The recent mandate for a return to work has triggered a noteworthy influx of individuals migrating back to their work cities, leading to a dramatic rise in demand for rental properties. Consequently, rental rates in urban areas have surged, particularly in Bengaluru, where the cost of rent has escalated by nearly 30%. Prospective tenants are now facing the requirement of paying landlords a security deposit that ranges from seven to ten months’ worth of rent.
In recent years, tenants in Bengaluru have encountered difficulties owing to landlords' ever-evolving demands, with some landlords even resorting to perusing tenants’ LinkedIn profiles. There have been reports of property brokers arranging appointments for tenants to conduct interviews with landlords, prompting many tenants to remark that passing such a 'rental' interview can sometimes feel more challenging than securing a job.
In response to these challenges, a zero-deposit rental scheme was recently introduced in Bengaluru. This innovative scheme allows prospective tenants to enter into a rental bond with the landlord and a third-party entity for a nominal one-time fee. The rental bond acts as a financial safety net for landlords, offering assurance in cases of tenant non-payment, which includes unpaid rent, utility bills, breaches of lock-in periods, or property damage.
How does the zero-deposit rental scheme work?
Harish, employed at a business process outsourcing firm in Bengaluru, faced considerable difficulties in securing housing, often being required to pay substantial rental deposits upon each relocation. Recently, he chose to utilize the zero-deposit rental scheme for an apartment in Sarjapura. This arrangement necessitates his signature on a Rs 3,000 rental bond (a significant reduction from the previously required Rs 50,000) while he pays a monthly rent of Rs 13,000.
For this zero-deposit model, tenants are expected to pay an annual premium up front, typically around 6% of the anticipated deposit or bond value, mirroring the minimum return on investment expectations. Furthermore, tenants are subject to a rent premium of up to 10% to access zero-deposit properties. In situations where rent increases occur and tenants are credit-verified, landlords are often incentivized to raise rent prices.
For instance, if the monthly rent is Rs 10,000, the tenant would need to pay Rs 10,500 each month—an increase of nearly Rs 500—and a one-time fee of Rs 3,600 at the time of signing the rental bond. With this framework, landlords are relieved from the obligation to collect a significant security deposit of Rs 60,000 from tenants upfront.
“This financial product aims to bridge the trust gap between landlords and tenants by providing much-needed security to the landlord,” explained Amit Kumar Agarwal, CEO and Co-founder of NoBroker.com. He emphasized that tenants are only responsible for one upfront fee when they execute the rental bond, which has launched in Bengaluru while being tested in cities such as Mumbai and Delhi-NCR.
Additionally, rental bonds are gaining traction in international markets like Brazil, with the startup QuintoAndar having previously introduced a similar offering. Their business model focused on connecting potential renters with landlords.
“Although the challenge of high rental deposits faced by Brazilian tenants mirrors that faced by tenants in Bengaluru, we made efforts to tailor the product for the Indian context,” Agarwal noted.
He further highlighted that nearly 40% of Bengaluru’s residents allocate their salaries to rent, often placing a significant financial strain on individuals relocating for work. He added that there have been instances of individuals inquiring about personal loans to manage exorbitant rental security deposits. The rental bond seeks to alleviate these pressures, requiring tenants to only pay about 6% of what would traditionally be due as a security deposit.
The rental bond remains valid for a period of six to eleven months, contingent on the lease duration and must be renewed annually.
“The rental sector has been experiencing unusually high inflation, and Bengaluru tenants, who are already grappling with rising rents, now face inflationary pressures from security deposits. Typically, landlords in Bengaluru request deposits that range from four to ten months’ rent,” Agarwal stated, asserting that zero deposit options present a viable solution catering to the needs of both landlords and tenants.
How has the zero-deposit rental scheme performed so far?
Based on a recent NoBroker survey, 35% of tenants in Bengaluru expressed their willingness to engage in rental agreements without a security deposit. Currently, 5% of the city's rental properties are leased through the rental bond scheme. This product has been available for just one year.
However, skepticism remains as some real estate experts believe that landlords will hesitate to lease properties without a security deposit, viewing it as essential collateral for potential property wear, tear, or damage incurred by tenants. It also provides a method for landlords to recover unpaid dues and can function as a fixed deposit to earn interest during the tenancy, cautioned Prashant Thakur, Regional Director & Head of Research at ANAROCK Group.