Rent Formula Shift: Heavy Blow to Tenants as Monthly Rent Gives Way to Deposits

Tehran's housing rental market this autumn has seen a notable shift in contract composition, with the share of deposits, or key money, rising and the share of monthly rent falling.

According to Ambassador Arjan, the review of online advertisements shows that the share of pre-paid rent contracts, which was around 62% in August, reached 70-75% in October. On the other hand, the share of monthly rent has decreased from 38% to about 25-30%.

This change in appearance can benefit tenants who prefer to pay a larger part of the housing cost at the beginning of the contract instead of paying monthly; But behind this shift, there is a set of economic concerns, inflationary expectations and lessors' efforts to increase the yield of their assets.

Four factors in changing the behavior of landlords

One of the most important reasons for the increase in the share of deposits is the concern about the worsening of economic uncertainty and the possibility of disruptions in household income. The experience of the March war and consequences such as retrenchment, reduced activity of some businesses and delayed payment of salaries have increased the risk of receiving monthly rent for landlords. In such a situation, receiving more money at the beginning of the contract can reduce the possibility of facing a delay in paying the rent.

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The second factor is related to the opportunity to invest with cash advance. In an economy with high inflation expectations, receiving monthly rent is not necessarily the most attractive option for the owner; Because the real value of this income may decrease over time. On the other hand, the deposit provides the lessor with an amount that can be used in other markets.

The yield of fixed income funds has reached about 40% and the value of the gold riyal has almost doubled over the past year. Such returns can strengthen the motivation of owners to receive more deposits and invest them in parallel markets.

The third factor is trying to increase the overall rental income. The owner's income is not limited to the monthly rent, and the growth of the property's value is also a part of his return. If the owner is able to invest the upfront money in another market, it may increase rental and investment income at the same time.

The fourth factor is related to the situation of old tenants. People who renew their contract may pay the increased rent by adding to the deposit; A method that is sometimes more manageable for them than providing more monthly rent. The same process increases the share of Pulpish in new contracts.

How much does it cost to rent a normal unit?

The market offer numbers provide a clear picture of housing cost pressure. The average suggested figure for renting a medium-sized unit in Tehran has reached about one billion and 600 million tomans as a deposit plus 19 million tomans as a monthly rent.

By converting the deposit into monthly rent, the equivalent cost of this contract is estimated to be around 67 million Tomans per month. This figure is a suggestion and does not necessarily mean the final amount of all concluded contracts; However, its distance from the financial capacity of a large part of households is significant.

According to the report of World Economy, the minimum salary of a worker with children is about 24 million tomans. Therefore, even paying the monthly rent of 19 million tomans can consume most of the income of such a household; That is before calculating expenses such as food, treatment, transportation and education.

Increasing the share of the deposit may reduce the pressure of the monthly payment, but it does not eliminate the main problem. The tenant has to use his savings, take a loan or sell part of his assets to provide more money. On the other hand, inflation gradually reduces the purchasing power of the deposit amount; However, this decrease in value usually becomes one of the most important concerns of the tenant when paying back the deposit.

As a result, the change in the rent formula cannot be considered as a sign of the preference of the lessor or the lessee. This trend reflects economic conditions more than anything else; A situation in which the lessor seeks to reduce risk and find more yield, and the tenant tries to reduce the pressure of current expenses by switching between advance payment and monthly rent.

However, until the household income matches the cost of housing, changing the composition of contracts alone cannot solve the housing affordability issue.