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Business News/ Opinion / How to avoid a hard landing

How to avoid a hard landing

There are a whole host of issues to take care of if land has to be a profitable investment

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Land equals huge money; this is because it appreciates faster than apartments and offers higher returns. However, returns alone do not seal the deal. There are a whole host of issues to take care of if this has to be a profitable investment. It is better to invest in land only if you have the holding power (at least 10-15 years), as it will not generate instant cash for contingencies such as medical expenses, education, and so on. Moreover, a mix of the right buyer, timing, price and economic climate are needed to ensure that land pays off in the long run. Added to that, it may be hard to find buyers in times of an economic downturn and banking on land to bail you out may be a huge risk as it is essentially an illiquid investment.

Land neither ages nor depreciates

This is the trump card for those who advocate buying land as it has zero depreciation and does not age. Another positive is that you may get ready possession of your land upon completion of payment. However, to ensure that your investment pays off, it is preferable to invest in large land parcels (2.5-3 acres) so that significant returns are assured when you sell it. Given the scarcity of land in prime city areas, developers are interested only in large land parcels. Location is also important, as the value of land may take time to appreciate in far-flung areas. The availability of essential infrastructure is also crucial; otherwise, there may be few or no buyers.

Huge upfront funding required

The cost incurred in buying land is high, ranging from a few lakhs to crores, depending on the location and the property type—residential or commercial. Buyers need to arrange the entire payment upfront, as external funding for land purchases is hard to come by. The Reserve Bank of India (RBI) bars banks from providing loans for land purchases.

Keep an eye on encroachers

Given the rapid urbanization and the lack of living space, especially in large cities, squatters often encroach on vacant land. Their proliferation may turn into an illegal slum dwelling colony. Over the long run, it will also be difficult to evict such trespassers, who may claim living rights.

Employ proper security personnel from recognised agencies to stop trespassers. Get the hiring contract and other paperwork in order so that the guard himself may not turn a squatter. Purchase land in the city where you are residing and preferably not in far-flung areas. Visit the site at least once in six months.

No regular income, but recurrent outgo

Land does not provide recurring income as opposed to apartments, which can offer a rental yield of 2-4% annually. One can make significant capital gains only when the land parcel is sold. The tax outgo is higher for land, where you have to regularly pay municipal taxes and any other levies as stated by the urban development authority. Tax issues also have an implication on the sale and proceeds. One cannot save tax on short-term capital gains (if property is sold within three years of purchase). Further, such a sale is also not eligible for any tax exemptions. By contrast, if you sell your property after three years of purchase, the resultant gain is treated as a long-term capital gain (LTCG), and a tax of 20%is levied. To claim actual exemption on LTCG, you will have to reinvest the gain in residential property within two years of the sale.

The “agri" (t)angle

Agricultural land come at throwaway prices, but also with a host of other issues. Under Indian law, only ‘farmers’ can explicitly buy or sell agricultural land. Others can buy it if the land is converted to a non-agricultural plot. Laws regarding holding and conversion of arable land for non-agricultural purposes differ across states. For non-resident Indians or persons of Indian origin (NRIs/PIOs), the laws are more specific. As per RBI regulations, no person belonging to this category can acquire agricultural land or plantation property or a farmhouse in India. They can, however, inherit and hold immovable property from a resident Indian.

Legal due-diligence

A holistic way to take care of such issues is to get all the documents verified by an independent lawyer and other relevant authorities. The critical factors to be verified are:

Title documents: The title must be clear and registered in the name of the seller only.

Easement issues: This refers to any rights of access granted by the seller to a third party, affecting your ownership.

Litigation: Verify whether the land parcel has been in litigation in the past, and whether all such cases have been settled.

Tax receipts and bills: Receipts for all payments made by previous owners must be up-to-date.

Encumbrance certificate: Ensure that the seller provides a proper encumbrance certificate attested by the sub-registrar, which will then rule out any legal dues attached to the land.

Pledges: Be sure to obtain a Release Certificate from the respective lending institution.

Demarcation letter: This should clearly state the boundaries of the land, as verified by a recognized surveyor.

Then there are issues that may not be under your control. For instance, there is a risk that the government may seize the land.

So the bottomline is that when you invest in land, you cannot just forget about it. There are many factors that one should take care to avoid a hard landing. It is not an easy investment, so place your bets carefully.

Binaifer Jehani is director, Crisil Research.

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Published: 13 Mar 2014, 07:31 PM IST
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