India expert Dr. Wamser, managing director of Dr. Wamser + Batra GmbH, about real estate in India.
The current real estate situation in India is problematic; short: The availability of land is generally low and the prices are very high, even by international standards.
While the size of the subcontinent may tempt an outsider to assume that the availability of land in India is virtually “infinite,” in reality it is very small. This has the following reasons:
Land use planning: no commercial uses for many properties
The majority of India is still undeveloped and undeveloped, so at least theoretically there is an extremely large number of potential properties available. However, this is mostly land that is a) unclassified or b) classified as “agricultural land”.
Indian land use planning does not permit the establishment of industrial/commercial uses on land that is not classified or classified differently. Although a “reclassification” can be carried out, the time required is often unplanned and the outcome is extremely uncertain. In short: Buying such a property still involves major time and financial risks for the buyer. In the past, it has actually often happened in India that purchased properties were not approved for the intended use and thus became practically worthless for the buyer, or that the entire project was delayed for several years because construction of the factory hall did not begin could.
Therefore, it is often the “low-priced” offers where the corresponding classification problem could arise. German companies in particular often experience unwanted surprises because the seller did not inform them that the property was agricultural land before purchasing the property. Incidentally, this is based on the different legal interpretation: the “caveat emptor” principle of Anglo-Saxon law leads, for example, to the need for due diligence before purchasing a property (the buyer has a “duty to provide information/research”), while in the German legal understanding the seller of the property property has a pre-contractual obligation to provide information.
An example from Chennai
A plot of land that has been classified as “Industrial Land” and approved for use as a production facility for an automotive supplier costs EUR 50 per square meter. The neighboring property, with basically the same infrastructural connection, only costs EUR 18 per square meter. However, the temptation to choose the cheaper property can have fatal consequences if, after the purchase has been completed, it is discovered that the land is unclassified and the use intended by the buyer is not subsequently permitted.
Commercial property & industrial property
In practice, buyers often try to create “facts with stones” (“Once the factory is built, I will receive approval afterwards”) or sellers reassure the ignorant buyer (“You have to start building before you you can apply for a building permit). However, it is usually not taken into account that this approach makes oneself extremely vulnerable to the authorities, which almost always leads to considerable covetousness among the officials involved (= risk of corruption) and/or the authorities remain “tough” and the structures created accordingly have to be demolished.
However, in many cases it is simply no longer possible to buy “industrial land” at a particular location - simply because there is no longer any free industrial land there. In these cases, the buyer must either take the corresponding risks or prevent the (entirely cost-relevant) negotiations with the authorities involved from being carried out before the purchase is completed or an “exit clause” is incorporated into the purchase contract that allows the purchase to be reversed in the event of non-approval.
Be that as it may, buying “industrial land” not only provides security, but also increases the price of a property due to the gain in “planability”.
Land registry: Unclear ownership of real estate
A particular difficulty is the inadequately developed land register system. Although there are often local “land registers” kept at village or city level, these were and are not kept with the same level of precision as in Germany. Therefore, before purchasing a property, it is often unclear what the exact ownership structure looks like; In short: Who is the owner and therefore the legitimate seller?
Examining the ownership structure over at least the last 30 years is not only difficult and time-consuming, but the outcome is also uncertain. It has actually happened to larger international companies that they started building on their property and shortly before completion, a farmer from the neighboring village was able to credibly demonstrate that the exact area on which the new administration building now stands was inherited from his grandfather became. A situation that not only costs a lot of nerves, but also usually costs considerable money (negotiations with the farmer).
“Quality” of the property
The “quality” of the properties differs significantly more than in Germany. Although there are central and developed or remote and undeveloped areas in Germany, the disparities are much more pronounced in India; In short: 95% of India is out of the question as a location from the start!
This not only depends on the fact that the infrastructural connections (long-distance roads, etc.) are inadequate in most regions, but there are also other aspects such as:
- Availability of management and skilled personnel – would potential skilled workers from other parts of the country/cities in India be willing to relocate to the location?
- Accessibility for customers and suppliers, but also for employees at the head office (e.g. when technical support is required)? The question of accommodation (hotel/guesthouses, etc.) should not be overlooked either.
It should be noted in this context that the “quality” of real estate not only drops dramatically between the metropolitan area and villages 400 km away, but that a corresponding drop in quality can also occur within just a few kilometers.
An example from Pune
An industrial space in the immediate vicinity of Pune can currently cost over EUR 150 per square meter (e.g. in the Pimpri industrial area in the vicinity of Tata Motors and Daimler). Just 48 km further south (still in the Pune area) a comparable property costs only EUR 18 per sqm. However, the transport connection here is already so bad that leading employees from Pune are not prepared to drive to the factory premises every day. An initially hoped-for cost advantage quickly turns into a location disadvantage.
In practice, the aforementioned facts lead to the following results:
- Often it is not the “price” factor that decides a company’s choice of location, but rather the “availability” factor.
- The "price structure" of India's real estate situation is not only far more complex than most outsiders assume, but is further exacerbated by the aforementioned problems, so that a "one-to-one" comparison of property prices in India is not possible.
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