Overcoming the Challenge: Land Acquisition in India

How real estate leaders in India are overcoming obstacles

March 27, 2023Real Estate
Members of GRI Club India gathered both online and in person in Bengaluru on March 2nd for a Hybrid Meeting to discuss issues surrounding land acquisition in India. Co-hosted by our Sectoral Club Partner JLL, and moderated by Mayank Ruia (MAIA Estates) and Rahul Raj Gogna (JLL India), the event gave the attendees an opportunity to share their insights and strategies to overcome challenges facing the sector. The topics covered included demand vs. supply, valuations and lending, alternative funding options, and much more.

The Lay of the Land

The real estate industry in India is grappling with a multitude of challenges, with land acquisition being a key issue. There has been a recent surge in land acquisition for real estate development in India, with large-scale projects and investments in both urban and rural areas. This has led to something of a land rush and increased competition for prime land. 

Difficulties in acquiring land in the outskirts of major cities primarily come from high land prices and landowners who are unwilling to negotiate on pricing. The volume and pricing of land has increased significantly in recent years, particularly in cities like Bengaluru, which has made it difficult for developers to acquire land at a reasonable cost. Even when they do, developers often face challenges in determining how to split costs. 

The cost of land acquisition is one of the most significant expenses in every real estate development project, and many developers are finding it demanding to manage these expenses. Our attendees also shared that the commercial and residential sectors are facing their own unique hurdles.

Acquiring Approval

One approach that developers have adopted is to buy land parcels after the necessary approvals have been obtained. This approach helps reduce the risk of non-approval of projects, which can be a major setback for developers. However, the inability to close commercial property through Joint Development (JD) agreements has led to some developers adopting the co-ownership model.

The use of data to earn on acquisition is essentially lost, resulting in significant pressure to formulate expedient land acquisition strategies. While the residential Joint Development Agreements (JDAs) market is still alive, the office JDA market has become harder. Developers who need to buy land must look for ways to fund their acquisition, and the participants recognise that good conduct attracts good capital.

Finding a source of capital for projects is a key challenge, and developers usually rely on institutions and family offices. However, the timeline for these sources is usually five to six years, with a maximum extension of two years and Institutional investors are typically only interested in investing in land that has been cleansed of title issues and is suitable for development. The risk-reward delta at the early stages of land acquisition and development is another factor that those in the industry must consider, when navigating the complex political and regulatory landscape.

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Runways and Risks

A key point made by the participants is that developers must take measures to ensure that landowners do not lose out in the acquisition process. The runway of land acquisition has gotten shorter, with the time frame reducing from seven to eight years down to four or five years. The risk aversion that affects approval is another major challenge, and title risk is an even bigger issue.

It was observed by those in attendance that lenders usually want a fixed return, which can lead to problems for other parties involved. Developers can adopt equity-type early investing to avoid losses. 

Currently, residential acquisition includes emotional factors that must be accounted for, while everything else is based on assets and practicality. This need to make space for the human element of land acquisition complicates the process but it is often essential. 

The attendees discussed the fact that few projects become stuck due to a lack of approval, and the return made usually comes in the form of debt. The titling issue of lands in India is a significant obstacle to overcome, with billions of dollars waiting to come into the country, but the government has not defined them in such a way to encourage foreign investment. 

To address these challenges, developers may need to consider a hybrid funding model that includes both equity and debt financing. This can help to spread the risk across multiple parties and ensure that everyone has a stake in the success of the project. Developers are now expressing increasing interest in creating their own alternative investment funds (AIFs) in order to secure funding for their projects.

The Future of Acquisitions

The real estate sector needs to thrive for India to attract the required level of investments. Approvals have been put on hold for more than two years, and the country is capital-starved. Land prices are escalating, and the dollar depreciation is further exacerbating the situation. Developers must find a source of capital for funds, ensure that landowners do not lose out, and adopt equity-type early investing to avoid losses. The government must also define land titles and make efforts to further facilitate foreign investments to ensure that the real estate sector continues to grow and thrive. 

With the right approach and support, the Indian real estate industry can overcome these challenges and continue to grow. GRI events provide the perfect platform to come together and share the insights that can only be gained from belonging to a powerful network of industry leaders in order to achieve success. We will be holding a number of events in the coming weeks and months, to find out when the next meeting will be taking place you can consult our calendar here, and be sure to register to attend the biggest real estate event in the country - India GRI 2023, taking place on 20-21 September in Mumbai.

Written by Rory Hickman