Does buying a plot of land suit your budget and needs? Find out
Aug 19, 2013
Source : The Economic Times

 

DELHI: 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 1.7 lakh. 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. Says Mayank Saksena, managing director, land services, Jones Lang LaSalle India: "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. Says Manish Aggarwal, executive director, Cushman & Wakefield India: "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.

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