The return-to-work mandate has resulted in a significant migration of people back to their work cities, driving up demand for rental properties. As a result, city rentals have skyrocketed, particularly in Bengaluru. The IT city’s rent has increased by nearly 30%, requiring prospective tenants to pay landlords a security deposit of 7 to 10 month’s rent.
Tenants in Bengaluru have struggled in recent years to keep up with landlords’ ever-changing demands, with some even checking tenants’ LinkedIn profiles. There have also been instances where property brokers have scheduled appointments for tenants for interviews with landlords, prompting many tenants to comment that passing a ‘rental’ interview may be more difficult than passing a job interview.
Recently, the zero deposit rental scheme was launched in Bengaluru. Under the scheme, the prospective tenant enters into a rental bond with the landlord and the third party who executes it for a small one-time fee. The rental bond serves as a guarantee to landlords, providing financial security in the event of tenant default by covering unpaid rent, utility bills, violation of lock-in periods, and property damage.
How does the zero-deposit rental scheme work?
Harish, who works for a business processing outsourcing firm in Bengaluru, had difficulty renting homes and had to pay large rental deposits each time he moved. He recently opted for the zero-deposit rental scheme for an apartment in Sarjapura. The scheme requires him to sign a Rs 3,000 rental bond (instead of Rs 50,000) and pay a monthly Rs 13,000.
The zero deposit model requires tenants to pay an upfront yearly premium, typically around 6% of the probable deposit or bond value, equivalent to the minimum return on investment. In addition, tenants pay up to a 10% rent premium for access to zero-deposit properties. Rent increases and credit-verified tenants can entice landlords to increase rents.
For example, if the rent is Rs 10,000 per month, the tenant must pay Rs 10,500, nearly Rs 500 more each month, and a one-time payment of Rs 3600 when signing the rental bond. Landlords will no longer need to collect a 60,000 security deposit from tenants upfront.
“This financial product aims to bridge the trust gap between landlord and tenant by providing much-needed security to the landlord. Amit Kumar Agarwal, CEO and Co-founder of NoBroker.com explains that the tenant only pays a one-time fee when executing the rental bond.
The company has launched the rental product in Bengaluru and is testing it in other cities, including Mumbai and Delhi-NCR.
Rental bonds are also popular in international markets like Brazil. QuintoAndar, a rental property startup, had previously launched a similar product in the country. The business model was based on connecting those looking for apartments with those renting them out.
“While the problem of high rental deposits faced by tenants in Brazil was similar to that faced by them in Bengaluru, we attempted to localize the product for the Indian market,” said Agarwal.
“We discovered that nearly 40% of Bengaluru resident’s salary is spent on rent. This often puts a financial strain on anyone moving to a new city for work. There have also been reports of people asking if they can get a personal loan to pay for high rental security deposits,” he said, adding that the rental bond aims to address these issues by requiring the tenant to pay only about 6% of the amount he would have paid upfront as a security deposit.
The rental bond is valid for six to eleven months, depending on the length of the lease agreement. It has to be renewed every year.
“The rental sector has seen unusually high inflation, and Bengaluru tenants, already dealing with rental inflation, are now facing exorbitant deposits. A Bengaluru landlord typically requests a deposit of four to ten months’ rent. Agarwal stated that zero deposits are a solution that meets the needs of both landlords and tenants.
How has the zero-deposit rental scheme performed so far?
According to a recent NoBroker survey, 35% of Bengaluru tenants are willing to rent with no deposit. The city leases 5% of its rental properties through the rental bond. The product has been available in the market for merely a year.
However, some real estate believe won’t want to rent a property without a security deposit. No landlord will rent out a property without a security deposit because it is collateral for any wear, tear, or damage the tenant may cause. It also allows the landlord to recover dues if the tenant fails to pay them in any way, and it can be set aside as a fixed deposit for the duration of the tenancy to earn some interest,” said Prashant Thakur, Regional Director & Head- Research, ANAROCK Group.