Valuing land

SMARTSHARE

Something like 90 per cent of Indian civil suits revolve around real estate disputes. And there's better than an even chance that any given piece of real estate has been the subject of dispute at some stage. Most civil suits the world over do revolve around real estate and real estate has been the root cause of most wars throughout history.

As they say, possession is nine-tenths of the law. Land is the most tangible and immutable of assets. You cannot hide it and you can't take it with you. It's also "lumpy" in that it cannot be divided up into very small units; it has to be bought in large chunks.

The paperwork takes a long time so, trading in real estate is also time-consuming. You can buy a crore worth of shares or gold in a very small fraction of the time it would take to buy a Rs 10 lakh parcel of land.

The fact that land is always there, sitting in your face also causes many misconceptions about valuation. Ask most Indians; they'll tend to agree that real estate is the safest investment in the world. Most will also say that it always appreciates in value.

Both statements can be proven false easily. A disputed property is not necessarily a great investment. Let's say somebody is illegally occupying a given property and the titular owner has filed suit for eviction. The occupier cannot sell the property and the owner cannot enjoy it or sell for more than a fraction of the market value.

Besides, law courts work slowly since they are clogged with such cases "" so it can be decades before resolution.

Property values also fluctuate a lot. Every few years, there is a bubble followed by a deflation. In the mid 1990s, it happened in the upmarket areas of Mumbai and Delhi. Values dipped quite drastically in the late 1990s and early 2000s. Values can also drop because of problems with amenities such as water supply and law and order.

The market changed about five years ago. India's vast, burgeoning middle-class suddenly received access to cheap, easily negotiated mortgages as the entire banking sector focussed on retail customers.

The road building projects improved connectivity, making it possible for developers to acquire large chunks of land in far-flung locations and sell onto the middle-class. Land registry departments started to computerise operations making the entire transaction process a little easier and quicker.

The market has also become cleaner due to institutional financing; the black:white ratio in property transactions has improved. Land-intensive industries such as retailing and IT have boomed creating more demand. As a result, land values have risen at a startling rate across the entire nation.

Is there a bubble? I suspect so because the rental yield on a given property is now far below the market value. But bubbles can continue to inflate indefinitely given more liquidity flowing into the system.

The housing and real estate sector is under-represented in the stock market though shares like Lok Housing have comfortably outperformed a raging bull market. DLF's massive IPO will increase the industry's representation on the stock market.

You should view the issue and the market response to it as a touchstone for medium-term sentiment. If the issue is amply over-subscribed, the real estate bubble will probably keep inflating. If not, there's trouble in the wind.