Mark Twain very famously remarked once – “Buy land, they are not making it anymore”. This seems to have been the mantra for all High Net worth Individuals (HNI) of India.
If one looks through the portfolio of many wealthy family offices, land is an integral part of it. They seem to have the knack of timing it right; buy when other asset classes are rising and sell when the policy framework is in favour. In essence, the performance of land as an asset class is closely tied to the policies of the government.
Besides keeping a close watch on the policy framework of urban development, three other factors have to be borne in mind while scaling your investment into land.
Risk: What are the chances of the asset value depreciating OR unable to beat inflation/ interest rate on a 3 year horizon?
Terms & Returns: Whether the investment would grow @ (+) 15% year on year?
Liquidity: How easy would it be to profitably exit, in parts or in whole?
Most land investors are convinced that the land is less volatile compared to mutual funds, stocks, equities, investment trusts, etc. Over the past few weeks, the entire country is witness to what has happened in the stock market valuations on the Adani industries issue. It would be a good idea to share the seven reasons why most high net-worth individuals prefer to invest in land vs. built up spaces and buildings.
Reason # 01: Taken a long term view, land is an evergreen, ever-growing asset. Brick & mortar assets like buildings (mall space/office blocks) deteriorate with time, whereas land appreciates. Remember, some studies confirm that the value of any commercial building becomes ‘zero’ in 27 years. Even when the building is useless & demolished, what is left behind is LAND.
Reason # 02: Land is an asset from day one. It has very little lead time to mature from purchase to progress. For e.g. If you are an early bird buyer for a residential or commercial property, it typically takes 3-5 years for your asset to be registered in your name, and to draw returns from them. One keeps investing money & time for 3-5 years, without returns. Land can be registered immediately, and can start delivering returns.
Reason # 03: Land is one asset which affords the most flexible options, within the real estate products. You can choose to buy any size & dimension, any value, anytime. Besides, land can be put to multiple use during the period of ownership. Let me elaborate. Agricultural land if invested into; can be used for farming. Post zoning, land use can be changed and commercially used. Anything build on it can be redeveloped, for e.g. the same piece of land could end up being used as warehouse premise, commercial, residential, etc.
Reason # 04: Land affords simple investment management. Once bought, it doesn’t incur high costs compared to built-up products. It is most likely that the land bought is self sufficient in deriving the maintenance cost, whereas, the other products attract a continually incremental maintenance.
Reason # 05: Considering India’s population & the Prime Minister’s vision of a $5 Trillion economy, Indian real estate is projected to be a $1 trillion business opportunity. Also, we would double the urban centres; 60% of India’s population would live in cities by 2050. Hence, land as a commodity would remain in demand. There is an acute demand for finished products, which would have to be constructed on land. Hence, investments in land are bound to grow, provided the buying strategy is right. For e.g: Delhi as a city state is forecasted to house a population of 3.1 crores by the end of this decade. That necessitates the entire state of Delhi to be declared an urban area and both GDA policy as well as land-pooling to create a supply surge. Hence, invest in land today, rather than wait for appreciation at a much later date; at much lower returns.
Reason # 06: Assuming that India averages a growth rate upwards of 6.5% through the decade ahead & disposable incomes being high, aspiration of green living, bigger houses, better amenities, affordable luxuries, etc., would take over. Those can be achieved on bigger land chunks developed as clusters of luxury living. Hence, investing into GDA villages makes sense today.
Reason # 07: Land affords the “right balance in your real estate portfolio”. While investing in real estate, one needs to have a right product mix to hedge the risk, with one or two products which are low on risk and high on returns. That is what land promises to be.
Having said the above, we also advise our clients to exercise the right amount of caution and source expertise while buying land. Seek out experts rather than take the ‘gut-feel-approach’. Analyze-understand-replicate success stories in land as a portfolio rather than try to re-write a success story. Remember, all leading developers in our country grew at this scorching pace on valuations, using land as the growth engine.