What India Needs To Deliver On Modi’s Low-Cost Rental Housing Promise

Having lost jobs as housemaids and cooks to construction workers in the nation’s crowded cities during the lockdown, they couldn’t pay rent on their shanties.

Prime Minister Narendra Modi’s administration, after more than a month of pleading by local governments, allowed special trains. For the long term though, Finance Minister Nirmala Sitharaman unveiled a plan to build affordable rental homes for the urban poor. Like the ones offered in Singapore and Europe.

India’s record of creating government-funded rental housing has been dismal so far despite rapid urbanisation and mushrooming slums. Nearly a quarter of Indians, or about 30 crore, live in slums, according to World Bank database. At least two states have tried to build rental housing for the poor but without success. Their failure is attributed to high land costs, strict laws that protect squatters and just poor execution.

“The crux of any rental housing scheme is in its implementation,” said Marina Joseph, associate director at YUVA, a non-profit that works for the rights of the poor. “The government can mandate the construction of housing but it requires operational investment from local authorities. And the way the local authorities are handling the existing housing for poor, it does not inspire much confidence.”

The Modi government plans affordable rental housing complexes under the existing Pradhan Mantri Awas Yojana for providing homes to the urban poor. For the new scheme, it will:

• Convert government-funded housing in the cities into affordable rental complexes in partnership with private companies through concessionaire agreements.
• Offer sops to manufacturing units, industries, institutions, associations to develop affordable rental complexes on private land and operate.
• Incentivise state agencies and central government organisations to develop and operate such housing.

Detailed guidelines are awaited.

Maharashtra’s Failed Initiative

In 2007, Maharashtra planned to build rental homes in partnership with private developers. It offered additional floor space index, or rights to add saleable space elsewhere, in return for building tenements with a carpet area of 160 and 320 square feet, according to details on the website of the Mumbai Metropolitan Region Development Authority.

These were to be allotted to low-income families but were handed over to the municipal corporation to rehabilitate people displaced by redevelopment projects. Not a single unit was given out on rent, the original purpose of the project.

In response to BloombergQuint’s queries in March, an MMRDA spokesperson said considering the need to shift project-affected people, the state had in 2013 allowed using half the rental housing units as temporary accommodation.

Then in 2014, it allowed to hand over ownership of half of such rental units outside municipal areas to textile mill workers. The policy for the rest, according to the spokesperson, is yet to be formulated.

Sulkashana Mahajan, urban planner and architect, had in a 2012 report highlighted reasons for the failure: from lack consensus among old tenants of rundown buildings to not protecting rights of legitimate owners. She had suggested giving rights to tenants in chawls and reconstituting Maharashtra Housing Board into a professional body like the Housing Development Board of Singapore. Mahajan told BloombergQuint the suggestions remain relevant even today.

Telangana also launched a similar scheme in 2015, following the Singapore model. The plan is to give poor and low-income households the ownership after paying the basic cost over 10 to 15 years, according to Anuj Puri, chairman at Anarock Property Consultants.

While some budget allocations were announced, Anarock said the proposal hasn’t taken any shape on the ground.

Prohibitive Land Costs

A big hurdle to public housing in India is the economic viability of the public-private projects when developers have to come up with land.

“For any rental scheme to work we need to rationalise the land cost. If that is high, rental housing won’t be feasible,” said Pankaj Kapoor, managing director at property consultant Liases Foras. “It affects the rental yield. For rental housing to be successful, rental yield should be higher than 5 percent. At present, it ranges from 2-3 percent.”

According to Niranjan Hiranandani, national president at developers’ lobby Naredco, another problem is location. “Rental housing works better when it is situated close to workplaces. Usually government-funded rental housing tends to be at peripheral locations,” he said.

Law Stacked Against Landlords

Rental housing in general is beset by legal challenges in India. It falls under the purview of the Rent Control Act and each state has its own version, said Puri. “The act primarily secures the rights of tenants while curbing the power of the landlord to evict them.”

While the central government drafted the Model Tenancy Act, 2019 to secure rights of even the landlords, most states are yet to implement it.

As a result, India’s rental housing market remains fragmented and underdeveloped, Puri said. “This creates pressure on the overall real estate market.”

Models To Emulate

European countries have successfully run social or rental housing. According to an OECD report, such homes account for more than 10% of the total stock in Finland, Iceland, France, and is 20% or higher in the U.K., Denmark and the Netherlands. Among India’s emerging peers, South Africa’s social housing stock is over 10 percent.

In India, most states have pulled out from active housing creation, said Prasad Shetty, Urbanist and associate professor at the School of Environment and Architecture. That, he said, has made builders powerful.

The European countries have an elaborate system involving private companies that are purely into rental housing and are regulated and incentivised by the government, he said. And they have to manage the properties as well.

Indian developers exit as soon as construction is over, Shetty said. He suggested public-private joint ventures to maintain and manage such rental projects.

Knight Frank India, in a yet-to-be published report shared with BloombergQuint, cited the Singapore model where 84% of the population lives in homes built by the Housing Development Board.

The board offers homes on a fixed lease of 99 years, and the flat along with land returns to the government once the term ends, according to Alok Sinha, associate director, transaction advisory, government & infrastructure, Knight Frank India. “The value of the unit at the end of the tenure is zero. As evident, the units approaching the end of the tenure trade at a significant discount to longer tenure units.”

India, too, can offer an initial tenure of 30 years with an option to extend on payment of a renewal premium, he wrote. And the property can be priced 20% lower than a similar long-tenure asset, the report said, and India can use the model to build subsidised housing.

The other is the rent-to-own model. These are contracts where a buyer or a tenant leases a property for a pre-defined period with an option to buy at a pre-decided price (with or without escalation) during or at the end of the lease period, wrote Saurabh Mehrotra, national director, valuation and advisory, Knight Frank India.

The lease rent is slightly higher than the market rate, as it also includes a portion of the commitment money or equity, he wrote. The seller benefits with higher yields and a better clarity on the transaction price, while the buyer benefits from a deferred payment for a home whose price he has been able to lock, the report said. The properties under rent-to-own agreements, he said, are usually better managed.

And for social housing to be successful, India needs to put unutilised government land to use, the report said.

Puri of Anarock, however, said India has the policies but lacks implementation, In Singapore, these are rigorously executed. And that’s where the government should focus to make it work.

Still, the scheme is aimed at providing relief in the years to come. Joseph of YUVA said migrant workers needed more immediate help than already announced. The step to create affordable rental housing is well intentioned but won’t provide relief now, she said.

Apart from putting money directly in the hands of people, she has one suggestion: defer rent payments for the next three to six months.