High net worth individuals are now likely to shy away from agricultural land deals and this might help soften market prices in the long term.
Will the ban on Rs 500 and Rs 1000 notes impact the lucrative farmhouse market in Delhi NCR?
It is no secret that the cash component in transactions for such properties range from anything between 25% and 60% with the largest investor segment comprising high net worth individuals. They are now likely to shy away from agricultural land deals and this might help soften market prices in the long term.
Funding for developers is not permissible under RBI rules. Developers are not allowed to borrow money from the banking system for land acquisition under RBI guidelines. Financing, however, is permissible through NBFCs (non banking financial companies) and real estate funds. Transparency in the market will be welcome and would mean greater control over cash flows. This would be a positive signal for institutional investors to come in, giving banks more confidence to lend for land.
Going forward, private equity funds and NBFCs could be encouraged to invest in this market due to the clampdown on black money and because of the low density residential plot policy (LDRP) of the Delhi government. This policy allows development of one-acre plots into three large high-end farmhouse residential units sold at ‘reasonably’ affordable prices of Rs 3 crore to Rs 8 crore.
As of now, the Delhi government and the municipal corporation of Delhi have yet to formalise and operationalise the process of building approvals. About 70 villages come under LDRP and 95 villages under the land pooling policy (LPP). Villages under LDRP include 23 in south Delhi and 47 in southwest and northwest Delhi. The Capital’s Zone J/green belt comprises 7,000 hectares and the remaining 47 villages are spread across 15,000 hectares. Altogether, this comes to around 22,000 hectares. In the short term, institutional funding opportunity for this asset class is worth Rs 2,000 crore, say experts.
The move to cleanse the system of black money can also encourage top-end developers of international brands to enter this segment. Currently, the minimum acreage required for an approved farmhouse is 2.5 acres for one approved dwelling unit. Under the new policy, the minimum land required will be 1 acre with three dwelling units. Hence, approved farmhouses would be available for anything between Rs 5 crore to Rs 10 crore as against the current value of Rs 10 crore to Rs 30 crore. Units too will be smaller (around 15,000 sq ft). “Going forward, it will be easy to get farmhouse dwelling units at the price of high-end apartments and we are hoping that they will eventually get funded by banks or other financial institutions. High net worth individuals, especially CEOs of companies, may be encouraged to invest in this segment going forward,” says Ramesh Menon of Certes Realty.
Experts say that transactions may dry up immediately and prices may soften but policy triggers in the long run will help build the market and bring back investor confidence.
Banks had since 2006 been debarred from lending money to developers to purchase land. Funding for agricultural land was also not permissible under RBI guidelines. Until now transactions are taking place as joint ventures, joint development or facilitating corporate divestments. But the demonetisation drive is expected to encourage institutional funding in this segment.
Money that NBFC has for land acquisition could be used for transactions earlier funded by HNIs who are now disappearing from the market. Also, with RERA regulations getting implemented, there will be increased transparency in the market, which will encourage institutional capital to chase these markets, say experts.
Ramesh Nair, COO – business and international director, JLL India, has a contrarian view. Going forward, there will be less aggregation in land because of the confusion in the sector and that could have an impact on the supply. “Reduction in supply will actually force prices to go up. Landlords who bought land at historical prices may actually want to hold on,” he says.
Though land is out of the ambit of institutional lending as of now, demonetisation may encourage institutional investors to come in, says Samantak Das, chief economist and national director – research, Knight Frank (India) Pvt Ltd. “Confusion may prevail for the next three to six months but going forward transactions will be more transparent and that’s when banks may consider reviewing this asset class.”
A leading investment banker says that they are watching the situation and the space with an intent to participate in the opportunity in the future.
Source: HT Estate
Dated: 19th November 2016