Insecure over security deposit of property? Here's how rental bonds can aid you

Real Estate bonds or realty bonds are a new fad in the real-estate spectrum when it comes to renting a property. As millennials and Generation-Z are moving out to work in metro and Tier-I cities, rental bonds are hogging the spotlight from both tenants and home-owners.

Amid the rising demand for residential products and solutions, as per recent reports from Knight Frank and CRISIL, the Indian residential market is estimated to rise to Rs 50,000 crore, thanks to the rising demand and supply constraints in the key market prepositions. However, renting a residential property in metro or tier-1 cities is a vexatious task for both property owners and tenants.

For the decision to rent-out their property, the landlord gets a limited time to decide if they want to let-out to the particularly tenant or not, is based on their prima-facie meetings and trust they build. In such cases credibility of tenant, their background, potential to pay rent on time and history as tenant remains unverified.

A rental bond is a guarantee in favor of the landlord that the surety will fulfil the financial obligations of the tenant in the event of a default. The bond replaces the security deposit and covers the landlord for default in payment of rent and utility bills, loss of rentals due to breach of lock in period and damages to the property.

By virtue of a comprehensive underwriting process, the rental bond addresses all the inefficiencies of the current process of tenancy and provides the landlord with access to credit verified and assessed tenants, said Vikash Khandelwal, CEO at Eqaro Guarantees, India's first financial guarantee platform.

In the current business mix, there is a slight skew towards co-living. But we are also witnessing high levels of adoptions in the family homes segment. Landlords in the family homes segment opting for rental bonds have been as high as 35-40 per cent in markets like Bangalore and Delhi NCR. As such the share of family homes is increasing on a month-on-month basis, he said.

Landlords and the owners of property take a fixed amount of refundable security deposit from the tenants at the beginning of their contract. In some cities, the security deposit is around monthly rent of 3-6 months, which may go up to as high as nine months in some cases.

For the landlords, the guarantee from the rental bonds reduces the time for a property to remain vacant and allows them to earn higher rental income. These bonds also ensure the damage they claim for their property, with lesser hustles. However, forgoing the entire security deposit for a new concept turns them skeptical to avail for these bonds.

However, rental bonds are a win-win for tenants as well. Firstly, they do away with the security deposits. making the property more attractive to them. Secondly, a tenant, who is likely to pay a higher rent, saves a higher amount of security. The security amount can be utilized or invested in other avenues.

Also, a tenant is able to move from one property to another without locking in any incremental funds. Rental bonds also allow them to carry their rental history, increasing their credibility to subsequent tenancies and easing up the process of renting in the case of relocation.

Charges of the rental bond

Eqaro Guarantees charge tenants with a fee for their guarantee to the landlord on their behalf. The fee is a small fraction, ranging in 6-8 percent of their rent, which is quite lesser than their security deposit. The contract is renewed annually and if the rent is increased, the fees for the guarantee are increased subsequently. For the landlord, there are no charges, the company said.

"We offer rental bonds for co-living accommodation as well as family homes. We are currently operational in Delhi-NCR, Mumbai Metropolitan Region, Bengaluru, Hyderabad and Pune but plan to scale to the rest of the country," said Khandelwal.

Drivers for growth

The number of zero deposit properties has grown by 426 per cent on a year-on-year (YoY) basis in the year 2022-23. There are over 30,000 properties across the country and the company has partnered with a few of marquee names in the real estate industry which help the landlords and tenants access the benefits of rental bonds.

India is a young country with 30 per cent of population staying in rented accommodation, which is lesser in comparison the developed nation. The rent accommodated population in the country is likely to increase particularly in the metro and tier-I cities, where property prices are sky-rocketing.

This current generation which prefers experience over ownership will add to the growth of rental housing in India. Further the cost of owning a house in India is quite exorbitant, which is on an average 9-12 times of the annual income. The prices are more extortionate in the areas closer to commercial hubs, Khandelwal said.

"Given the low rental yield in India, many would opt for the convenience of renting rather than get locked in to lengthy mortgages. As such we expect India’s rental market to start trending towards the 40-45 per cent as is visible in the developed economies" he added.

Challenges

The rental bonds are new alternatives, but are gaining popularity. However, landlords are likely to be skeptical of such guarantee papers for their property. Firstly, there is limited history and they have to forgo their entire security deposit. Secondly, there are limited case studies for different scenarios.

The rise in demand of rental bonds will add to drive demand and expansion of rental business. Eqaro claims to have the largest data bank of defaulting tenants. This can help landlords benefit from that as a tenant who has defaulted earlier would never qualify for a bond.

As per Khandelwal, they have met numerous landlords over the last few years, who want good tenants in their property. They are happy about the fact that only credit verified and assessed tenants are granted the rental bond and it works as a layer of security for them. "Despite that, if the tenant still defaults, the rental bond pays out to them," Khandelwal said.