03/10/2013

Should you buy a Flat or Plot of land ? | Transcend's Planning Lounge

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Should you buy a Flat or Plot of land ?

In 1993, T Sridhar (name changed) bought four plots of land, each measuring 40 ft x 30 ft, outside Bangalore, for a total of
Rs 1.7lakh. At that point of time, the plots lay outside the city on the Bangalore-Madras highway. Today, the city has
expanded to touch this area and a lot of development is taking place in the vicinity. The value of those four plots has soared
to Rs 1.2 crore, which amounts to a compounded annual return of 23.72% over 20 years.
While this may seem too good to be true, given the current market conditions, it is hardly implausible. In fact, you too
could earn high returns from investing in land. You may have to venture outside your city and the initial capital required may
be high, but if you can rustle up the money, scout around diligently and be patient for a few years, you can earn such
returns, thanks to the rapid urbanisation.
Plots give higher returns
When retail investors want to invest in real estate, most consider either a plot or an apartment. According to experts, it is
better to invest in the former since the rate of return is likely to be higher. "Once you construct on the plot, the real estate
will have two components. While one component, land, continues to appreciate, the other, the building, depreciates in value
as time goes by." The quality of building, its space planning, and quality of maintenance, all come into play at the time of
deciding the valuation. In most cases, an empty plot scores higher when it comes to returns.
The demand-supply dynamics are also the reason for the higher appreciation of a plot compared with an apartment. "Plots
appreciate more because their supply tends to be lower than that of apartments." He explains the underlying math.
Suppose that a developer purchases 10 acres of land in Noida. Since the FSI (floor space index) allowed is 2.7, he can
develop worth 27 acres or 1.1 million sq ft. If each apartment is approximately 1,500 sq ft, he will be able to develop about
800 flats on that land.
What if he were to sell only plots? One acre equals 4,047 sq m. Of this, he will be able to use only half; the rest will have to
be devoted to infrastructure, green areas, and so on. If each plot is of about 250 sq m, he will be able to develop about eight
plots on an acre, and 80 plots on 10 acres. Thus, there is a 10-fold difference between the supply of apartments and plots
on a given piece of land.
Moreover, in north India (though not in the west), people still yearn for independent houses, which drives up the plot prices.
For all these reasons, you can expect the price of your plot to double in four to five years, which amounts to a compounded
annual return of about 14-18%.
It is also easier for investors to sell a plot than an apartment. The latter sells only if it suits the investors tastes and needs.
In case of a plot, if the location, direction and dimensions are acceptable, it sells in a jiffy.
The caveats
While the returns from a plot are likely to be higher than that from an apartment, what you finally earn will depend on a few
factors. The stage of the economic cycle is one. With the economy facing a slowdown at the current juncture, the prices of
plots have witnessed a correction in many places, especially the more central ones. Within the National Capital Region
(NCR), for instance, the prices are down 10-12% in south Delhi, and 15-20% in Gurgaon, from their previous peak values.
The return you earn also depends on the entry price. If, for instance, you buy a plot at Shanti Niketan, one of Delhis
upscale localities, where the going rate is already Rs 10 lakh per sq yard, it is unlikely to double in four years. On the other
hand, if you were to buy a plot in Noida at the rate of Rs 50,000 per sq m, the probability of its price doubling within four to
five years is higher. "Usually the rate of return tends to be lower in well-established colonies. If you are looking for returns,
invest in a suburb or in the peripheral areas of your city,"
Risks and disadvantages
An investment in land also has a few disadvantages. These include:
Illiquid asset:Land is not a liquid asset. During a downturn, if you are laid off and need cash urgently, it may not be easy
to find buyers. Investor and wealth management expert, recounts how an investor can face problems while investing in land.
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Should you buy a Flat or Plot of land ? | Transcend's Planning Lounge

In 2000-1, when the info-tech boom in the US had ended, many Indian IT personnel had to return. Having worked in the US
for six to seven years, they had saved about Rs 30-40 lakh and many of them invested their savings in land on Bangalores
outskirts. Over the next few years, the price of this land grew manyfold. In 2008, when the Lehman Brothers crisis unfolded
in the US, the Indian IT sector was once again in trouble. By then, the value of these investors land had risen to Rs 3-4
crore.
Some of these people were laid off in 2008 and as they had no alternative income streams, they came under financial
stress. When they tried to sell their land in the depressed market, they found very few buyers. Those willing to buy
demanded a massive discount.
So, if you plan to invest in land, make sure you have alternative sources of income, such as rental income, or adequate
cash to tide over difficult circumstances. Do not depend on land to offer you liquidity in an emergency.
Large sums required: Investing in land is not for those with shallow pockets. If you invest in a plot in a small town, say,
one with a population of about 2 lakh, you would need Rs 5-10 lakh for a 60 ft x 40 ft parcel on the outskirts. If you venture
to do so in a metro, the amount required could soar to Rs 30-40 lakh, or higher. This is unlike a mutual fund, where you can
start an SIP with as little as Rs 500-1,000.
No income stream:While you hold a plot of land, it will not offer you a regular income stream. The only gain comes from
capital appreciation when you sell it.
Fear of encroachment: The biggest risk of investing in a plot is keeping it free of land grabbers, encroachers and
squatters. If the value of the property has appreciated, a local muscleman or politician may try to grab your land. On this
score, an apartment scores higher. You can always lock it. Since it is situated within a gated community and there are
security guards around, the risk of losing your property is much lower.
Agricultural land or developers?
This is the first point that an investor must decide while investing in a plot of land. While the returns from agricultural land
are higher, so are the risks. On the positive side, agricultural land is cheaper. However, this comes with many negatives.
The title is not clear. "If you are investing in agricultural land, you have exercise due diligence or get a lawyer to do it for
you."
How many people have ownership rights for the land? Are they all agreeable to selling it? What has been its ownership
history for the past 30 years? All this will have to be ascertained from the patwaris books. You will also have to ascertain
whether the land has been involved in litigation, and whether the case is over.
In the case of agricultural land, there is also the fear that it could be acquired by the government for a public project. "When
the government takes over land for public purposes, the rate paid to you may be below the market rate," The risk of
squatting or encroachment is also high in the case of an agricultural piece of land.
When you buy a plot within a developers project, the price is no doubt higher, but the land title is likely to be clean.
However, you still need to perform the necessary checks. The plot comes with proper infrastructure and the chances of
land grabbing are also lower within a gated project. Further, the developers development activities will attract a lot of
buyers. As people start building their houses and settling in the area, the price of your plot will appreciate.
So, despite having paid a premium to the developer, you are likely to earn a good rate of return. Hence, a small investor is
safer investing in a plot from either a developer or a government authority.
Choosing the right plot
While purchasing a plot, pay attention to the areas development potential, as well as the legal and physical issues.
Development potential: When you invest in land in remote areas, you are betting on the future. So, learn about the
development plans for that area. Such information can be gleaned from the local development authoritys website and
newspapers. Opt for places where the manufacturing or service sector is likely to come up in the near future.
Legal aspects: If you are buying from a developer, check whether he has the licence and get a registered title (see Get the
documentation right). Find out whether the land is leasehold or freehold. If you are buying in an unapproved colony, look
into the title history for the past 30 years.
Physical aspects:The plot should enjoy easy and quick access to a main road or highway. Since a lot of buyers take
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vaastu into account, it is better to purchase an eastor north-facing plot. In front of your plot, there should be at least a 9-m
wide road. There should be no revenue tract (village road) passing through the land. If the plot is situated next to an open
area, such as a large field or park, it is likely to enjoy a higher valuation.
The plot should be properly demarcated and you should be familiar with the boundaries. After you have purchased it, it is
important that you erect a wall or a fence around it.
In some places, the development authorities stipulate that the construction of a house on the plot should be completed
within a certain time period. If you dont intend to undertake construction, it will limit your holding period.
Finally, land is a long-term investment. So, make sure you have an investment horizon of 5-10 years. If you follow the above
recommendations, there is no reason why you too cant garner the high returns that Sridhar did.
Source: ET Wealth 19th Aug, 2013
August 20th, 2013 | Tags: advantages of investing in land, investment in land, property investment, rental return, Satish Menon |
Category: Goal Planning, Plan your Finance, Property Buying Satish Menon

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