How to Calculate the Actual Cost of Land?
The Indian
real estate boom has drawn large interests from around
the world. However, the increasing property
prices have created a tense situation for the potential
buyers especially the individuals who have been waiting to turn
their dream of owing a home in reality for long.
The next two months are believed to be extremely critical for
the real estate market. If demand does not revive by then, a correction
can not be ruled out. With the Sebi coming up with fresh guidelines
on the subject, valuation of land has become
a hot topic of discussion nowadays.
Let’s have a view on questionnaire that seems to be
on mind of everyone desiring to purchase/sell the land.
What does the valuation of land mean?
Valuation of land, in most cases, means evaluating the land
at its future saleable prices. This may come up with artificially
hyped prices. ‘As-is-where-is’ is an applied statistical learnt
rule of thumb’ to calculate the approximate value of land. But,
the valuations done must be realizable and comparison, if any,
must be derived between the lines.
What entities require to be kept in mind during the land
evaluation?
As such, each of the entity taken will give out a different value.
Therefore, one needs to make a number of assumptions regarding
the structure to come up on the land. For example, the agricultural
land is generally shown as land bank in case of a special economic
zone (SEZ). But, it has to be converted as non agricultural land
for the development process. Such land valuations
and costs largely depend on mere assumptions. The more the assumptions,
the large the valuations come.
How to Evaluate the True Value of land bank?
The quality of titles plays a critical role. The assumptions
for land valuation can be more realistic on the basis of verification
of the following details:
- Is the property developer real owner of the
land? - Are payments
of the land complete by his end? - Does he have the permission to
utilize the land in his own way?
What guidelines should investors follow when evaluating
real estate equities?
A real estate developer will always want to fund his project
with the help of debt. In case of debt funding, the savings of
the developer is liable to some deductions including interest
burden, which is also deductible expense. The left out part is
known to be the developer’s profit. However, if he dilutes equity,
his profit gets shared. Besides, he also needs to pay a high dividend
distribution tax.
What is the immediate effect of the interest rate surge
on real estate in India?
Land loans will be only provided if the land
is a part of any construction
project. Such a criterion is nowadays followed by
many banks. The increasing interest rates do not affect those
who already own low-price land. Contrary to this, those who have
purchased high cost land through auctions, whose cost is funded
by bank or any financial institution, will feel the urgency to
complete the project soon, as the interest rate is rising fast.
Also, the on time project completion will help the developer to
prevent the damage and sell it off.
Photo: Raj Retreat Housing Complex, Building-2 by Atulburnwal, licensed under CC BY-SA 3.0, via Wikimedia Commons.
