Digitization, transparency, security: What does India’s new Model Tenancy Act mean for NRI investors?

The rental segment is a critical part of any real estate market, with multiple social and economic benefits. It expands the pool of investors, and creates options for those who can either not afford to purchase a property outright, are delaying that decision, or find it more viable to rent particular premises.

Recent reforms in the Indian real estate sector have led to a record inflow of Foreign Portfolio Investors (FPIs), with net inflows of $710 million in March 2021, and $213 million in April 2021⁽¹⁾. Rationalizing the rental market was the logical next step for India, and the Government of India responded to this need on the 2^nd of June 2021, by approving the Model Tenancy Act (MTA), which mandates the setting up of district level rent authorities, courts, and tribunals, with fully digitized records and access, to protect the rights and interests of landlords and tenants⁽²⁾.

The launch of much awaited safeguards and norms

While the MTA 2021 has been created and approved by the Central Government of India, the nation’s federal structure means that Indian States, and Union Territories, will have the option to adopt the Act as a fresh legislation, or by making amendments to existing laws governing the rental market.

According to the Government of India, the launch of this formalized regulatory regime has been enacted to boost rental housing as an investment, and to establish trust between Landlords and Tenants. Applicable to future agreements within the commercial, residential, and educational leasing sectors, the MTA will bring much needed transparency and accountability to Indian rental markets.

Opportunities for Non-Resident Indians (NRIs)

In the past, as absentee landlords, Non-Resident Indians have been relatively averse to renting out their vacant properties, unless they had the safety net of a local caretaker, to liaise with their tenants.

The formalized regime, put in place through the Model Tenancy Act, will serve as a boost to attract investments into the Indian real estate sector, from this important investor demographic. According to figures released by the Dubai Land Department, Indians constituted the largest group by nationality, to invest in Dubai real estate, in 2020⁽³⁾. Clearly, NRIs represent a huge potential for India, in terms of attracting capital into the country’s real estate market. With rising demand for housing, regulatory reforms, and an increased influx of capital from institutional investors, the Indian real estate market represents a lucrative opportunity for investors as well. This convergence of interests is significant, with India poised for urban renewal and redevelopment, at a scale that most other markets cannot match.

A win-win for markets and NRIs

Despite the ongoing Covid-19 pandemic, the Indian housing loan market registered a growth of 9.6%, year-on year, in Q3 of FY2021⁽⁴⁾, according to the credit information bureau CRIF High Mark. Given such positive market sentiment, Non-Resident Indian investors are likely to consider opportunities in the Indian market very favourably. This is especially true because of familiarity, and the comfort factor of being able to look at investments from a long-term perspective.

In the past, relatively low returns, high loan rates, and a lack of confidence about existing dispute resolution mechanisms, has kept NRI investors somewhat averse to the Indian real estate markets. Given the active role of such investors in several other international markets, the newly announced Model Tenancy Act could be the first step in setting this missed opportunity right – in a move that benefits both NRIs, as well as the Indian real estate market.