How does land banking work in India’s real estate market?

We get an expert’s view on how land banking – the process of aggregating several parcels of land for future sale or development – impacts India’s real estate market and the benefits that it offers to developers and landowners

What is land banking and how does the business of land banking work?

Land banking is the practice of aggregating parcels or blocks of land at current market rates or lower, for future sale or development. A land aggregator aggregates land by tracking the geographical and topological locations, which are primed for investment, based on social infrastructure and demographic factors. Generally, the land originates to the aggregator in an unprepared format, wherein, he prepares the title reports, property boundary, zone regulations, conversions, registrations, approvals and sanctions for the land, after which, the land is primed for sale or development. Land aggregators buy land, wait for the land value to appreciate and then, sell the same to developers, investors and other interested parties for a substantial profit.

Organizations that engage in land banking

1. Federal, state and local governments:

Government agencies use land banking to support long-term civic planning or to support future economic development. Municipalities gain and hold ownership of land to be used for new roads, metro stations, hospitals, schools, parks or for economic or residential development efforts.

2. Businesses

A city’s master plan, which outlines the infrastructure that is planned for a region, can serve as a guide to plan the procurement of land. The aggregators can purchase and hold undeveloped or pre-developed land parcels, which expected to increase in market value, for long-term business gains.

3. Universities and non-profit entities

Universities and non-profit entities purchase land for future growth and/or expansion in public interest.

4. Individuals

Owning properties, including land, provides a sense of security. Individuals can use land as wealth creation vehicles, either for their retirement plans, to pay for their children’s education, or to create a family legacy.

Land banking models in India

Buying and selling model: In this model, the land aggregator will buy land from the primary landowner and sell it to a third party.

Joint development model: This is a popular development model, adopted by most of the landowners, wherein, the landowner and developer combine their resources and efforts. Under the joint development model, the landowner contributes his land and the developer assumes the responsibility of development.

Land leasing model: This model is generally adopted for a long lease of the property, where landowners offer the land without any development. Mobilizing land through leasing contracts is less expensive than through the buying and selling model. Here, the land aggregator works as a middleman between landowners and the third party, to process lease contracts, provide guarantees to the procedure and to process the mobilization of land.

Key factors deciding the location of land banking

Land: The land should ideally be stable and usable.
Title: The land should have a clear and marketable title.
Connectivity: The land should be well-connected (present and future) by road, rail, sea and air.
Social infrastructure: Public infrastructure related to health, education, housing, transport and civic amenities, should be available in the vicinity.
Availability of amenities: The land should have easy access to general amenities (present and future) such as water and electricity, among others.
Educational institutes: Existing (or upcoming) schools and universities.
Growth factors: In-line with demographic, geographic, civic and industrial growth.

In addition to the above factors, the surrounding commercial and residential development around the property, are also major factors in land banking.