Are you following the plot?
An indicative guide to buying land/plotted layouts from developers.
Pun intended or not, investing in land has held its sheen for mankind over many centuries.
‘Buy Land, they aren’t making it anymore’ by Mark Twain is an oft-repeated quote by real asset sellers world over, while buying land and gold as generational investments is not alien to us Indians either. The Mark Twain quote gathers larger relevance when one is actually buying land or plots in place of apartments – apartments today are manufactured in plenty almost to the extent of being a soap or commodity, thanks to the ever-evolving building regulations allowing developers to construct taller and denser projects.
Recent real estate industry research reports point out to a huge surge in demand for plotted developments in India post the start of the pandemic. Many of us started seeking larger homes, flexibility within the layout to accommodate home offices and more open and breathable green spaces that are easily accessible. With WFH picking up, many families did not mind moving further away from business districts to find larger apartments, independent houses, villas or plots where they could build their own homes. This trend picked up specifically at the onset of 2021 and ever since, larger apartments in well-designed gated communities with open spaces, villa developments and plots have been the hot cake to sell for developers.
Why does buying plots make sense?
Well, larger open spaces and independent living aside, the most compelling driver is the ability to customize your home with the room sizes, layouts, materials and interiors, a luxury you do not get with most developers while buying apartments. The other benefit of course is the ability to scale the size of the house if needed in the future – an important decision driver for larger or joint families. Lastly, you own the underlying land unlike with apartments where either you hold only a society share certificate or an undivided share of land (depending on the city).
You also potentially go one level up in the real estate value chain by building your own home – saving the developer’s construction margins but this of course comes at the cost of convenience.
Why do developers love selling plots?
With the increased buyer demand and infrastructure push in most major Indian cities, plots are increasingly becoming a lucrative product to sell for developers to achieve faster sales, increased asset turnover and hence realize higher investment return ratios - faster inflow of cash compensates for lower margins (though some plotted layouts are sold at high margins too - read obscene price points). Infrastructure upgrades with new metro lines & feeder roads and the pandemic-induced end-user demand have contributed immensely to this trend. This is pronounced in case of branded developers who have strong legal and due diligence teams to close land deals and take the plots to market in the quickest possible time. Most branded/listed developers have announced ambitious plans to establish a plotted development segment in the last one year and not limited to tier-1 cities.
Tier-2 cities offer an immense opportunity today with the construction of new expressways, many state governments’ push to de-bottleneck their capital cities by encouraging investments in these cities and triggered by the remote work induced demand bump-up these cities experienced recently. More on this opportunity in a different post.
So what should you be wary of so that you don’t lose the plot?
I know we overdid the pun there :)
Let’s dive right in to the purpose of this post. While buying plots especially from branded developers seem like a cushy option with ease of transaction and opportunity for higher capital gains than apartments, there are a few caveats one needs to be mindful of. We avoid discussing much on land title due-diligence as it is the foremost aspect of purchasing land/plot layout and buyers typically are aware of the criticality.
Terms for house construction and other conditions
It is prudent to clarify the critical construction related terms upfront prior to signing up on the plot purchase.
1. Is there a cap on the number of structures you can build on the plot? Some schemes do not allow you to construct two houses even on a larger plot size.
2. What is the Floor Area Ratio/Floor Space Index (FSI) regulation for the said layout? What is the ground coverage – ratio of built area to plot area – permitted? (Ground coverage norm is applicable for select states). Is there a cap on number of floors/height of building additionally? These regulations determine the overall built-up area and layout of your house, so do understand them upfront from the developer instead of any surprises coming from your architect post plot purchase. Why compromise when you’re building your dream home?
3. Is there a maximum time period until which you can hold the plot without starting construction? What happens if you do not manage to start construct within the timeline? A developer imposing stringent guidelines on this aspect is actually healthy to avoid speculative investors in the scheme. More speculative investors -> Larger supply for re-sale -> Lower long-term returns on exit.
4. If you intend to use a part of the constructed unit for commercial purposes (say home tuitions, part office for professionals), does your sale agreement with the developer on your usage of the plot prohibit the same? Most developers do not allow a resident to display any hoarding or advertising signage even if it is located inside your plot premises.
5. What are the ‘construction guidelines’ on the plot that you are being asked so sign up for? Many developers include these as part of building bye-laws/regulations. These terms cover overall design, façade, elevation of the building apart from requirement on frontage requirements and open spaces (ground coverage).
Does the developer insist as part of plot sale agreement that your architect’s layout plan be first approved by developer/his representative prior to submission to relevant municipal authority? If yes, what are the turnaround times involved for builder approval of plans?
It is prudent to check upfront if all these guidelines are reasonable and suitable for your context prior to signing up on the plot purchase. Some developers require you to document with them the construction commencement and completion certificate of your house (regulatory approvals).
6. Does the developer mandate mandatory maintenance services to be availed by developer-appointed agencies/developer’s in-house teams? What is the stipulated period for this arrangement? These kinds of norms are usually positive signs as it indicates that the developer cares deeply about how the community shapes up post hand-over of the plot.
7. In case the development has a club house, will the conveyance be done to the society post handover or will the developer/promoter own the facilities and offer the clubhouse services on a membership fee basis? If the developer retains ownership, can the developer sell the membership rights to people who are not residents of the development? Does he have the right to sell the club & facilities asset to any third party in the future? These are important as the price you are paying today includes the promise of access and availability of these amenities.
8. In case of an upward future revision in permissible FAR/FSI by the regulatory authorities, can buyers can take advantage by building more within the plot? In case of plotted development within larger townships, developers typically embed the right to retain any additional development rights (FAR/FSI) that might accrue from future revisions. This impacts you directly as a land owner who does not benefit from a beneficial regulatory update.
9. What are the terms to divide/split the plot in the future if required, particularly in case of larger plots? This is particularly of importance when plots might be inherited by multiple owners in the future. Some developers prohibit this to prevent density increase in the development which is again a positive sign as a buyer but the norm should suit your context.
10. Can you amalgamate two adjoining plots in the future to build a large house? Some developers require prior consent and approval from them to effect this amalgamation.
Small size plots are a win for the developer. Does it make sense for you?
A lot of plots advertised in recent months are of sizes lower than 1000-1200 square feet in size. Developers sub-divide these plots in smaller chunks to keep the overall ticket sizes affordable and achieve faster sales. There are two concerns with this trend:
a. Should you plan to construct a house for self-use, this offers you much lower ground space and low built-up area potential. If you were to take all the pain in appointing an architect, contractor, understand local regulations, supervise in the process of building a house, why would you build a house that will have low flexibility for future expansion?
b. If you are buying ‘just for investment’, be ready to compete with your neighbour who also bought anticipating capital gains. As developers divide the overall land into smaller plot size chunks, the volume of plots increases in the layout/scheme and coupled with smaller ticket sizes, it attracts more investors than end-users. So essentially you are competing with more people when it’s time to resell and benefit from capital gains. Remember the golden rule – real estate is ultimately an end-user asset. If it doesn’t attract enough end-users today, it won’t in all probability even 10 years later.
Leverage the lender’s due diligence
Banks and NBFCs have higher levels of scrutiny in lending to purchasers of plots than apartments.
It is prudent to check the quality of lenders that have approved home loans for the project. If the top 4-5 leading banks have approved the project, it offers an additional level of comfort basis their stringent due diligence mandates. If the project is approved only by tier-2 NBFCs (or any HFC/NBFC apart from HDFC), it makes sense to be circumspect of the underlying title, the developer pedigree or the developer’s financials.
If you feel the developer has a good track record, insist with their team that you bank with the leading brands (say SBI or HDFC) and would only avail loans from them. You can assess the developer pedigree by their willingness to share documents with these banks or their honest disclosure on the lenders who have rejected their projects for loan disbursements.
Developer pedigree
One can’t emphasize this factor enough irrespective of what type of real estate you are buying with your hard-earned money but developer quality becomes more paramount in buying plots/NA layouts.
Why?
a. Low entry barriers for business – The only value-add a plotted project developer does on top of the raw material (land) is regulatory approvals and construction of basic utility infrastructure. The developer does not have to engage consultants (architects, contractors) for doing buildings, procure materials and monitor project construction for years altogether. The capability required to construct these projects is significantly lower than for a developer constructing gated communities/complexes or even stand-alone buildings.
b. Speculators become developers – For politically exposed people who want to earn a quick buck by flipping land, it is relatively easier to manage purchase of land at a lower than market rate and expedite approvals required for layout approvals from the authorities. The next step is to engage brokers/consultants to aggressively market the plots to realize healthy margins and faster cash flows within an year and exit the project.
Why is that a concern for you as a buyer?
It is because the speculator does not have a reputation to keep. There might be challenges in the underlying title, circumvention of regulatory norms (which will come back to bite with political regime changes), slippages in infrastructure work or lack of responsiveness for any issues. Brokers advertise these projects on the back of high commissions paid to them. Irrespective of your howling on social media, the developer will initiate another similar project in a different location in a new brand avatar to hunt for other oblivious consumers. You have everything to lose as a buyer.
c. ‘Joint Venture’ partner – You might generally feel safe about purchase of a plotted project from a branded/Grade-A/listed developer. This makes sense as these developers have tenured legal teams who carry out thorough due diligence on underlying titles and have a hard-earned reputation to keep.
The biggest risk though comes when this reputed developer has a ‘Joint-venture’ partner who is actually the land owner and is responsible for the regulatory approvals. The integrity and transparency you might experience is directly linked to the performance of this developer at the back end, whose track record might be typically hard to trace most times. The grade-A/branded developer usually takes enough care to keep their brand reputation but you should consider sufficient due diligence on history of this JV partner, promoter track record (google searches help a lot) and political linkages, promoter reputation with lenders prior to signing up.
Environmental regulations/violations
Environmental regulations are one of the most volatile regulatory approval categories in real estate projects and because of their unpredictable nature, they have the ability to stump even quality developers for no fault of theirs. These issues stem from multiple bureaucratic layers and often multiple government agencies have their purview over these approvals. A classic example is how the Graded Response plan to alarming air pollution levels halted all construction activities in NCR recently or how issues related to Sanjay Gandhi National Park or the thane creek boundaries regularly impacted projects in Mumbai suburbs. The former type of challenges bring short-term disruptions and only impact delivery timelines largely but the latter type have the ability to stall projects for months or even years altogether.
As a buyer, you do not have much control over these sudden shift in regulations as these at times depend on whims of certain decision-makers or environmental approval bodies basis a random study or appeal. Reputed developers offer recourse in such events of long-term disruption to either refund your payments with nominal interest or accommodate you in other projects basis your preference. With other developers, the light at the end of the tunnel might be elusive.
With plotted developments, one must take care to see if the layouts do not violate any norms related to the following:
a. CRZ – Coastal Regulation Zones: Applicable for land parcels closer to the sea. This has been a major contention in cities/resort towns along the coast as developers have consistently lobbied to relax these norms to attract buyers in these attractive locations.
So while you fancy the gorgeous sunset views from your sea-view villa, make sure the developer has built some buffer with respect to these norms as a safeguard in case the regulations become stringent in the future.
b. Lake beds/River delta/flood plains: Ensuring your layouts are fully compliant with respect to these norms both from future flooding risk and regulatory risk. Speak with the locals in the neighborhood and check with them if these areas are prone to flooding during rains and what used to exist in this location before – this is one of the best ways to understand the terrain of the land prior to it being marketed as an attractive plot/villa destination.
c. Proximity to forest areas or wetlands: Regulatory norms related to forests and trees form one of the most stringent regulatory norms and it makes sense to understand if the plot is free from any violation on being located in an area earmarked as forest or green cover in the development plans.
Other Considerations to be mindful of in buying plots
Confirm in writing with the developer if they undertake a binding commitment to install utility services (water, electricity, waste, broadband) or if they ‘will endeavour’ to obtain the same. This is significant specifically for plotted layouts that are located in far flung areas or which do not have neighbouring developments which already have these utility connections.
Watch out for the location of utility services within the overall plot scheme. Plots located nearby sewage treatments plants (STPs) or Organic Waste Converters might bear nuisance and have low resale-ability in the future.
Check with the developer who between the developer and the buyer is responsible for updating owner name in the ‘revenue records’ of the municipal body/panchayat/town planning body. Certain agreements state upfront that it is the buyer’s responsibility though the developer ensures support with required documents.
If the developer has built and showcases a fancy show villa at site as part of marketing process, enjoy the process but do not attempt to visualize it as a benchmark as all real-world constraints are not typically baked in while designing these model flats.
Some branded developers explicitly bake in a clause prohibiting buyers from using the building in the plot as serviced apartments/Airbnbs. If you are purchasing plots especially in far flung areas/second homes, do clarify on this point if this is a potential rental stream for you.
In summary, it is prudent to exercise thorough due diligence on the title, regulatory norms, potential violations and promoter/joint venture partner track record prior to signing the cheque. While you might be told that the plots are selling in a hurry and you need to decide then and there, ensure you do not skip your due diligence and ask all the relevant questions including common facilities, construction and maintenance terms before taking the plunge. No investment opportunity ever vanishes in a day. There’s always a ‘Phase-2’ around the corner, albeit at a marginally higher price but it is probably okay to pay up that price as a premium for protecting your downside.