Land acquisition money-spinner for realtors

NEW DELHI: Real Estate companies are making a killing even in the land acquisition process. As they announce plans of setting up projects in a particular area and start buying real estate, land prices in and around that area normally shoot up in anticipation of the development.

This usually leads to a huge difference in the price at which the developer buys the first acre and the last acre. However, as his average land acquisition price is much less than the final market price, he makes a substantial notional profit.

Consider this. A well-known developer recently acquired about 100 acres in Delhi’s Najafgarh area. Initially, the company paid Rs 25 lakh per acre and, but the last deal materialised at Rs 1.25 crore. Despite escalating land cost, the company was able to complete the acquisition for about Rs 40 crore, whereas the land is valued close to Rs 125 crore.

Analysts say both listed and unlisted real estate players are benefiting from this phenomenon. “Since the sector has higher gestation periods, increasing land prices is the best way to keep valuations growing. Real estate companies anyway attribute a major part of their valuation to their landbanks,” said a source in the share brokerage business.

Having a continous land procurement process is also the most critical function for unlisted companies looking for equity investments. “Foreign investors would also calculate your valuation based on the current price of the land under your possession.

The actual investment made towards procurement of this land is clearly not his concern. So, a developer would get a much better deal if the land procurement is right,” says Paras Build-Call COO Rajinder Takhar.

The Delhi-based firm is in talks with 2-3 foreign investors for raising equity. Most real estate companies have amassed thousands of acres in various parts of the country, even though they may not be developing all these properties at the same time.

As per their disclosures in September 2006, both DLF and Unitech, the two leading players in the sector, had a landbank of over 12,500 acres. Sources say that both these companies now have more than 20,000 acres.