isb affordable rental report - 2012 - indian school of business

Manufacturing Housing: Creating Rental Housing for Industrial Labour

CEMS Working Paper AH-‐01

January 2012

Authors:

Dhaval Monani Nikhilesh Sinha TM Bhargavi Shahen Dastur Swapnil Lodha

Working Papers Series

Table of Contents

EXECUTIVE SUMMARY 3

CONTEXT OF AFFORDABLE HOUSING IN INDIA 4

MIGRATION CREATES A DEMAND FOR RENTAL HOUSING 6 MOST MIGRANT JOB-‐SEEKERS WORK IN MANUFACTURING OR CONSTRUCTION 6 HOUSEHOLDS EARNING LESS THAN INR 7000 CANNOT AFFORD OWNERSHIP 8 PROBLEMS WITH THE EXISTING RENTAL MARKET 9

PROPOSED RENTAL MODEL FOR INDUSTRIAL WORKER HOUSEHOLDS 10

THE OPTIMAL MODEL 10 EFFECTS OF CHANGING CONSTRUCTION COSTS 13 REASONS WHY THE GROUND+1 WORKS 14 CAVEAT 1: THE RELATIONSHIP BETWEEN LAND COST AND THE OPTIMALITY OF THE MODEL 15 CAVEAT 2: INVESTOR INTEREST 15

A PROPOSED DORMITORY MODEL FOR INDIVIDUALS 16

POLICY ISSUES 18

LAND AVAILABILITY 18 INFRASTRUCTURE FACILITIES 19 A NOTE ON RENT CONTROL 20

CONCLUSION: 22

Executive Summary

In the past five years, the shortage of housing in Indian cities has widened from 24.7 million to

26 million. Over 90 per cent of this shortage consists of housing for families living on less than

INR 3,300 per month. The public sector has failed to provide for this section of society and

private sector involvement has been seen as unviable. There are however segments, such as

industrial worker housing where the private sector can play a primary role.

Our analysis of housing prices and affordability for different income groups reveals that families

earning less than INR 7,000 cannot currently afford home ownership and are thus reliant on

rental housing provision. This report presents a commercially viable model for rental housing

which is affordable to families earning as little as INR 2,700 per month in Industrial zones

outside large cities. The model potentially offers investors a 6 per cent annual yield and an

overall return of over 20 per cent.

A targeted set of policy interventions can lower the cost of rental housing and extend its

accessibility to a larger group of beneficiaries. In areas exhibiting high industrial growth,

restrictive norms on the use and sale of agricultural land present a serious obstacle to housing

initiatives. We have put forward concrete suggestions to address this issue. The report also

contains policy recommendations on trunk infrastructure provision and optimal land use

through town planning schemes.

Context of Affordable Housing in India

In the space of seven years, India’s urban population has increased from 290 million to 380

million. By 2030, this number is expected to reach 590 million. This growth raises serious

questions about the adequacy of urban housing supply. In 2007, the urban housing shortfall

was 24.7 million units; in 2012, it is closer to 26 million. Of that, about 22.8 million or

approximately 90 per cent of the shortfall is housing for the Economically Weaker Section

(EWS)1, households living on less than INR 3,300 a month or less than INR 40,000 annually

Data source: Report of the 11th Five Year Plan (2007 – 2012) working group on urban housing with focus on slums, GOI

Table 1: Classification Of Households By Income Group

Income Groups Monthly Household Income (INR) EWS (Economically Weaker Section) Less than 3,300 LIG (Lower Income Group) 3,300-‐7,500 MIG (Middle Income Group) 7,500-‐14,000 HIG (Higher Income Group) More than 14,000 Data source: MHUPA – Working Group on Urban Housing 2007-‐2012

1Planning Commission, Government of India, Report of the 11th Five Year Plan (2007 – 2012) working group on urban housing with focus on slums, available at http://planningcommission.nic.in/aboutus/committee/wrkgrp11/wg11_housing.pdf (last visited on December 14, 2011)

21.78

2.89 0.04

24.71

0

5

10

15

20

25

30

EWS LIG MIG & HIG Total

Figure 1: Urban Housing Shortage in Mn. (2007)

This shortfall is unevenly distributed amongst the different Indian states. While Maharashtra,

the state with the highest urban population, has the highest shortfall -‐ roughly 3.72 million

houses -‐ Tamil Nadu has the next highest (2.82 million) followed by Uttar Pradesh, West Bengal

and Andhra Pradesh. With a combined deficit of almost 13 million houses, these five states

account for more than 50 per cent of the shortfall.

In the initial years of post independence India, the emphasis was on a planned economy and

the state saw itself as the primary housing supplier2. By the 1980s however, the housing and

urban development task force set up by the Planning Commission recognised that government

schemes had made only a marginal contribution to the overall housing environment. By the

Eighth Plan (1992-‐1997), housing provision was regarded as essentially private sector activity3.

Since most of the housing shortfall involves households living below or barely above the

poverty line, it is unrealistic to expect the private sector will solve the housing problem without

considerable government support. The basic costs -‐ land, finance, construction and labour –

place housing beyond the reach of many households, even without factoring in an acceptable

return for the developer.

There are however sub-‐markets where the private sector can play a significant role in housing

provision, like for instance industrial worker housing. Industrial labour consists typically of

migrants from villages who move to industrial areas outside cities in search of work. While

some big firms, notably those in the iron and steel sector, provide housing for their workers,

the 60 million employees of the Micro Small and Medium Enterprise sector which produces 45

per cent of India’s manufactured output, are mostly expected to fend for themselves.

In September 2010, ISB became a knowledge partner in a pilot affordable housing project

situated in an industrial cluster outside the city of Rajkot in Gujarat. The proposed single storey

housing model, focusing on peri-‐urban areas and industrial zones, was a radical departure from 2UNCHS, 2006.National Trends in Housing-‐Production Practices, Vol 1: India, Nairobi, UNCHS (Habitat) HS/310/93 3ibid

the low rise models under development. The land required for the pilot project was acquired at

market prices without state intervention and the project built housing units affordable even to

LIG households on an ownership basis. While this is the most affordable formal housing

available on the market, it is still not accessible to a large section of LIG and EWS households.

We make the case for private industrial housing rental provision, with best practices and

learning that have been culled from the Rajkot Pilot Project.

Migration Creates a Demand for Rental Housing While natural population growth in urban areas accounts for between 50 and 60 per cent of

urban growth, about 21 per cent of population growth in cities can be attributed to rural-‐urban

migration4. In other words migration accounts for a fifth of urban growth. This figure does not

however account for short-‐term migration, which consists mainly of individuals who move for

periods of between 30 days to six months.

Migrants typically opt for rental housing when they first move to a new location, as it is both

flexible and affordable while they search for jobs and gather information about available

housing options. While rental housing is a sensible option even for migrants who have made a

permanent move to a new location, it is a necessity for short-‐term migrants, which creates a

specific demand for rental housing.

Most Migrant Job-‐Seekers Work in Manufacturing or Construction According to the National Sample Survey Organization Report 2007-‐08, about 14 million people

from rural India migrate for short periods. The majority moved in search of employment.

(Figure 3)5 About 3.3 million short-‐term migrants were engaged in manufacturing and about 4.2

million in construction.

4 National Sample Survey Office, Government of India, Migration in India, 2007-‐2007, NSS 64th Round, available at http://mospi.nic.in/Mospi_New/Admin/publication.aspx (last visited December 15, 2011) 5 ibid

Data Source: Ministry of Labour& Employment, Government of India

Both sectors require short-‐term labour, often hired on an ad-‐hoc basis. Rental housing offers

them flexibility and mobility, so they can move quickly to jobs in other locations if need be.

23.6%

1.3%

16.8%

0.2%

41.6%

7.3% 5.7% 3.7%

12.6%

0.6%

26.0%

0.4%

25.2%

18.1%

4.9%

12.2%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Figure 2: Sector-‐wise Short-‐term Migracon for Employment from Rural Areas

To Rural

To Urban

-‐ 2,000 4,000 6,000 8,000 10,000 12,000

Figure 3: Monthly Wages of Manufacturing Industries in 2008 (INR)

Data Source: Ministry of Labour& Employment, Government of India

Households Earning Less than INR 7000 Cannot Afford Ownership Rental housing is not only the best solution for short-‐term migrant workers, but also for

households that cannot afford to buy a home. The Centre for Emerging Markets Solutions

(CEMS) at ISB conducted a survey of 39 affordable housing projects across the country in 2010,

which revealed that none of these are affordable to the EWS and bar two, none cater to the LIG

either.

Given that the cheapest available house at the time of writing cost INR 311,0006 and that the

average family cannot contribute more than 40 per cent of income towards housing (in

addition, they must also be eligible for a home loan and provide the 20 per cent down

payment), it is evident from the table above that households earning less than INR 7000 cannot

afford home ownership.

6 The most affordable private formal housing available for purchase at the time of writing was the Type 2 unit in the Rajkot Pilot Project.

Table 2: Home Affordability Based On Monthly Income

Calculation of Home Affordability • We assume 40% of the household income is set aside for buying a house. • For example, if the household income is INR 10,000; the amount of money set aside

for payment towards the house will be INR 4,000 (40% of INR 10,000)

Problems with the Existing Rental Market According to the National Sample Survey report on Housing Conditions and Amenities7, only 5

per cent of housing in urban India falls under the category of formal rental. While about 30 per

cent of urban India lives in rental housing, of that, 84 per cent of them live in informal rentals,

where there is no written contract, in structures often illegally constructed, badly maintained

and without access to basic amenities such as water, electricity and proper sanitation. More

than 40 per cent of informal rental accommodation in cities has open drains, while about 16 per

cent has no drainage facilities8

One of the main reasons for the low participation of the formal sector in residential rental

markets is that rental yields are typically between 2-‐3 per cent. Most landlords see rental

income as an additional benefit to capital gains from real estate investment, where houses are

rented out while the owners wait for the value of the property to appreciate. This means that

rental supply does not respond directly to shifts in rental demand and that an increase in

available rents does not necessarily translate into an increase in the supply of houses available

for rent.

7 National Sample Survey Office, Government of India, Housing Conditions and Amenities in India 2008-‐09, NSS 65th Round, available at http://mospi.nic.in/Mospi_New/Admin/publication.aspx (last visited December 15, 2011) 8 ibid

61.50%

4.70%

5.00%

25.40%

3.30%

Owned dwelling

Employer’s Quarter

Hired Dwelling -‐ Formal

Hired Dwelling -‐ Informal

Others

Data source: NSS 65th Round (2008-‐09) – Report on Housing Condi[ons and Ameni[es in India

Figure 4: Tenurial Status for Urban India

Proposed Rental Model for Industrial Worker Households Our rental model offers households accommodation in a 171 square foot home with an

attached toilet and kitchenette. If monthly rent is calculated at INR 800, it will be accessible to

households earning as little as INR 2700, while ensuring investors earn an annual yield of over 6

per cent. The business model includes a provision for exit after a period of ten years. The return

for investors is estimated at over 20 per cent when project value appreciation is considered in

addition to the rental yield.

The proposed rental model is based on an extension of an existing 218-‐unit affordable housing

project located in an industrial cluster (Shapar GIDC*). built on five acres (approximately 20,234

sq. meters). The project offers two standard sizes of housing units, both ground-‐level, single-‐

storey structures with front and back yards. Type 1 is a two-‐room house with a kitchen,

attached toilet and bath and a built-‐up area of 430 sq. ft. Type 2 is smaller, at 272 sq. ft. unit

with one room, a kitchenette and an attached toilet-‐cum-‐bath. The units were sold at between

INR 311,000 and INR 480,000 making these the cheapest private sector housing in the country.

The Optimal Model A two-‐storey or Ground+1 stack is the most cost effective design, allowing maximum utilisation

of Floor Space Index (FSI) and minimisation of land cost per unit. It optimises land value. The

land cost for the Ground+1 model is approximately 12 per cent of the total cost of the unit. This

is significantly lower than a ground-‐only model, and slightly lower than a ground+2 structure.

The construction costs for ground+1 is marginally lower than ground-‐only structures because

the cost of the foundation work is split between the two units. Adding a third storey, however,

requires additional reinforcements for the structure to meet safety norms. This drives up the

construction costs for each unit. In addition, while an external metal staircase is acceptable for

the ground+1 model, the ground+2 model would require an internal concrete staircase. This

increases the super built-‐up area, requiring additional FSI apart from the increased cost of the

staircase itself.

Rental Housing Can Cater to Households Earning INR 2700 Based on the results of the simulation of a rental model, it may be possible to provide housing

to households earning as little as INR 2700 a month.

*G.I.D.C – Gujarat Industrial Development Corporation • GIDC is a government owned corporation that sets up industrial estates all

over Gujarat, India after assessing the location’s industrial viability • There are currently over 182 GIDC estates across Gujarat • GIDC offers industries allotted industrial land with infrastructure facilities • The size of these estates varies from 50 hectares to 500 hectares.

Jargon Buster FSI – Floor Space Index is a ratio used mainly when building multi storey building. It is the ratio of the total area covered by construction to the area of the land on which the structure is developed. FSI= (Total area of all floor of a building on the plot)/(Area of the plot) For example is the FSI for a certain plot is 2, the developer can construct a structure whose total area can be 2 times the size of the plot. Carpet Area – Is the area that is the net usable area. It is calculated from by measuring the inner wall-to-wall area of a house. Built-Up Area – Built-up area is the carpet area plus the area of the walls. I.e. the total area of a unit Super Built-up Area – This is the built-up area of the unit plus the common amenities such as lifts, corridors, and staircases.

Table 3: Rental Affordability Based on Monthly (INR)

Assumptions in the Model

• Land cost per unit is taken as INR 30,000. This cost is derived from the ‘Ashray Housing’

model • Over the past few years land appreciation has been higher than the rate of inflation

consistently. Hence, we are pegging rent and land value appreciation to inflation. By doing so we are assuming that we are not losing value of land over a period of time. However, if we do decide to keep the land and rent appreciation value higher than inflation rate we will observe higher rental yields and IRRs from the project.

• The IRRs are calculated assuming the owner/stakeholder decides the give the developed project out for rent for a period of 10 years. Following this the developer sells all the units. Hence the IRRs are calculated taking into consideration the rental yields as well as the sale price of the units after 10 years.

• The yearly rental yield is calculated by summing up the rent collected for one unit in a year divided by the cost of one unit to the stakeholder.

In order to arrive at optimal model we considered how different types of structures could minimise construction costs and maximise rental yields For this purpose considered the following three types of structures and did a sensitivity analysis of how a change in construction cost might impact yields for each.

• Ground Only Structure • Ground+1 Structure (with an external staircase) • Ground+2 Structure (with an internal staircase)

Effects of changing construction costs

Sqft Cost (INR 650) Ground Only Ground+1 Ground+2

Total Cost (INR) 3,24,394 2,37,699 4,94,859

Rental Yield (%) 7.4 10.1 4.14

IRR Exit (%) 19.2 18.8 12.93


Total Cost (INR) 3,54,882 2,52,440 5,42,754

Rental Yield (%) 6.78 9.51 4.02

IRR Exit (%) 17.98 17.83 12.62


Total Cost (INR) 3,83,425 2,67,213 5,90,649

Rental Yield (%) 6.26 8.98 3.69

IRR Exit (%) 16.88 16.94 12.36

Ø The rent for all the above calculations is kept at constant of INR 2,000 Ø All the above models use a similar housing unit size and design Ø The ground+1 and ground+2 models do not include a lift

From the above table it is evident that the Ground+1 model offers the highest yields, regardless of construction cost. It is interesting to note however, that the ground only model offers the best IRRs when constructions costs are low. The cost breakdown given in the chart below gives clear indication of why the Ground+1 model trumps the others.

Data Source: CEMS Research

Reasons why the Ground+1 works Optimizes Land Value The land cost for the ground+1 model is approximately 12% of the total cost of the unit. This is significantly lower in proportion as compared to the other models. This would benefit the developer/investor as land prices in India have appreciated at a high rate over the past decade. As the percentage of the total cost of a unit has a lower percentage of land cost, the total cost of the unit is not highly volatile even if the land cost varies. The Ground+1 also has lower land cost per unit as compared to Ground Only as the land is optimized better to accommodate more units hence, reducing the land cost per unit. Optimizes Construction Costs As the construction of any structure starts to go vertical, the construction costs will start to increase. This is because of the need for reinforcement/ increase in reinforcement for the structure to be safe. Hence, for the Ground+2 structure reinforcements will need to be added for the structure to be safe. This will drive up the construction costs for each unit. Where as in the case for Ground+1 the construction costs will not increase, as the reinforcement of the ground structure is suitable for adding one extra floor to make it a ground+1 without any additional reinforcement to the existing structure (Ground Only).

3,40,000

2,45,000

5,90,000

-‐

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

7,00,000

Ground Only Ground+1 Ground+2

Construccon

Infrastructure

Land

Figure 5: Cost break down for Type 1 unit (INR)

The ground+1 model uses and external staircase made of metal to gain access to the first floor. This would not be very expensive. However, for the Ground+2 model and internal staircase will need to be constructed. This will in return increase the super built-‐up area per unit and the cost of the staircase will be significantly higher than an external staircase. Due to these factor the Ground+2 model has a higher construction cost as compared to the other models.

CAVEAT 1: The Relationship Between Land Cost and the Optimality of the Model The price of land around industrial clusters is significantly lower than within city limits. The

economics of this model only works in locations where proximity to workplace creates demand

for housing and the relatively low cost of land allows private providers to offer affordable rental

housing.

CAVEAT 2: Investor Interest While this model has yet to be piloted, conversations with investors have been promising. A

rental yield of 6-‐8 per cent in the first year is considered excellent in the Indian context where

residential rental yields fall within the 2-‐3 per cent range. Investors perceive our model to be a

hybrid in which they will make their exit through a sale in Year 10 or Year 15 and cost of capital

will be offset through rental yields.

A Proposed Dormitory Model for Individuals The model discussed above is designed for migrant households. However, there is also a need

for worker hostels that cater to individuals without families, who require cheap, shared

accommodation. The dormitory model is a variation designed to cater to this segment.

The proposed model is a three storey Ground + 2 structure.9 It consists of 5 buildings. Each

building has 93 units; 31 units per floor. The 465 units, in total, can accommodate between

930-‐1,860 individuals, depending on the number of persons residing in a room (2 – 4 occupants

per room). The rooms have a carpet area of 144 square feet and do not include attached

bathrooms. Instead, the design provides for two communal washrooms per floor. It also

provides for approximately 3,000 square feet of communal area that could be used as a dining

hall for the residents.10

Assuming that there are 3 occupants per room and that each occupant pays a rent of INR 500

per month, the investor can expect a rental yield of approximately 8 per cent. The model also

assumes that the rent charged will be increased at the rate of 10 per cent per annum, and that

1 per cent of the total revenue will be allocated towards maintenance of the property. Due to

the annual increase in rent, the developer can expect a rental yield of nearly 11 per cent in year

Five and approximately 17 per cent at the end of year Ten.

9 As the dormitory design allows for the construction of a greater number of rental units on a given piece of land than a model consisting of individual housing units; the rental revenue offsets the additional costs of the construction of a Ground +2 structure. 10 The developer may lower costs significantly by not providing attached bathrooms and individual dining areas; the requirement of laying utilities such as piping, toilet facilities for each unit is eliminated. It also results in more effective utilization of floor space and a consequent increase in the number of rooms that may be built.

* Assumptions – No. of rooms – 500, People per room – 3, Rent per person – INR 500, Rent appreciation – 10% per

annum, Maintenance cost– 1% of total revenue

A comparison of the rental yields at varying levels of rent per month as well as number of

occupants per room has been tabulated below. The rental yields for the model range from 5

per cent for two occupants per room paying a rent of INR 500 per month, to 21 per cent in the

case of four occupants paying a rent of INR 1,000 each.

The last three sections have dealt with the possibility of private sector involvement in the

provision of affordable housing, and the use of for-‐profit models to address the growing

shortfall. Two of the key challenges in this sector have been identified as the availability of land,

and in the case of peri-‐urban housing, the absence of trunk infrastructure such as roads,

electricity, drinking water and sanitation. The last section of this report deals with specific state

initiatives that could address these concerns and facilitate private sector entry into the

affordable housing sector in peri-‐urban areas.

0%

5%

10%

15%

20%

1 2 3 4 5 6 7 8 9 10

Rental Yield

Year

Figure 6: Rental Yields for Dormitory Model*

Table 4: Rental Yields for Dormitory Model

Rent%(INR)% Number%of%Occupants%

%2% 3% 4%

500% 5%# 8%# 11%#600% 6%# 10%# 13%#700% 8%# 11%# 15%#800% 9%# 13%# 17%#900% 10%# 14%# 19%#1000% 11%# 16%# 21%#

Policy Issues

Land Availability In India, land laws have been used extensively as a tool to increase access for the poor. An

elaborate structure of welfare legislation governs transactions involving agricultural land, which

determines the extent of land that is available for non-‐agricultural application in peri-‐urban

areas. Several States, including rapidly industrializing ones like Maharashtra11, Gujarat12 and

Karnataka13 restrict the sale of agricultural land to persons who are not agriculturists.

These regulations are not uniform across States. In fact, in certain cases, there is lack of

uniformity even within a State. For instance, while the Saurashtra Gharkhed, Tenancy

Settlement and Agricultural Lands Ordinance, 1949 is applicable to a part of Gujarat, the rest of

the State is governed by the Gujarat Tenancy and Agricultural Lands Act, 1948. The norms

prescribed by these two legislations are not entirely analogous.

In an attempt to balance competing needs, a few States have carved out an exception to this

rule of restricted sale. Where the purchaser intends to convert the land to ‘bona fide industrial

use’ (as defined in the relevant legislations), such a purchaser, being a non-‐agriculturist, may be

permitted to acquire agricultural land. Housing for workers is covered by it, if it is an extension

of a manufacturing or processing unit for which such agricultural land has been purchased.

Stand-‐alone housing projects for industrial workers do not come under its ambit14. Land is

available only to the extent that the industrial unit sees merit in providing housing to workers.

There is little scope for a housing market to develop outside of the largesse of the

employer/owner and little scope for private participation in the housing mission in such areas.

11 Sec. 63, Bombay Tenancy and Agricultural Lands Act, 1948. 12 Sec. 54, Saurashtra Gharkhed, Tenancy Settlement and Agricultural Lands Ordinance, 1949; Sec. 63, Gujarat Tenancy and Agricultural Lands Act, 1948. 13Sec. 80, Karnataka Land Reforms Act, 1961. 14 Sec. 63-‐1A, Bombay Tenancy and Agricultural Lands Act, 1948; Sec. 63AA, Gujarat Tenancy and Agricultural Lands Act, 1948.

A further set of restrictions on sale are applicable in some states when the owner of the

agricultural land is a landlord, i.e., he is not cultivating the land himself and has let it out to a

tenant15. As a process it is complex, time consuming and could adversely impact land

availability for housing projects.

To augment land availability, incremental changes to the existing regulatory framework may be

in order. It may be prudent for all States that place fetters on sale of agricultural land to non-‐

agriculturists, to adopt a more expansive version of the ‘bona fide industrial use’ exception for

such areas – a version which includes affordable housing projects for industrial workers on a

stand-‐alone basis. There is also a need to study the impact of the restriction on sale of

agricultural land by landlords in industrialising areas, in order to ensure that the benefits of

such restriction are not offset by the ill effects on land availability for other needs.

Infrastructure Facilities

Rajiv Awas Yojana (RAY) is a program instituted by the Government of India aimed at the

creation of slum-‐free cities and States. This programme includes within its scope not only the

upgradation of existing slums but also the prevention of the growth of new ones. In order to

achieve this objective, RAY recognises the need to engage the private sector in creating

affordable housing stock, on ownership as well as rental basis, with the provision of civic

infrastructure and services16.

The Affordable Housing in Partnership program (AHP), a pre-‐existing scheme and a part of the

Jawaharlal Nehru National Urban Renewal Mission initiative, will dovetail into this RAY

framework. Under AHP, eligible housing projects are entitled to assistance from the

15 Sec. 64, Gujarat Tenancy and Agricultural Lands Act, 1948. 16 Ministry of Housing and Urban Poverty Alleviation, Rajiv Awas Yojana – Guidelines for Slum-‐free City Planning, available at http://mhupa.gov.in/w_new/RAYpercentper cent20Guidelines-‐percentper cent20English.pdf (Last Visited on September 30, 2011).

Government of India to the extent of INR 50,000 per dwelling unit, or 25 per cent of the cost of

all civic services proposed in the project, whichever amount is less. This assistance covers a

range of civic services including water supply, solid waste management, sewerage treatment

facilities, rain-‐water harvesting and electricity lines17. The government could provide impetus to

the involvement of the private sector in slum containment and redevelopment by extending

this subsidy to the proposed industrial worker housing model.

As the affordable housing projects are to be situated in proximity to industrial complexes, the

likelihood of the dwelling units being used by the intended beneficiaries is significantly higher.

It would, therefore, be possible for the government to better target its funding and reduce

leakages of the subsidy amount.

A Note on Rent Control In addition to low rental yields, archaic rent control legislations have been identified as a cause

for inhibiting the growth of the rental market. Over the years, loosening the grip of regulation

on this field has been the subject matter of study of a number of committees set up by the

central and state governments.18

In July 1992, the Government of India proposed a Model Rent Control Legislation to address

some of the lacunae of the then existing rent control regime. In an attempt to boost rental

stock and to reverse the freeze on rents that had occurred in a few states, it provided for a

formula for regular enhancement of rents. It, however, continued to provide limited grounds

for eviction of tenants and continued to regulate the rent that could be charged (Ministry of

Urban Development, 1992).

17 JNNURM Mission Directorate, Guidelines for Affordable Housing in Partnership, available athttp://mhupa.gov.in/w_new/AffordableHousing.pdf (Last Visited on September 30, 2011). 18 The Report of the Rent Acts Enquiry Committee published by the Government of Maharashtra in 1976, the Twelfth Report of the Maharashtra State Law commission published in 1979, the Report of a Study by the Economic Administration Reforms Commission published by the Government of India in 1982 and the Sixth Report of the Uttar Pradesh State Law Commission, 2010 are a few examples of such efforts.

Over the next two decades, the position of the government moved towards greater de-‐

regulation. As a result, the Model Residential Tenancy Act proposed by the Ministry of Housing

and Urban Poverty Alleviation in 2011, placed great emphasis on the agreement between the

landlord and tenant in order to determine the terms of the lease. It dispensed with notions of

formulas based on construction costs for determination of the appropriate rent. It provided for

tenancies of fixed term which would give landlords more control over their property. Further, it

provided for de-‐requisitioning of rental properties commandeered or allotted by the

government under previous rent control laws (MHUPA, 2011b).19

While there has been a move from ideas of strict regulation to a more market based approach

to pricing and tenure, rental legislations are yet to catch up with this development. According

to the Jawaharlal Nehru National Urban Renewal Mission Monitoring Formats, produced by the

Ministry of Urban Development, a large number of states have not met their commitments with

respect to rental reform, as of 31st December, 2011 (Ministry of Urban Development, Web-‐site

Last Visited on February 28, 2012). Once these commitments are met, there will be greater

scope for the development of a thriving rental market.

19 While the Model Residential Tenancy Act, 2011 makes a decisive move towards de-‐regulation, it does contain a few ambiguous provisions. For instance, Section 11 suggests that the landlord or the tenant may apply to the rent tribunal for fixation or revision of rent. However, it is not clear under what circumstances such an application may be made, as the Act also states that the rent is to be determined by agreement between the parties. Further, the Act makes it compulsory for the rental agreement to be in writing and registered or notarized. In most states, a written agreement is not mandated for leases of less than a year. Considering that an attempt is being made to cover the EWS/LIG section, such a requirement may place the poor in a more detrimental situation than before. Their position could be reduced to that of a trespasser, at the worst, or a licensee (instead of a lessee), as their oral agreement with the landlord may not be legally valid.

Conclusion:

It has been established that the private sector cannot provide home-‐ownership to households

earning less than INR 7,000. If one leaves aside government subsidy20, the private sector may

only be able to play housing provider to households in the EWS category through a rental

model. Rental housing would also provide for the needs of migrants, who account for 20 per

cent of the growth of Indian cities. The dearth of affordable formal rental and poor living

conditions associated with informal rental housing present a huge challenge and an opportunity

for the private sector to offer innovative solutions. We have proposed two private rental

models, one aimed at EWS and LIG households, and a dormitory model, both of which offer

attractive returns to investors. The next step is to pilot these rental models in order to test

whether they are operationally viable. This will be done using ten units at the Rajkot Pilot Site.

There is a proposal to carry on a pilot rental study on a larger scale at Vapi in Gujarat.

While the model is viable in itself, a targeted set of policy interventions could further lower the

cost of rental housing and extend its accessibility to a larger group of beneficiaries. In areas

witnessing industrial growth, especially those areas which are on the cusp of the urban-‐rural

classification divide, restrictive norms on the use and sale of agricultural land present a serious

obstacle to housing initiatives. Incremental changes to the existing regulatory framework have

been proposed in this report in order to address this issue. In addition to enhancing land

availability, provisioning for infrastructural facilities in peri-‐urban areas is also a significant

challenge. Innovative programs under the Rajiv Awas Yojana and the strategic use of land re-‐

adjustment mechanisms, through town planning initiatives, could go a long way to address this

concern.

20 Some form of government subsidy may indeed be necessary if one is to address the entire housing shortfall of 24.7 million. However given the potential for misappropriation and subsidy induced market distortions, we have steered clear of solutions involving direct subsidy, except in the case of infrastructure provision. The argument there is that infrastructure may be considered a public good given its non-‐rival and non-‐excludable characteristics.

isb affordable rental report - 2012 - indian school of business

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