Evolving Nature of Land Transactions in India

Land is one of the most precious and prized assets in any country. The size, scale and usage of a land parcel can change in fortunes and there are stories galore with the value of rising manifold with time, or with ‘Change of Land Use’. In this note, Gagan Randev captures his years of experience in land, its usage and potential in India.

Not too far back in time, various state governments would restrict the limit to which one entity could own land by implementing land ceiling restrictions. While the intentions were noble to ensure poor farmers don’t succumb to land grabbing, landowners and developers found a way around by having multiple companies which owned land to not fall foul under the Land Ceiling Act. Real estate developers then proudly touted their land holdings as their biggest asset. They believed that land prices would only move upwards, and this was generally the case till the early 2010’s. The scenario changed post that.

Land, once converted from agricultural and after CLU or Change of Land Use, can be used for development as per the Master Plan on that sector, city or state. The uses can be from Residential, Commercial, IT, Industrial or warehousing. The pricing of the land at conversion is determined by the usage, the location and the FAR/FSI (Floor Area Ratio or Floor space Index) available. Of course, when land gets converted and licensed for one of these the Government levies dues like External Development/Internal Development Charges (EDC/IDC). Net-net, the State Government plays a very large role in determining how much development is possible and for what purposes. The overall bifurcation of activities are outlined as per the Master Plans which are prescribed every decade or so.

The evolution of land transactions started in the good old days with a simple sale and purchase transactions. The seller would sell the land, either licensed or otherwise, and the buyer would pay the transaction amount and take over the land. There would be transactions where developers and landowners would accumulate large land parcels (to be used in the future) or purchases were made by parties to immediately launch projects on them. Some developers accumulated land, where they believed they were getting a good price and would then encash these through projects to be launched over the next decade or so. These were also in the good old days where land was appreciating every year.

This changed in around 2010 when players like Tata Housing , Godrej Housing, Sobha, Prestige, Lodha, entered the development fray. They revolutionized the market and the traditional model of land purchase and project launch. What started next was the “asset light model” where these developers would get into a Joint Development Agreement (JDA) or a Joint Venture (JV) with the landowner to allow them to launch many more projects and expand rapidly. The model which evolved was to give the landowner a deposit and thereafter, depending on whether it was a JDA or JV, a share of the revenues or the profits. Initially both JV’s and JDA’s were signed by landowners (JV’s because the share of bottom line for the landowner was higher than in a JDA where the percentage share was more skewed towards the developer). With time and as the market clearly gravi- tated towards national developers, the concept of DM or Development Management was brought in by developers. As DM managers, developers leveraged on their reputation to design, develop and manage the project and their ability to sell. This became a pure asset light model which zero capital infusion. Development Management fees are typically linked to topline sales of the project along with some ancillary fees. These could accrue to 10 to 15% of the revenues. All costs were borne landowner.

| Developers don’t believe in holding land for 10-15 years anymore as they do not want to lock in funds in land.

With the effective implementation of RERA in 2016 and the actual performance of joint ventures changed the game slightly. Many of the JV partners ended up in between the partners, as costs overran in most cases and the actual profits to be shared were far lower than projected. RERA also came down on DM agreements and opined that DM Managers were to be held equally accountable for lapses under RERA. These made developers more careful in signing fresh DM agreements even though it was so lucrative. One key reason was the builders dependence on funds being infused by landowners and sometimes landowners just ran out of cash or were unable to raise significant amounts which led to project delays or stalling. The onus then fell on the DM Manager to salvage their reputation by getting in financial closure.

As things stand today, most reputed developers are looking at JDA models or at buying land outright. There’s also now a preferred trend of plotted developments and low-rise projects that are launched, sold and delivered quickly, making returns on investment very lucrative. A group housing or high-rise project can take 5 years to deliver with lower returns on investment. Well-funded developers continue to buy some land parcels selectively to launch marquee projects where returns can be very high.

DM agreements have become very selective and uncommon, and are only workable where either the landowners have very strong financial capability or where the DM manager takes on the responsibility of financial closure of the project. Developers also don’t believe in holding land for the next 10-15 years anymore as they do not want to lock in funds in land. They see more financial logic in having that much land which can be launched as projects in the next 3-5 years. The market evolves every couple of years but at the core of every evolution, the basics remain unchanged – you need to deliver otherwise clients are unforgiving and reputations can take a beating; risks need to be controllable, and projects need to make financial sense. v