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| November 04, 2016 |
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Impact 
Everybody dreams of owning their piece of paradise on this beautiful planet. But whatever is scarce, commands a premium. Hence, buying property can be as tricky as the purchase of equity shares. Can you a bet on a company that is doubling its losses (Yes! You read it right) every year for past 5 years? The most seasoned value investors on Dalal Street may not have the courage to make such investments.
Similarly, under the present scenario, would you prefer to buy a plot of land in Syria or South Sudan? Potential buyers might give these proposals a miss, even if you offered them hefty discounts. Well, there's nothing wrong with the countries mentioned above, only that, they are facing a socio-political upheaval which has increased a lot of uncertainties about their future.
These are extreme examples of bad investments and declining them are a no-brainer. What's harder to understand is the most subtle risks associated with investment propositions. Usually, a land parcel in popular areas, residential or industrial hubs will quote at astronomical valuations, as everybody (with money) will try to carve a share on the available land. But what about those who want to buy property on a tight budget? You will find a number of such potential buyers around you (and probably one within you).
So someone with similar expectations seeking to buy land as an investment would be value driven. He/she will primarily try to assess what is the scope for the development of the locality in future.
Peep into the past and try to recollect how land pieces on the outskirt of your city got developed and try comparing their prices 20 years ago vis-à-vis valuations that they command today. Many people actually think such history gets repeated regularly and try buying properties in many remote areas which don't show any sign of rapid development. They hope that one day things will change, as they are bound to. However, this might well prove to be hoping against the hope.
Before you read about the common mistakes, many people make while buying a plot of land, first know what are the risks associated with investing in a piece of land.
Here are the risks…
The biggest risk is illiquid nature of such investments. Imagine you bought a plot of land in a remote village 100 Kms away from a metro city, thinking that you would successfully sell the plot in next two years. Contrary to your expectations, it could very well happen that, the area you have bought property in may remain as underdeveloped.
What if your assumption goes wrong? You would struggle to find a buyer and instead of having an asset, as precious as a piece of land, you might have to face financial difficulties.
So the rule of diversification applies here too like it does in case your equity and mutual fund investments. Instead of buying a large plot just in just one locality try purchasing smaller plots at 3-4 places, if your resources permit you to do so.
This needs a special mention
When you are buying a plot, you run a significant risk of encroachment. Unless you understand the social and cultural environment of the locality/village where you are planning to buy land, don't venture into any deal. Please don't forget, you are not going to be present on the site to patrol your territory. In such cases, at times even legal assistance doesn't help.
The success of your investment in a land plot is subject to your assumptions turning out to be true about the development of the area. A lack of development or simply a lack of interest of other investors to buy in that market would severely restrict your chances of making money. Therefore, don't depend on your investments in land for fulfilling short-term financial goals.
Make a note of this in your diary
The seller of the property or his agent may show you documents to prove that the title of the land is clear, but do verify such claims more than their face value. Try to cross-check their details with the Government records. Getting such information is not very difficult for a person like you, who is educated and internet savvy. Spare some time to check e-records.
For example, if you are buying any plot in Maharashtra, you may visit; https://mahabhulekh.maharashtra.gov.in/ and try to test the authenticity of the information provided to you by the seller.
Buying land exposes you primarily to the risk of
- Fraud
- Encroachment
- Illiquidity
Now read about the common mistakes…
First and foremost, many naïve buyers don't understand the difference between a farmland with irrigation facilities and a land that has development permits. Agricultural land will quote a lower rate than a residential plot. So first and foremost, before you get lured into buying a land parcel because of its lower bid price, know whether it's a residential plot, agriculture plot with irrigation facilities, or a dry land plot. Among these, buying a cultivable plot with irrigation facilities will be the trickiest.
And here's why…
Re-classifying such areas into residential properties is the toughest job.
Many builders operate on a unique model, they don't construct residential complexes, bungalows, row houses, or commercial establishments. They only buy a large land bank (often agricultural plots) convert them into smaller plots and sell them off to many buyers.
If you are purchasing a plot from any company/firm doing similar business, be alert. They often don't disclose some material things such as who has sanctioned the plot layouts. Those who mention, more often than not, get them approved by the local authorities such as gram panchayats. Now be ready to receive a 1,000-volt shock. The gram Panchayats don't have powers to approve such plans. Make sure, the scheme is approved by the appropriate state development authority.
If you are buying a farmland hoping that you will be able to convert it into a Non-Agriculture (NA) later, that is nothing short of living in a fantasy. There will always be shortcuts that demand greasing palms of some people, but the actual procedure for such conversion is not as easy as it is portrayed.
States have their own systems for classifying land under a particular head and therefore, any re-categorisation would require you to follow a set of prescribed procedures. Ask yourself, do you have a temperament and the patience to deal with the bureaucracy?
Once you clear this hurdle, you must ensure there are no title issues and all legal heirs, if any, have a consensus on selling the land to you. If there is any lack of clarity or you feel the seller is dodging your questions on potential claims, raise a red flag.
Last but not the least, if you are buying a plot with an expectation that you will sell it when it appreciates in value, pay close attention to how serious the Government authorities are about the development of that area.
Things to look for…
- Who has authorised the re-classification of land from Agriculture to NA
- What are the prospects of development in the area in which you are buying a plot
- Authenticity of the documents produced by the seller to claim the clear title
- Social environment of the locality
Land ownership can be a matter of pride but it can be a root cause of big headache too. Deal with caution.
PersonalFN believes, you should assess your risk appetite before committing your hard-earned money. Those with low risk appetite may refrain from investing in plots.
What, according to you, should be done to make land deals more transparent in India? Share your view here Facebook | Twitter
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Impact
One advertisement campaign that every Indian will always remember is –'Isko Laga Dala Toh Life Jinga La' run successfully by Tata Sky--Direct-to-Home (DTH) digital satellite television service provider. Tata Sky was one of the pioneering companies that popularised DTH services in India. And 'Jinga La La'- a word which in itself has no meaning, helped a lot to simplify the benefits humorously.
Big stars of Bollywood—Mr Amitabh Bachchan and Mr Aamir Khan who worked in this brand's commercials, made its appeal more favourable. In one of the commercials, Mr Bachchan explained how Tata Sky can offer you a wide variety of channels that would go well with the taste of people of any age group, while in the other Mr Khan made a reference to the winning combination of Tatas and '21st Century'. Of these two, one symbolises technological supremacy, while the other is used synonymously for 'trust' in India.
Tatas are known for making partnerships and entering joint ventures with people and companies that share their passion for excellence and integrity. This why the tryst of Tatas and Mistrys was a hot topic about four years ago when Mr Ratan Naval Tata handed over the charge of Tata Sons to a non-Tata person—Mr Cyrus Pallonji Mistry.
The committee appointed for finding the successor of Mr Ratan Tata had handpicked him. Mr Cyrus Mistry comes from the Shapoorji Pallonji group that holds 18.4% stake in Tata Sons— a holding company that owns controlling stake in all Tata group companies. An introvert by nature, Mr Cyrus Mistry, took a while to make his mark but he chartered his way with a high resolute and aplomb.
When everything started looking 'Jinga La La', the news of Triple Talaq rocked the world. Mr Cyrus Mistry was asked to establish a 'direct-to-home' connection. He was ousted from the top-most position with immediate effect. Although as a temporary arrangement, Mr Ratan Tata made a comeback.
Nowadays, people use two remote controls—one to switch a TV on-off and the other to surf channels, thanks to digitalisation. However, nobody anticipated that the Tata group of companies were being operated by two remote controls. The ease with which one of the most powerful business groups of India could expel Mr Mistry gives you a sense of the existence of two parallel power houses.
Are there any governance issues at Tata companies?
The official statement suggests that Mr Mistry was removed for the reason of bad performance. However, a fair assessment suggests that one can't blame Mr Mistry alone, considering the problems he inherited from the previous Chairman.
When he took over as the Chairman, the group was facing issuing about the bad allocation of funds. Nonetheless, the Shapoorji Pallonji group can't absolve itself from the responsibility of decisions that were taken when Mr Ratan Tata was the Chairman, which subsequently proved to be wrong. Weren't they one of the major shareholders when Tata Steel clinched the Corus deal? Accusing Mr Mistry for streamlining operations is equally questionable too.
To make matters worse, Tatas and Mistrys took potshots at one another after the forced exit of Mr Cyrus Mistry. There was a rumour on the market grapevine that Mr Cyrus Mistry might drag the Tatas to the court over his dismissal. Nothing significant has materialised as yet.
The Tatas are keeping tightlipped about the succession plans of Mr Ratan Tata. Rather than resolving questions that bog down many Tata group companies at present, the expulsion of Mr Mistry gives rise to more questions. Tata Sons is an unlisted holding company which is answerable only to a handful of shareholders, however, as it controls the entire empire of Tata group, investors are all ears as to who will take on the Chairman title of Tata Sons.
To read more about this story and Personal FN's views over it, please click here.
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Impact
Some people forget to pay their credit card and utility bills. Their intent is not to default on the due payment, but it simply gets forgotten in the daily scheme of things and they pay the penalty. But imagine when people even forget about their investments as well. What's the result? They tend to lose because of their negligence. For example, many people fail to claim their Employee Provident Fund (EPF) benefits.
These days, people often switch jobs. Ideally, you should transfer your PF account when you change your job, but some individuals prefer to open a new account and leave the older one idle. From the Financial Year (FY) 2011-12, inoperative accounts lost the benefit of earning interest. Any account that doesn't receive contributions for more than 36 months is classified as an inoperative account.
The above given table highlights the exposure of investors who are over 1% of the total market capitalisation of Tata companies. However, that doesn't tell you how much is the total exposure of a particular investor? For example, as per above given table, if you only consider investments of HDFC Mutual Fund which constitute 1% plus exposure to any Tata group company, the market value of such investment stands at Rs Rs 2,781.56 crore as on October 26, 2016. However, the total exposure of the fund house is to Tata companies was Rs 4,522 crore as on October 28, 2016. This implies that mutual fund houses are picking up companies as per the merits of underlying businesses. They are allocating more money to the companies they are more confident about.
This practice will change soon…
However, there wouldn't be any such classification from now onwards. The Government is in the process of putting out a notification to clear the way of Employees' Provident Fund Organisation (EPFO) to make the payment of 8.8% interest even in inoperative accounts. Inoperative accounts collectively have a balance of Rs 42,000 crore, as per the data published by the Labour Ministry.
To read more about this story and Personal FN's views over it, please click here.
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The days of long wait to receive Employees' Provident Fund (EPF) claims are over. EPFO has issued directives to its field officers asking them to settle death claims within 7 days and retirement claims before an employee bids adieu to his office. In another development, the certificates submitted by the 50 lakh pensioners will now be linked to Aadhaar.
People had criticised EPFO for its red tape on social media. On this backdrop, initiatives taken by EPFO are worth having a mention of.
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Liquidity Risk: Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
(Source: Investopedia)
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Quote: "Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth."- Theodore Roosevelt
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