The Real State of Real Estate
Land is not expensive in most parts of India.
The powerful and well connected buy land for maybe between Rs 20 per square foot to Rs 200 per square foot from ignorant farmers.
Then they use their political connections (of course, many times the land grabber is a politician!) to convert what was classified as agricultural land into zoned, "sale-able" land.
Some municipalities have development charges (which can be Rs 500 per square foot) for the amenities that they are supposed to provide. Much of that money, needless to say, does not find its way into the purpose it was raised for. Table 2: The abnormal, super-profits of a residential property in the rising cities
Rs per sq ft Cost of construction 1,500 Land cost 200 Land development cost 500 Total cost of project 2,200 Selling price to buyer 5,000 Profit before financing costs 2,800
Developers can also "creep" their way into low priced land banks.
They do this by first buying lands where there is a development charge and then buying the neighbouring lands - just outside the area in which they have these developing charges. In the example in Table 2, they would save Rs 500 per square foot and also get the land a bit cheaper. But their selling price would change by maybe Rs 250 per square foot. This ensures that the developer’s average cost of land declines and profits surge. The buyer, on the other hand, ends up paying a high price and gets the same pathetic infrastructure. Falling over their own greed?
We have no doubt that there is a huge demand for real estate in India.
But my negative view on real estate is based on one known fact: there is a significant amount of corruption in the land acquisition process.
Left to a more "free" market and an improved zoning process, the cost of real estate would decline. And, unless the governments want to deal with a national Naxalite problem, they would deliver on:Not that it will happen in a hurry.
- providing housing at lower prices,
- providing the infrastructure around it,
- controlling the amount of profits that real estate companies make from "arranged" deals of zoning land.
via equitymaster.com
Another masterpiece by Ajith Dayal - visit the link to read the entire article.
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