Industrial Real Estate – A Treasure?

We recently came across some assignments in industrial area and that gave the way to this post. We thought of accessing this area as an option of investment and after analyzing, we came up with many interesting conclusions.

What is Industrial Real Estate?

All the land and properties located in the manufacturing zone of a city/town can be categorized under the category of Industrial Real Estate. This includes:

• Industrial Land
• Industrial Sheds
• Industrial Storage Spaces
• Industrial Laboratories
• Industrial Offices, etc.

In simple words, each and every realty asset class, related to the production/manufacturing of goods & located in the Government-specified industrial areas comes under the periphery of Industrial Real Estate.

What if you don’t have any industry/production unit?

This is the main issue that every investor faces while investing in industrial area. Even we were facing the same issue from a long time and now we are hunting desperately for an industrial asset. Let’s see what made us change our mind.

1	Unprecedented Rental Returns	As has been our philosophy, we pay equal heed to rental returns as appreciation returns; we were astonished by the potential of industrial properties in this aspect. An industrial land is capable of paying a rental return to the tune of 200% more than an equivalent investment in residential property. Take for instance, an amount of 5 million INR invested in residential property in India will yield a rent in the range of 8K-12K INR per month; while an equivalent amount invested in industrial area will yield anywhere between 20k-25k INR per month.
2	Huge Asset Creation	Industrial property transactions are dealt in square meters rather than square foots or square yards. The reason being, land is relatively cheaper in industrial areas and the availability is abundant. Hence once invested in an industrial area, you will have a huge asset created at your disposal.
3	Future Option	In case you or your heirs think of moving into the manufacturing sector, you won’t have to worry as you will have your own land to start the production unit on. Of course this reason looks stupid and insane but trust us, sooner or later most of us faces this issue. We want to start our production unit, but are inhibited due to the land scarcity issues.
4	Steady Land Appreciation	Also for our readers who are motivated more by the value appreciation rather than rental aspects, industrial real estate provides awesome prospects. Industrial land appreciates at a slower but steady rate and at the end of a period of 5-10 years; one can expect handsome returns on his investment.

How can I invest in this arena?

Simple,

• Look for a cheap land on a property portal on your city and grab a decent amount, in the range of 1000-5000 meter squares
• Get 2-3 sheds constructed of about the size 300 meter squares each
• Put up your property for rent and enjoy the spectacular returns for life!

What are the risks in this type of investment? <link> 

• You may be unable to find a tenant for your property: No issues, you have an asset and sooner or later you will find one.
• Too much investment upfront: Think of it this way – which other asset class promises you the same passive returns on same investment?
• Land may get acquired by government if unused: More reasons to cheer up in this case as the new land acquisition law provides more than awesome returns upon acquisition.

Closing Thoughts

We have surveyed a lot in this arena and have come up with the above conclusions. This was the only reason that we took so much time to write this post. After our research and analysis, we feel that we made a big mistake by not investing in this sector earlier. But this is our understanding; you may definitely differ here.

------ Thanks for reading RealT Horizon J ------

Land Acquisition Act (LARR 2013)

 After a hiatus of about 120 years, Government of India has finally brought in a new bill in Real Estate sector:

“The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013” (LARR)

This bill has a lot of changes, improvements & additions over the existing Land Acquisition Act of 1894. And as the name suggests, LARR primarily caters to the issues of rehabilitation & resettlement on top of land acquisition norms. To understand the bill clearly, let’s first see what the older Act was all about.

Land Acquisition Act, 1984

The Act of 1894 was focused on the providing compensation to the owners of acquired land for any of the following Public purposes:

• Village/town development
• Habitation for landless people
• Education development by either state or authorities like society/co-operative societies
• Development of a government corporation

Issues with Act of 1894

This Act had provision of acquiring the land only by the government or government-allied agencies. There was large scale critic of this Act and a demand to bring in new law due to several issues. Some of them are:

• The Land Acquisition Act of 1894 did not speak about the rehabilitation and resettlement of the displaced landowners
• The compensation paid to the landowners was not appropriate in some cases and over-valued in others
• Many a times, the ‘Public purpose’ was questioned to be genuinely public
• There was no provision in favor of landlord if the acquired land was not used for the purpose for which it was acquired or resold after appreciation in the value
• There were issues while acquiring land for PPP (BOT) projects by Private agencies

To do away with these and several other issues, LARR was formulated and approved in the Parliament in September 2013. Let’s have a simplified overview of LARR.

Land Acquisition, Rehabilitation & Resettlement Act (LARR 2013)

LARR is an enhancement and revision of the Land Acquisition Act of 1894. Like the older Act, LARR also lays protocols for compensation in lieu of the acquired land for Public purpose projects. The definition of Public purpose projects has been modified though. According to LARR, now the land can be acquired for following purposes:

• Development of villages/habitation area for landless/displaced people
• Development of government hospitals & infrastructure facilities like educational institutions, hotels except the private undertakings
• Development of government owned/affiliated tourism, sports club, space programs, cold storages, processing units and manufacturing units
• Purpose of national defense & security
• Other government administered projects for the development of region

Salient features of LARR

• Provisions for Rehabilitation & Resettlement of displaced land owners of acquired lands apart from the compensation awarded
• A one-time subsistence allowance equal of Rs. 36,000; construction of a new house in urban land if the house of the owner is lost
• Award of livelihood job, transportation costs and a series of other compensation benefits over the land valuation
• Minimum 80% landlords’ consent for the acquiring area by Private firms & 70% in case of PPP projects
• Clause of safeguarding the climatic aspects by monetary compensation in case the land acquired belongs to a cultivable belt of multi-cropped or single-cropped region
• Compensation to the tune of 400% of market value in rural areas to 200% in urban regions
• Assessment study of Social Impact & notification of acquisition intention by the developer
• Provision of paying the landlord, a sum equivalent to 40% of the land price appreciation, if the land remains unused and sold after 5 years of date of acquisition
• Fixing the timelines and enforcing more strict guidelines of acquisition
• Formation of governing committees at 3 levels: Centre, State & Project Level

Issues with Act of 2013

Many activists, industrialists & people advocating vote in favor of manufacturing sector have raised following concerns against R&R:

• R&R will halt the growth of Indian economy by discouraging the infrastructure projects by PPP projects
• The new Act will give undue power and advantage to agricultural sector and will result in cartelization against industrialization
• Ambitious projects like DMIC, East-West-North-South Road Corridor etc., which require large scale land acquisition will come to a standstill
• This Act is just to generate a vote bank from farmers living in the rural India
• FDI in Real Estate will be deflected to neighboring nations who provide cheaper and hassle-free acquisitions for Infrastructural projects
• Land prices will decline as sellers will not be able to find buyers

Our Views

After a lot of discussions and brain-storming over the above mentioned Act, we at RealT Horizon have come to following conclusions:

• LARR provides unmatched compensation benefits, monetary & non-monetary, to the landowners. So much so that rather than opposing the acquisitions, landowners will now look forward to one so as to make easy fortunes for rest of their lives. Ideally this should not be the case as this will also hamper the Nation’s productivity.
• From the point of view of Manufacturing Sector, there could not be a worse Act for them. As explained above, this sector will experience the most severe blow by this Act. The project costs can increase from 9% to 110% in some cases.
• But one has to agree that in the existing scenario, there is no way out that landowners can raise their concerns of land acquisitions. Developers and Government have already exploited the owners for a very long time and with the advent of this bill, at least this will come to an end.

As per our philosophy of looking at the Real Estate from a new angle we believe that this bill was necessary, but with some lenient clauses. R&R will way too much affect industrialization, which is the prime need of the hour for the nation.

------ Thanks for reading RealT Horizon :) ------