Why Land is Becoming Important in Portfolio Management Strategies

Back in 2007, The Times of India ran a story on the ‘sudden millionaires’ of Gurgaon. This was a story of landed farmers who used to earn ₹15,000 per acre in a year through farming. Their acres were suddenly valued at over a crore in rupees back then, thanks to the sudden development of Gurgaon. Today, this could be as high as ₹25 crores in certain areas of the satellite city. Land in Gurgaon is quintessentially a long-term investment success story.

As the Gurgaon story gets replicated in many cities to varying degrees, the importance of land in portfolio management is undoubtedly becoming prominent. The government reforms continue to evolve land into a lucrative long-term investment for Indians, while its advantages make it a worthy consideration in portfolio management strategies.

The Inherent Appeal of Land

An investment in a plot of land is much more than a sentimental sense of achievement. Here are some of the reasons why land holds so much appeal -

• Evergreen Demand - Land accounts for less than 30% of the world's surface, of which only about 43% is habitable. In a country with a growing population like India, land will continue to be a scarce asset with a finite supply.
• It Doesn’t Depreciate - Stocks and funds may rise and fall, while if you invest in real estate constructions, it will depreciate over time. However, land never depreciates. It can give 10X more return than ready apartments, according to a recent Colliers’ Advisory report.
• Multi-utility Asset - Build a dream home, use it for agriculture, rent it out for commercial ventures, or make it your weekend retreat - land is a flexible asset that can be used for a variety of purposes.
• Tax-friendly Investment - The capital gain tax on the sale of land can be exempt if the sale proceeds are utilised in investments prescribed under the tax laws.

Why Diversify Your Portfolio with Land?

Three primary reasons build a strong case for land as a portfolio management option.

1. Market Risks - Land and the real estate portfolio, in general, have very little correlation with other asset classes like stocks, gold and bonds. Market dynamics have a major impact on equities, whereas even gold traditionally maintains a reverse relationship with the equity market. Stable investments like bonds, too, are affected by interest rates. Land, on the other hand, maintains a steady growth. Rental income from your land, in fact, increases with inflation.

2. Long-term Investment Growth - The stable growth makes land an excellent portfolio diversifier. From a portfolio management perspective, it mitigates the market risks involved in investments. For instance, despite the high inflation rate of the preceding year, early March 2023 saw a significant rise in land prices in all major Indian cities.

Even from a long-term investment perspective, land delivers a steady and assured growth that few other assets can guarantee. Long-term investments in land in different places across India have all shown respectable returns, as can be seen in the table below

3. Ease of Investing- Land in India has not been an ‘easy to invest’ asset till recently. However, government reforms and administrative mechanisms have shown distinct progress towards making the land an easy investment.

The Digital India Land Records Modernization Programme (DILRMP) is eliminating the existing lacuna in the land investment process with aggressive digitisation. This will make the tedious land verification process a thing of the past and make land purchases hassle-free. Land records and registries are being computerised across the country, while revenue courts are being digitised to integrate land records. There are even talks of shifting the burden of proof in land ownership from the title holder to the government, as seen in the model Land Title Act drafted by Niti Aayog.

The Portfolio Management Decision

The perennial advantages of a long-term investment in land are complemented by the strong growth trajectory that land prices command in India. The digitisation of land records and registries in India is making it easier for investors to bookmark land investments as an essential long-term investment option.