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Economy Dec 12, 2012

Investing in land? You better know this

By Santosh Kumar

Where flats are traditionally the most sought-after type of investment property, the attractiveness of buying land for long-term and potentially higher gains has never lost its sheen.

Flats are an inflexible format of property and this fences in the maximum value they can attain. Flats are snapped up in most cases, but at fixed residential prices dictated by prevailing market rates. Land is a very different ballgame.

One may still wind up with a 'dead duck' property if one buys it without knowledgeable guidance, or from an unknown property dealer. Reuters

In a growth sector with new market drivers coming in, investing in a plot of sufficient dimensions and the right kind of authorised usage criteria for the area can become attractive to developers from the residential, retail, office and hospitality sectors. As an area attains more market drivers and begins to saturate, plots increase in value manifold and can be sold on a seller's, not a buyer's market. Also, land is cheap in most cases and represents a very good capital investment.
Even if the land is clearly NA, one still needs clearance from the local authorities to build on it.

However, investing in land is not as simple as it may appear. To begin with, there might be (and usually are) any number of legal requirements to meet and procedures to follow before a piece of land becomes a marketable item. Most buyers are aware of the difference between the Agricultural and Non-Agricultural (NA) categories - one cannot put in a development of any magnitude on agricultural land. Even if the land is clearly NA, one still needs clearance from the local authorities to build on it.

One should not purchase land without any idea of whether it is included in some other developmental plan.

For instance, the town planning board may have scheduled a highway to run through it, or allocated it to the building of some government structure. If this is the case, one may own a piece of land and still have no right to do anything with it - including sell it. In the case of highway construction or electrification, the owner may eventually wind up with a high-tension cable array perched in the middle of the plot, or a Super Expressway running through it. There is no getting around the government's prerogative of Eminent Domain. This is a very real risk when we consider land purchase in one of the cheaper rural areas which are constantly being hawked on the real estate market. Anyone hoping to develop land will, in any case, require a building permit.

A plot must have a clear title and be demarcated properly.

Assuming that it has already been sufficiently developed to make it marketable, it still needs to be properly protected from encroachment. Plots gain value only over periods of time - if left unattended, other developments usually encroach on it and this raises legal problems that make the plot unmarketable for the duration of the legal tussle over it.

No kind of property development involving even a minimal degree of inhabitation is feasible without a basic septic tank and drainage system.

In other words, what lies underground is as important as what stands above it. If the plot is unsuitable for digging deep enough - unstable or extremely rocky soil could be possible reasons - one could be in deep trouble while trying to sell it. In fact, geologically unstable ground would mean that it can support no structure at all.

The absence of sufficient ground water would also be a major drawback, especially in a resale scenario. It is a serious mistake to rely on municipal water supply alone, since this can be pretty sporadic in rural locations. Availability of electricity is another important consideration.

Santhosh Kumar, CEO - Operations, Jones Lang LaSalle India, a real estate consulting and research firm


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