x Abu Dhabi, UAEMonday 22 January 2018

New Delhi's commercial property owners suffer under decades-old rent caps

An archaic rent control law in New Delhi means landlords of valuable buildings are often financially much worse off than their tenants.

NEW DELHI // In 1933, when Lala Babu Ram heard the British were looking for investors to help build New Delhi - India's new capital - he sensed an opportunity to provide for his family for generations to come.

He purchased a plot in M-Block of Connaught Place, the commercial heart of the new city, and paid for the construction of a three-storey property with apartments above and shops below. More than seven decades later, the building that cost Ram a few thousand dollars to construct is now worth millions as prime real estate in one of the world's largest emerging economies. But far from being the golden goose Ram thought it would be, the property has become more like an albatross around his descendants' necks because of Delhi's archaic rent control law.

Introduced a few years after the building was completed, the law means only that his descendants receive 150 rupees (Dh12) a month in rent from each of their three shops. "Our tenants spend more on parking their car or a cup of coffee than they do on their rent," Mr Ram Kanwar Gupta, Ram's 87-year-old son, said in an interview. "I can't afford a sweeper for that money, let alone maintenance." The Delhi Rent Control Act was introduced in 1947 to prevent rents from skyrocketing as hundreds of thousands of refugees from Pakistan flooded into the city in need of affordable housing.

Sixty-three years on, however, the law still caps rents in thousands of properties around Delhi, with the result that many of the city's oldest buildings are being left to crumble while the price of newer property is pushed ever higher. Analysts have also calculated that the city is losing hundreds of millions of dollars in tax revenue because of the law, which has also hindered efforts to modernise the capital.

For years, many owners simply accepted the low returns rather than engage in the expensive and lengthy legal battles required to raise rents or evict tenants, many of whom are now richer than their landlords. As India's economy booms and property prices soar, landlords are coming together to fight for what they see as their right to receive a fair rent. Formed last year, the Committee for the Repeal of the Delhi Rent Control Act, is challenging the legality of the law in Delhi's High Court, saying it deprives landlords of their constitutional right to a livelihood.

"The law was designed to help the poor, but it is the rich who are benefiting now," Shobha Aggarwal, a founding member of the committee said. "In effect we are subsidising other peoples' businesses." As it stands, the law in Delhi prohibits owners from evicting tenants unless the landlord can prove they need the property for their own personal use. The law also caps rent increases at 10 per cent every three years in properties where the rent is less than 3,500 rupees a month.

Because many properties in Delhi's oldest - and now most sought after - areas such as Connaught Place, Old Delhi and Khan Market have been occupied for decades, rents are still only a couple of hundred rupees, or lower. Many of those buildings house businesses with multimillion-dollar turnovers such as banks or insurance companies. Some, however, are home to tiny one-man businesses that seem to belong to a bygone era - shops on Connaught Place include light-bulb sellers, an old-stamp dealer and a snackw store. Other buildings simply lie empty because it is cheaper for tenants to keep paying for a space they do not use now than to take on a new lease at market rates later.

The problem, analysts say, is that there is little political will to repeal a law that is ostensibly pro-poor in a city where some two-thirds of the population live in slums. As a result, Delhi and India's financial capital, Mumbai - where rent control laws are also unreformed - both suffer from a shortage of leasable property and rents in the two cities are some of the highest in the world. Anshuman Magazine, the Indian chairman of the property consultancy firm, CB Richard Ellis, said: "In terms of services you get far less than you do in New York or Hong Kong though you are paying a comparable amount." The market rate for renting space at Connaught Place is as much as 550 rupees a month per square foot - more than the combined rent Mr Ram's family receives for three shops that cover almost 1,000 square feet.

Many tenants exploit this difference and sublet their properties. In K-block of Connaught Place, Rajendar Kumar, who has a manual typewriter repair shop, tells the story of two neighbours who rent shops from the landlord for 33 rupees each - roughly the same amount Mr Kumar pays. The shop to the left looks stuck in time, a gentlemen's outfitters selling polyester jackets and ties from the 1970s, its sign obscured by dust, paint and pigeon droppings.

The shop to the right is a glass-fronted service centre for one of India's new mobile telecoms providers. The tenant there has sublet the shop, taking hundreds of thousand of rupees rent a month, Mr Kumar said. In the hope of making some money from his property, the owner offered to do what many Delhi landlords eventually end up doing - sell the properties to his tenants at way below the market value.

But Mr Kumar refused. "Why would I want to that?" Mr Kumar asked. "The minute you own a property, you have to start paying taxes." @Email:hgardner@thenational.ae