and contribute 13% (thirteen percent) to the country's GDP by 2025. Retail, hospitality, and commercial real estate are also growing significantly, providing the much needed infrastructure for India's growing needs. Indian real estate increased by 19.5% CAGR from 2017 to 2028.1
The recent trends in the real estate market required standardisation of the tenancy and rent control laws. In lieu of the aforesaid, the Ministry of Housing and Urban Affairs prepared the draft Model Tenancy Act, 2020. The need for the aforesaid model legislation has arisen to bridge the gap between the growing need for housing on one hand and the non-availability of houses for rental purposes on the other. To understand the growing need of the commercial and residential real estate sector it is important to trace the recent trends in the aforesaid sectors.
- Real Estate Trend - Sector Wise
The need for office spaces has increased in the recent years. Office space has been driven mostly by growth in ITeS (Information Technology Enabled Services) / IT (Information Technology), BFSI (Banking, financial services and insurance), e-commerce business consulting and manufacturing sectors. During 2019, the office leasing space reached 60.6 million square feet across 8 (eight) major cities, registering a growth of 27% year over year. In 2019, office sector demand with commercial leasing activity reached 69.4 million square feet.
The growth of co-working spaces has also been increasing rapidly in the country, with the segment accounting for around 13% (thirteen percent) of the total office transactions in 2019 from 5% (five percent) in 2017. Small start-ups as well as large IT players are finding this an attractive model. The ever-expanding service sector has increased the demand for office spaces which is one of the biggest drivers of the commercial real estate sector in India. The total office transaction in the first half of 2019 was a strong 28 million square feet and this office space demand is being led by the IT/ITES sector.
Other than office space, the boom in the warehousing and logistic sector has in turn boosted the demand for properties suitable for logistic(s) and warehousing services. The warehousing space in expected to reach 247 million square feet in 2020 and see investment worth INR 50,000 crore (US$ 7.76 billion) during 2018-20. Grade-A office space absorption is expected to cross 700 million square feet by 2022, with Delhi-NCR contributing the most to this demand. Housing sales reached 2.61 lakh units in 2019 across seven major cities.2
The majority demand for the real estate sector in India arises from Tamil Nadu, Andhra Pradesh, Maharashtra, Karnataka, Gujarat, West Bengal, Uttar Pradesh and National Capital Territory of Delhi. This rise in demand is attributable to the increase in the employment hubs in Chennai, Hyderabad, Mumbai, Pune, Ahmedabad, Bengaluru and National Capital Territory of Delhi. The need for rented accommodation has also increased in recent years for various income segments including migrants, formal and informal sector workers, professionals, students, etc.
- Real Estate Trend - Co-living Sector
Co-living spaces have also seen an increase in India. It is a concept of housing where the living space is shared by residents. According to a recent survey conducted by Knight Frank India, 72% millennials are wiling to consider co-living spaces as an option for accommodation. The study further concludes that a co-living facility generates net yield of approximately 12% (twelve percent) while rentals from a traditional accommodation yields at 1.5% - 3%.3
While the market for co-living spaces was blooming before COVID-19, COVID-19 has had a negative impact due to health and safety concerns and social distancing limitations.
- Real Estate Trend - Student Housing Sector
Student housing sector has also seen a significant growth (7% to 10%) in the past 3 years. The student housing sector was set up as larger facilities with varying amenities and varying degree of technology intervention. Rental yields are also better than in other asset classes on a risk adjusted basis i.e. 10-15% compared to 8-10% for commercial office assets.
Post Covid-19, the costs with respect to sanitization and cleanliness had increased. While student housing rents have increased, the growth of student housing will be paused.
- Model Tenancy Law - Status
The draft Model Tenancy Act, 2020 has been prepared by the Ministry of Housing and Urban Affairs. The objective behind preparation of the Model Tenancy Law is to balance the interests and rights of the landlords and tenants.
It is aimed to enable creation of adequate rental housing stock for various income segments of society including migrants, formal and informal sector workers, professionals, students etc.; increase access to quality rented accommodation; and enable gradual formalisation of rental housing market. It is also estimated to overhaul the legal framework with respect to rental housing across the country.
One of the factors requiring the Model Tenancy Law that the existing rental laws had been long drawn provision with resulted in lengthy litigation to resolve disputes. Another factor for the Model Tenancy Law is the inability of low-income households to afford their own house.
The need for the aforesaid model legislation has arisen to bridge the gap between the growing need for housing on one hand and the non-availability of houses for rental purposes. The need for rented accommodation has increased in recent years for various income segments including migrants, formal and informal sector workers, professionals, students, etc.
The absence of standard legislation governing the intricacies of the tenancy has been the root cause for the introduction of Model Tenancy Law. The Model Tenancy Law has been prepared with an objective to balance the rights of both landlord and tenant and create a transparent and accountable system for renting premises.
Model Tenancy Law has been introduced to increase the access to rented accommodation, enable formalisation of rental housing/ commercial market and assist in the overhaul of the legal framework with respect to the rental housing market.
The Draft Model Tenancy Law is a model/ template for States to adopt. It is neither a Central Bill nor an Act of Parliament.4. The nature of the Model Tenancy Law is such as the 'collection of rent' is part of the 'State List' of the Constitution of India. Therefore, the template law has been prepared by the Ministry of Housing and Urban Affairs to be adopted by the states. Currently, no state has adopted the aforesaid template as legislation.
- Summarized provisions of Model Tenancy Law
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1 India fBrand Equity Foundation, Indian Real Estate Industry, October 2020, available at https://www.ibef.org/industry/real-estate-india.aspx.
2 India Brand Equity Foundation, Indian Real Estate Industry, October 2020, available at https://www.ibef.org/industry/real-estate-india.aspx.
3 Co-Living: Rent a Lifestyle, https://content.knightfrank.com/research/1004/documents/en/india-topical-reports-in-the-first-of-its-kind-industry-report-titled-co-living-rent-a-lifestyle-we-give-a-comprehensive-analysis-of-the-potential-for-rental-housing-in-india-6027.pdf.
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