Realty Corner

Encashing Land

Santhosh Kumar

SANTHOSH KUMAR, CEO – Operations, Jones Lang LaSalle India, says that adopting a comprehensive, well-planned strategy would be the best way to go for maximising returns from sales of surplus lands.

Information on how much surplus land the Government of India holds is not readily available in the public domain. These lands, whether belonging to the Centre or each respective State, are spread across urban areas (where the values are likely to be quite high), peri-urban and suburban areas (where land prices are relatively moderate) and rural areas (where land prices are lowest).

Consequently, putting a number on the total area (and its value) of the Government's land belonging is a challenge. The country's Port Authorities certain hold a substantial chunk of it, with the actual size of their holdings in the ballpark of 258,000 acres, out of which approximately 20 per cent is not in use. The Airports Authority owns around 20,000 hectares and defense services have approximately 1,700,000 acre (Source: Business Standard).

The Rail Land Development Authority (RLDA) is the single-largest owners of lands in this country. In fact, it has approximately 43,000 hectares of vacant land under its purview - most of it in locations where there is a shortage of housing. There are great opportunities to develop mass housing projects with private sector participation. Certainly, these land holdings represent a great opportunities to develop mass housing projects with private sector participation.

The Process of Encashment

An interesting question arises when one considers the auctioning of these lands as a potential avenue for lightening fiscal deficit - how long would such a process take?

The time required for marketing these lands would depend on a number of factors. At the first level, the Government would need to have a structured sale strategy and a phasing plan that would identify which lands need to be sold in the first phase, and so on. Lands in urban areas, depending on their location, are likely to be sold at a relatively faster pace. This would, inter alia, entail the definition of 'reserve prices' for each of these land parcels. Given the extent, spread, and locational diversity of these lands, such a strategic planning exercise could easily take six months to a year.

Another important fact is that these lands should not be released for sale too quickly. The sudden supply infusion could seriously impact property prices around the areas in question. Further, the market’s appetite for consumption of these lands will play a critical role in how quickly they will be absorbed.

Market appetite is a function of current economic growth, the outlook for various industry sectors, liquidity in the system and the potential demand for end products that will be developed on these lands. Consequently, phased sales of such land holdings could begin in a period of about six to nine months from the date that all internal approvals and sanctions for sale are received by the respective Government departments.

However, this period is subject to a lot of externalities - including global market trends, domestic economic outlook, future outlook of the cities and the areas where these lands are located, and the market’s perception for the future growth potential of these lands and their micro-markets. Overall, given the potential scale, the sale of all or most of the Government's land portfolio, could take a number of years. In such a scenario, it would be best to obtain independent valuations of the land parcels just before they are brought into the market for sale.

Even then, the sale of such land would not be without challenges.


Potential Roadblocks

Certain major difficulties can be readily perceived:

  • Redefinition of land use and permitted developments at these surplus lands would be subject to critical scrutiny, as valuations of lands are highly contingent on the scale and type of development permitted at the locations in question
  • Valuations of each of these land parcels could become a matter of contention and impact land prices in the vicinity
  • Given the potentially massive size of lands, finding buyers with high-ticket size appetites would be tricky. Moreover, such buyers would likely be in a rather good negotiating position and may ask for discounts. Consequently, these land parcels may need to be subdivided to reduce ticket sizes and generate a higher level of competition. This would become time-consuming.
  • Market appetite is very sensitive to economic growth and outlook. Consequently, buyers might become cautious while making such high-ticket purchases. This means that marketing horizons - or the time periods for completion of sales - could get extended even further
  • As already mentioned, it would not be practical to sell all of this land in one go. The resultant high level of supply doing so would create would adversely impact the marketing of the entire portfolio.

Taking all these factors into account, it is evident that adopting a comprehensive, well-planned strategy along with a phased sale plan would be the best way to go for maximising returns from sales of these surplus lands.