Should you participate in land pooling or not?
Mar 10, 2014
Source : The Economic Times

 

DELHI: Dharamvir Yadav, 35, a resident of Kangan Heri village near Najafgarh, Delhi, is upbeat these days. Ever since the Delhi Development Authority (DDA) began discussions, and subsequently adopted, a land pooling policy, the price of his holdings on Delhi's outskirts has been appreciating. It has risen almost three times in the past oneand-a-half years. Yadav is debating whether to sell his land and cash in on the current upsurge or participate in land pooling. As a growing number of development agencies adopt pooling (see Land pooling is catching on), landowners across the country are likely to face Yadav's dilemma.

Should you participate in land pooling or not?c
Sharing the benefits

Earlier, the DDA would acquire land from landowners, provide the infrastructure, and then auction it to developers. The price at these auctions ranged from 10-30 times the acquisition price. While the DDA made a killing, the landowners did not share the benefits. This led to criticism that the DDA was profiteering at their expense.

Land pooling is aimed at countering this criticism. Now, the DDA, landowners, and developers will join hands. The landowners in an area will transfer their legal rights to a designated land pooling agency. In return, they will receive certificates that will entitle them to developed land in the future, its amount depending on a specified formula (see How much land will you get?). The DDA will provide the infrastructure, and private developers will develop the projects. Once the development work is done, the land that the owners receive will command a higher price than their original holdings.

Land pooling is also finding favour because land acquisition has become very difficult. Currently, a private entity acquiring land must obtain the consent of 80 per cent of the landowning families in the area (70 per cent in the case of public-private partnership projects). Obtaining consensus is also difficult. So, an acquirer could buy two parcels of, say, 60 acre each, but not the 30 acre in the middle that would give him a contiguous 150 acre.

The landowners may not want to sell or may hold out in the hope of higher compensation. Laying out roads and other amenities becomes impossible on fragmented parcels. Litigation by landowners can hold up infrastructure development for years. Hence, policymakers have turned to land pooling, wherein landowners have a higher incentive.

Should you participate in land pooling or not?

Should you participate in land pooling?

The cost of land acquisition is exorbitant: two times the market price in urban areas, and four times in rural areas. The rehabilitation and resettlement package that has to be offered to the dwellers on the land swells the cost further. Under the land pooling scheme, the development agency does not pay cash to landowners. The latter are mostly compensated via land or FSI (floor space index refers to the right to develop a certain area), which can be sold to a developer.

Will prices moderate?

Land pooling will increase the supply of land, resulting in price moderation. Besides Delhi, there could be a ripple effect in the suburbs. "With fresh supply coming into the Delhi market, land prices in suburbs like Gurgaon and Noida will also moderate eventually," says Anshuman Magazine, CMD, CB Richard Ellis South Asia. The cost of built-up real estate may also follow suit since land is the biggest cost component. However, prospective real estate buyers should temper their expectations. The prices will correct sharply only if supply increases drastically. If new supply enters the market slowly, as is likely, the prices may not fall much.

The risks

The biggest risk to landowners participating in pooling will arise from delays in development. Unless development takes place, the price of land, the currency in which owners will be paid, will not appreciate.

The DDA is planning to offer singlewindow clearance to developers' projects. However, as K T Ravindran, dean emeritus, RICS School of Built Environment, Amity University, says, "Many agencies are involved in giving clearances over which the DDA has no jurisdiction." Offering a singlewindow clearance will not be easy in Delhi where different organisations work in silos, he says.

According to another real estate expert, Delhi has a total area of 1,450 sq km, of which only 750 sq km has been developed. Developing the balance 700 sq km will be a humongous, time-consuming task. This is where the risk lies. "You may surrender your land now, but it could be years before it is developed and you get the benefits," he says. Finding the funds to develop infrastructure on such a large area will also be a big challenge for the DDA.

The owners of small land parcels may not be compensated with developed land, but with an FSI certificate (or cash, the probability of the former being higher). They will have to sell the FSI to a developer. If there are many sellers of FSI and only a few buyers, the certificates may command a low value initially. It may be a while before diminishing supply drives their price up.

What should you do?

Small investors and landowners should pool their holdings to a minimum level so that they become entitled to developed land as compensation, and don't end up with an FSI certificate. Finally, keep in mind that those who participate in pooling should have a reasonably long investment horizon. Those looking for quick gains may as well take advantage of the current price spurt and sell it.

 

 

 

 

 

 

 

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