by THO
The return-to-office mandate has prompted a significant migration of people back to their work cities, consequently driving up the demand for rental properties. This has led to rentals in cities, especially in Bengaluru, hitting the roof. The IT city itself has witnessed rents increasing by almost 30% and this has meant prospective tenants shell out almost 7 to 10 months of rent as security deposit to landlords.
Tenants in Bengaluru have for the last few years struggled to cope with the ever-changing demands of the landlords, some of whom have gone to the extent of checking profiles of tenants on LinkedIn. There have also been instances wherein property brokers have allotted appointments to tenants for interviews with the landlords forcing many tenants to remark that cracking a ‘rental’ interview may be tougher than getting through a job interview.
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Of late, the zero deposit rental scheme has been launched in Bengaluru. Under the scheme, the prospective tenant signs up a rental bond with the landlord and the third party executing it for a nominal one-time fee. The rental bond serves as a guarantee in favor of landlords, providing financial security in the event of tenant default, covering unpaid rent, utility bills, breach of lock-in periods, and property damages.
How does the zero deposit rental model work?
Harish, who works in a business processing outsourcing firm in Bengaluru, had a difficult time renting homes and had to pay hefty rental deposits every time he shifted homes. Recently, he has opted for the zero deposit rental scheme for an apartment that he has taken up in Sarjapura. Under the scheme, he has signed a rental bond of ₹3,000 (instead of ₹50,000) and has to pay a monthly rent of ₹13,000.
Under the zero deposit model, tenants pay an upfront yearly premium, typically around 6% of the probable deposit or bond value, equivalent to the minimum return on investment. Additionally, tenants pay a premium of up to 10% on rent for access to zero deposit properties. This augmented rent, combined with faster rental turnovers and credit-verified tenants, often serves as a compelling incentive for property owners.
To cite an example, if the rent is ₹10,000 per month, the tenant will have to pay ₹10,500, almost ₹500 more every month, and a one-time payment of ₹3600 when he signs the rental bond. Under the scheme, the tenant is not required to pay ₹60,000 that he would have otherwise paid as an upfront security deposit to the landlord.
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“This financial product attempts to bridge the trust deficit between the landlord and the tenant by offering that much-needed security to the landlord. The tenant gets to pay a one-time amount as fees only at the time of executing the rental bond,” explains Amit Kumar Agarwal, CEO and Co-founder of NoBroker.com
The company has introduced the rental product in Bengaluru and is testing it in other cities such as Mumbai and Delhi-NCR.
Rental bonds are also popular in global markets such as Brazil. A start-up focused on rental properties, QuintoAndar, had launched a similar product in the country. The business model was based on facilitating a connect between those looking for an apartment with those renting out properties.
“While the problem of high rental deposits faced by tenants in Brazil was similar to the issues faced by them in Bengaluru, we have tried to localize the product for the Indian market,” said Agarwal.
“We found that almost 40% of a person’s salary in Bengaluru is spent on rent. This often leads to a financial strain on anyone migrating to a new city for a job. There have also been instances of people enquiring if they can avail of a personal loan to pay for high rental security deposits,” he said, adding the rental bond seeks to resolve these issues as the tenant gets to pay only about 6% of the amount that he would have otherwise paid upfront as security deposit.
The rental bond is valid for six months to 11 months, depending on the tenure of the lease agreement. It has to be renewed every year.
“The rental sector has been experiencing an inflation that is quite unusual and Bengaluru tenants, already struggling with rental inflation, are now having to deal with exorbitant deposits. Landlords in Bengaluru ask anywhere between 4-10 months of rent as a deposit. Zero deposits as a solution takes care of the needs of landlords as well as tenants,” said Agarwal.
How has the zero deposit rentals scheme fared so far?
According to a recent survey conducted by NoBroker, 35% of tenants in Bengaluru are willing to opt for zero deposit rentals. Currently, 5% of rental properties are being leased in the city through the rental bond. The product has been active in the market for almost a year.
There are a few real estate experts, however, who are of the view that landlords may not be keen to rent a property without a security deposit.
“No landlord will prefer to give a property on rent without a security deposit because it acts as a collateral against any wear, tear and damage that the tenant may cause. It also gives the landlord some leeway to recover dues if the tenant defaults on paying dues in any way, and can be set aside as a fixed deposit for the duration of tenancy to earn some interest,” said Prashant Thakur, Regional Director & Head – Research, ANAROCK Group.
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