Should You Buy A Plot Or An Apartment During The Pandemic

Arijit Gupte, a 45-year-old IT professional, has been scouting for a house for the last three years. He’s not willing to take any chances as he has seen his elder brother burn his fingers in a real estate project that was embroiled in litigation for almost six years and was delayed for over 12 years. Working for home for almost seven months has given him enough time to explore his options. Last week, he decided to invest in a plot in Gurugram that cost him Rs 45 lakh. He hopes to complete construction in 18 months.

In the midst of the COVID-19 pandemic, demand for plots has gone up as homebuyers see this asset class as a low capital investment with limited project execution risks and faster exit opportunity while for developers it is a means to generate quick cash flows and a smart strategy to liquidate land banks for raising working capital.

Demand for these plots that range from Rs 20 lakh to over Rs 50 lakh is being witnessed in Haryana which came out with the Deen Dayal Jan Awas Yojana, some cities of Uttar Pradesh and Punjab, not to mention Bengaluru, Hyderabad, Chennai and Pune.

Some of the leading developers with plotted developments now include DLF Ltd., Mahindra Lifespaces, Raheja Group, Godrej Properties, Century Real Estate, Puravankara’s Provident Housing, Shriram Properties, Goel Ganga, TVS and Alpha Corp, among others.

The minimum size of marketable plots is as low as 550 sq. ft., and goes up to 10,000 sq. ft. In select projects, larger plots are also available. Plot sizes ranging between 1,200 sq ft to 2,500 sq ft are seeing maximum demand. However, in the southern cities of Bengaluru and Chennai, smaller plots of average sizes 550 – 750 sq ft are also generating interest.

Under the Haryana government’s Deen Dayal Jan Awas Yojna scheme, a developer can either sell bareshell plots or developed ones.

“We are developing 80 sq m to 150 sq m plots in Sohna in Gurugram and in Karnal. We are also constructing four floors on a 100 sq yard plot as floor wise registration is now allowed,” says Pradeep Aggarwal, chairman and founder, Signature Global, adding “we will be launching more plotted projects before March 2021.”

A luxury apartment in a high-rise costs upwards of Rs 70 lakh but in a low rise it costs anything between Rs 40 lakh to Rs 45 lakh which is almost 25 percent less.

“Floors will be a game-changer for the real estate market and demand for high-rises may actually come down going forward,” he told Moneycontrol, adding a low-rise project gets completed within two years compared to high-rises that take over three years and there is also the option of getting an occupation certificate for completed plots rather than towers.

“The format works best in today’s market conditions because liquidity is faster, construction challenges are less and there is no pressure to complete the entire society before procuring an occupation certificate,” he said, adding there have also been cases wherein people have bought all the four floors.

“Four floors with 12 bedrooms and 4 large size living rooms on each plot for Rs 2 crore offers a better proposition than a Rs 2 crore apartment in a high rise for which the wait may be longer,” he said.

In its regulatory filings, DLF has outlined a long-term plan to launch and develop around 35 msf of projects having potential sale value of Rs 360 to 400 billion. Of this, DLF intends to launch around 12 msf over the next 18 months (H2FY21-FY22E) across plots/mid-income housing/independent floors in Gurugram, Chandigarh and New Delhi in a phased manner.

Raheja Developers too has launched Riyasat Hills Farmlands project spread over 100 acres near Sector 95B in Gurugram. The company is offering farmlands of 1 acre and above

In an attempt to provide healthy eating and living options to people, Raheja Developers has come up with ready for delivery developed farms called Riyasat Hills Farmlands, says Achal Raina COO Raheja Developers Limited.

The price of plots in this project starts at Rs 18.7 lakh and has sizes ranging between 68 sq yards and 144 sq yards.

Should you invest in a plot or an apartment?

In a scenario where thousands of homebuyers have been left in the lurch by developers and have not received possession even after a decade, buyers are wary of investing in projects that are yet to take off and may take a long time to get completed. Plots, therefore, make more sense.

“A high-rise development requires construction finance and has a long drawn construction cycle. The end-user today prefers investing in real estate where there is visibility of structure and delivery is barely a few months away. Therefore, an investment in a plotted development makes sense,” says Anckur Srivasttava of GenReal Advisers.

For a plot to be developed, a developer is required to provide drainage, water, roads, power cables, storm water drains, landscaping – and the entire process may take just about a year. Also, by selling just about 40 to 50 percent of the plotted inventory, developers are better placed to raise money upfront resulting in immediate cashflows.

Also, under the Haryana government’s Deen Dayal Jan Awas Yojna scheme, almost half of the plots are ‘locked’ by the state government until a developer procures an occupation certificate, he explains.

The average size of the plots is 100 sq yards to 120 sq yards. The total price of plots in Tier 2 cities is in the range of around Rs 18 lakh to Rs 20 lakh and in Tier 2 cities it is around Rs 30 lakh. Plots in Tier 1 cities cost Rs 45 lakh onwards. Besides, they also qualify for the PMAY’s Rs 2.67 lakh interest subsidy.

Builder floors are also more efficient than apartments. During COVID-19, several tenants residing in high-rises moved out to affordable builder floors where the maintenance costs are less. Therefore, builder floors are more ‘efficient’ than high-rise apartments as the common area is greatly reduced.

Efficiency levels in case of builder floors are anything between 65 percent to 70 percent as lobbies and common areas are not heavily loaded. Maintenance too is 30 percent lower compared to high-rise apartment complexes, says Srivasttava.

In markets such as Greater Noida and Ghaziabad where the capital values of some units in high-rise projects is below Rs 3000, the construction cost including interest and time value of money is anything between Rs 2200 per sq ft to Rs 2300 per sq ft. This leaves hardly any profit margin for the builder.

“It is due to this reason that some developers have applied for change of group housing approvals so that they can sell plots instead of apartments,” says a broker active in the area.

Another trend that has been observed lately is that several investors are ‘tiptoeing’ into the real estate market by investing in plots. As many as 20 to 25 percent of the plots inventory is being taken up by investors/speculators. These include both the value-for-money retail investor who is willing to put in anything between Rs 40 lakh to Rs 50 lakh for a bare shell plot and the bulk ultra HNI investor who is investing upwards of Rs 2 crore to Rs 50 crore for plots.

“We are witnessing the return of the investor/speculator into the market after years. Most plots are available in the range of Rs 25,000 per sq yard to Rs 30,000 per sq yard. These investors are hoping that the price of plots may appreciate to Rs 40,000 per sq yard in the next few years,” says Srivasttava.

However, real estate experts say that prices of plots may not witness drastic appreciation as supply too is expected to hit the market in the coming years.

Things buyers should keep in mind before investing in plots

Checking the title of land underlying the plot is most critical. Buyers should ask sellers to provide all title related documents and the same should be inspected, say legal experts.

In a plotted colony, often there are multiple land owners who would have collaborated to implement the project. Buyers should conduct in-depth searches at local revenue offices and registrar’s offices to find the correct owner(s) and satisfy himself about seller’s title and absence of any charges, lien, encumbrances, Vaibhav Suri, Partner, L&L Partners told Moneycontrol.

Always be careful in agreeing to the terms and conditions under plot buyer agreement. Give due importance to terms like possession handover date promised by the builder, delay compensation, infrastructure and facilities to be provided by the builder at the colony, whether any restrictive covenants are imposed, he said.

From a legal perspective, one needs to be more wary while buying a plot in comparison to an apartment for various reasons, since if any legal issue does arise on a plot, it’ll more or less affect the individual plot owner alone.

“To that extent the benefit of getting involved in a dispute with the builder will be individual rather than a collective action as a bunch of apartment owners,” explains M Arun Kumar, partner, IndusLaw.

Due diligence is necessary to ensure there is clarity of title chain of ownership, there is zero encumbrance on the land, and that the said land can be used for constructing a residential property in line with land use approvals and zoning regulations, he says.

While purchasing a plot, buyers should also confirm the land use.

Purchasers should also be aware of nuances in plot development. In case the buyer is developing the plot himself, he/she should make sure that all development approvals are in place. This question arises as the entire larger layout is shown as one single development before the plan approving authorities, says Harsh Parikh, Partner, Khaitan & Co.

(Source: Moneycontrol)