Part 2 : Hurdles to land banking

In part 1, I wrote about the rapidly evolving landscape of Indian real estate and how land banking emerges as a pivotal yet intricate strategy. This practice, which involves the strategic acquisition and holding of land for future development or sale, is a cornerstone of the nation's economic growth. However, the sector is ensnared in a web of complexities that poses significant challenges to investors, developers, and the broader economy. Understanding these challenges is crucial for navigating the multifaceted realm of land banking in India.

One of the most daunting challenges in Indian land banking is the overwhelming prevalence of legal disputes. Land-related issues form a substantial portion of the cases clogging Indian courts. A staggering 25 percent of all cases decided by the Supreme Court involve land disputes, a third of which are related to acquisition. Moreover, land or property disputes account for two-thirds of all civil cases in the country. The protracted nature of these legal battles is concerning, with the average land acquisition dispute taking around 20 years to resolve from its inception to a Supreme Court decision. This situation not only slows down the pace of development but also creates an environment of uncertainty and risk for investors and developers alike. A majority of these cases arise from improperly maintained land records, the same property being sold twice resulting in contested rights, and inheritance claims resulting in disputes.

Another significant challenge is market volatility. The real estate market, by its nature, is subject to fluctuations influenced by a multitude of factors, including economic conditions, policy changes, and global events. The 2008 global financial crisis is a prime example of how external economic shocks can have a profound impact on land banking investments. Such unpredictability can lead to substantial impermanent financial losses for investors, especially those who fail to anticipate these market downturns. These swings in value result in longer investment cycles and even loss of monthly revenue from rental.

Adding to the complexity is the issue of liquidity. Land, in its undeveloped or developed state, is typically not a liquid asset, making it challenging to convert quickly into cash without potential loss. This becomes a considerable concern for investors and owners, particularly in situations where land earmarked for development / urban expansion/infrastructure projects remains stagnant due to delays or litigation.

High entry barriers also pose a significant challenge. Land banking often requires a substantial initial capital investment, making it an inaccessible venture for smaller investors. This issue is compounded by the costs associated with legal due diligence, documentation, and ongoing maintenance, which can be prohibitive and deters entry into the market.

Environmental and social impact concerns are increasingly at the forefront of the challenges facing land banking in India. Unplanned or poorly executed land banking can lead to environmental degradation and social unrest, as seen in controversial projects like Lavasa City in Maharashtra. The need for sustainable and socially responsible development in land banking is more critical than ever.

The sector is susceptible to information asymmetry and fraud risks. The infamous Telgi stamp paper scam, though not directly related to land banking, underscores the vulnerabilities in sectors where one party may have more or better information than the other. Such scenarios can lead to fraudulent activities, including the sale of disputed lands or lands with unclear titles, eroding investor confidence and trust in the system.

Land banking in India, while offering significant opportunities for growth and development, is fraught with challenges that require careful navigation. These challenges, ranging from legal disputes and market volatility to liquidity issues, high entry barriers, environmental concerns, and risks of fraud, underscore the need for a more robust and transparent system in land banking. Understanding these challenges is the first step towards devising effective strategies to overcome them, paving the way for a more efficient and profitable land banking sector in India.

We at Rooba.Finance have been assisting one of the largest land aggregators in the country, @Ram Rattan Group over the last 6 months to digitize and make investable an INR 1300 crore land banking project. This project to tokenize agricultural land spans over 900 acres on the strategically located Delhi-Mumbai Industrial Corridor. We have been conducting a PoC so far behind closed doors but now we are excited to show you the results.

Aren't you curious how we have solved their previously unsurmountable problems?

Follow for part 3.

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