Major Factors Affecting the Economic Development and Industrial Land Valuation of a Region

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1 Major Factors Affecting the Economic Development and Industrial Land Valuation of a Region Mahesh M Thakur Pacific University, Udaipur (mmt.mcgm@yahoo.co.in) Suchismitaa Sengupta IES Management College and Research Centre (sensmita123@gmail.com) The Valuation of Industrial Land is affected by infrastructure, amenities, various tax benefits, affordability and location. If all these factors are properly planned and implemented then one may get value of money in terms of industrial development. The road infrastructure projects increase the mobility and quality of life. The transportation investment and various government policies also boosts productivity and the economy. Land is a premium asset, which is a major source of revenue to the Government. The Mumbai Pune Nashik Corridor was selected for studying the effect of various factors in Industrial Land valuation. 1. Introduction Valuation is defined as an opinion of an expert who assesses the worth of an asset, be it a property/ machine/gold or any other item. By valuation, the present value of land/ property is determined. In every valuation, land is one of the important components of valuation. The lands may be with single ownership or joint ownership with others or Hindu Undivided Family. Land may be defined as the balance available area of the Earth's crust after deducting the areas of the sea and the coastal land. This landed area may be classified asa. Agricultural lands, b. Non Agricultural land, c. Forest land d. Rocky and Hilly lands. The Non-agricultural land can be further classifies asa. Residential b. Commercial c. Industrial The agricultural lands in the periphery of a city or a municipality are likely to be declared as urban land. Broadly lands can be classified as urban lands and farm lands. The value of urban open lands residential, commercial or industrial primarily depends on the potentiality of their development by constructing appropriate structures over them. The valuation of farm lands are agricultural field output on the basis of which, people can earn their livelihood. The type of land is classified in the Development plan declared by the respective Municipal Corporation or Nagarpalika which is further weighted by respective State Govt. Object of preparing Development Plan is to use the land for the best purposes for which it is most suitable for e.g. residential, commercial, industrial, agricultural, recreational, etc. 2. Objective of the Research This Paper seeks to address following How is a Project or a policy intervention worthwhile from overall point of economic development? What is the gain or loss to the society especially for poor and middle class? Is an infrastructure project economically sustainable? How the cost can be recovered? The extent to which the various factors play a role in social or economic benefits and on economic rate of return of a project? 3. Research Methodology 3.1 Literature Review In 1990, the Government of Maharashtra appointed Rites and Scott Wilson Kirkpatrick, UK, to carry out feasibility studies for the new Expressway which is operated on a toll basis. Rites submitted their report in 1994 with the estimated cost of the project at Rs1146 crores ($240 million). The Government of Maharashtra entrusted the work of the expressway's construction to the Maharashtra State Road Development Corporation Limited (MSRDC) in March 1997 on a Build Operate and Transfer (BOT) basis, with permission to collect tolls for 30 years. The total construction cost on completion was Rs Crores. The The road sector was declared an industry in 1994 and it was decided to amend the National Highway Act. This declaration if of great importance because this now allows companies to generate revenues through bonds, levy tolls and allow the private sector to participate in infrastructure construction on a BOT basis. It has also allowed 100 per cent foreign equity participation and given the rights to the private sector to develop services and rest areas along the roads. Companies involved in BOT projects can avail of a 100 per cent tax holiday for five years and a 30 per cent tax holiday for another five years. 139

2 4. Data 4.1 Vehicular Data As per the data collected through a RTI, the traffic on the Expressway comprises cars as highest in numbers, followed by trucks in vehicular traffic. Whereas in , the number of cars passing through the Expressway were 57 lakh (57, 67,023 to be precise), in , that number has increased to 79 lakh (79, 72,271 to be precise). As against this, the number of trucks (including ordinary trucks, three axles as well as multi-axles) was 25 lakh (25, 55,811) in whereas in , it increased to 27 lakh (27,328,818). Other vehicles using the Expressway include light commercial vehicles (LCV)-9 lakh in (9,53,540 to be precise) and 14 lakh (14,44,297) in As for buses they were 5.2 lakh (5, 28,441) in and 5.8 lakh (5,83,567) in Revenue Data MSRDC has estimated the per year toll collection on Mumbai-Pune Expressway as Rs. 61 Crores per year. However, a RTI application shows that between the toll collection has been around Rs Crores which comes to be around Rs. 140 Crores per year i.e almost 2.25 times the estimated toll collection. Data release shows that there is an increase in revenue by way of stamp duty, registration charges. Following table shows increase in revenue of Pune Municipal Corporation due to inclusion of the villages in Corporation Limit- Table 1 Increase in Revenue of Pune Corporation Amount of Income Sr No. Financial year Percentage increase (in crores) Rs8384cr NA Rs % Rs % Rs % Rs % (Source: After completion of Mumbai-Pune-Nashik triangle and shifting of Automobile industries on Pune-Nashik Road near Chakan there has been increase in Land Rates as seen below Table 2 Land Rates in Chakan MIDC Sr Year Industrial Plots rate per square meter Commercial Plots rate per square meter (Source: 5. Necessity of Valuation The valuation of open plot or any other property is required for the purpose of Income Tax, Wealth Tax, Banks and Embassies. For submitting annual returns in income Tax department, valuation is required for purposes of income & wealth tax. Even for the purpose of getting loan from banks and for showing assets to the embassies, the valuation is required. A Few main purposes for industrial land valuation area. Sale and purchase of property b. Hypothecation/ pledging of property for taking loans from financial institutions/banks c. Acquiring the agricultural land for public purpose i.e for laying of roads, railways, irrigation & power projects. Valuation is a continuous process as it gives an individual or a firm the real time value of its assets. 5.1 Methods of Valuation There are different methods of valuation viz. A) Abstractive Method B) Sales Statistics Method C) Comparative Method A) Abstractive Method: In the Abstractive method following are the three distinct steps are involved in this method: i) A nearby properly fetching rent is considered and its capitalized value is worked out by multiplying its net income by year's purchase (Say X). 140

3 ii) The estimated cost of the replacement of the above building is worked out and then, after making due allowance for the depreciation, a figure representing the cost of the building alone at present is obtained, (Say Y). iii) The difference Z= (X-Y) gives the value of the land and if A is the area of land, the cost per unit area = Z/A. The Abstractive Method is a type of Rent Capitalisation method useful where land transactions are based on the income from the land (especially in case of agricultural land) &in cases where there are no prior records of land sales available. B) Sales Statistics Method: In this method, the various transactions of nearby lands are properly studied and then a fair rate of land under consideration is decided. Thus, the comparative method will be useful only in case of an active market where there are large number of statistics available for comparison. The Valuer has to satisfy himself after a thorough inspection of all the underlying factors in the market that there have been no changes in conditions since the transaction took place. The element of time plays a vital role in this method. In case of volatile markets, it is found that within a very short interval of time, the evidence of sale chosen for comparison becomes unreliable. The revenue department or the Sub-regitrar s office will have sales statistics for the type of land being evaluated. The sales statistics of past 12 years leaving the periods of calamity. C) Developmental Method: This method is used for Lands which are not developed but bears potential strength to appreciate to a considerable value if converted to residential/commercial or an industrial layout depending upon the location, size, shape, frontage & depth etc. 6. Factors affecting Industrial Land Valuation 6.1 Major Factors i) Location: The value of land which is situated at proximity to Urban Areas will certainly be more than that of land which is situated far away from the towns. The location of the property is very important and it is quite likely that a slightly different location can cause a vast difference to the market value. The location is said to be a prime factor in demand for land. If the property possesses some special advantages because of its location or any other reason, the same should be considered while arriving at the reasonable rate of open land. For e.g in vicinity of industrial area where there are big manufacturing industries such as Automobile then the related small scale industries which are depending on big industries are attracted to that area. This also increases the demand of the land and thereby the pricing of the surrounding land. ii) Amenities: The valuation of properties with better infrastructural capabilities and modern amenities are costlier than those which fail to provide proper electric connections, telephone lines, water supply and sewerage facilities. Valuation of property is clearly based on the availability of necessities and facilities connected with affordable housing. iii) Infrastructure: Infrastructural development is one of the most important factors which influence real estate prices in India. The presence of roads, airports, flyovers, and public transport in the vicinity of the property, helps in value escalation of the same. It is a known fact that connectivity is one of the most important requirements for investors looking towards purchasing land or property. This leads to the concept which explains a rise in the valuation of property which is well connected to medical facilities, educational institutions, retail markets and business centers, along with other day to day facilities. The type of access road whether it is tarred or kutcha or concrete reaod affects the value of the land. The land approach on concrete roads attract better price than that of tarred road or kutcha roads. The revolution in transportation has made distance from the town no longer as much of a handicap as formerly on the basis of time saved. iv) Demand and Supply: Demand for real estate in a particular area is inversely proportional to its supply. As the supply or availability of real estate decreases, the valuation of property increases. Changes in population are the key drivers for demand. Along with an increase in the number of people inhabiting a particular area, the popularity of a particular locality in terms of people wanting to be a part of the locality also increases its price. v) Affordability: Affordability refers to the cost incurred by the owner in the process of enjoying or retaining a property. In layman s term, it is the term which establishes a relationship between interest rates, property prices and wages. If any of above three variables reach their maximum level in a particular area, then the inhabitants start looking towards a better lifestyle elsewhere. vi) Restriction on Development: The permissible floor space index or F.S.I should be studied for the plot to be valued and scrutinized. The plot of land having more permissible F.S.I. will naturally be sold at higher price as compared to the one having less permissible F.S.I. vii) Land-locked land: It sometimes so happens that a plot of land has no well-defined legal access and it is surrounded on all sides by plots belonging to other owners resulting in less value. viii) Encumbrances: The plots of land which are subject to the easement rights of natural air, light or passage will be less attractive to the prospective purchasers and depending upon the inconveniences caused, there will be reduction in values of such lands. 141

4 ix) Special Economic Zones & Tax Benefits: India was one of the first countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in In order to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of worldclass infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April as: The objectives of SEZs can be explained a. Generation of additional economic activity; b. Promotion of exports of goods and services; c. Promotion of investment from domestic and foreign sources; d. Creation of employment opportunities; e. Development of infrastructure facilities. The incentives and facilities available to SEZ developers includei) Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. ii) Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. iii) Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. iv) Exemption from dividend distribution tax under Section 115O of the Income Tax Act. v) Exemption from Central Sales Tax (CST). vi) Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act). vii) There were about 143 SEZs (as of June 2012) operating throughout India, by June 2013 this had risen to SEZs have been approved for implementation by the Government of India (as of June 2012). Software Technology Park scheme- It is an export oriented scheme for the development and export of computer software, including export of professional services. The STP Scheme provides various benefits to the registered units, which includes 100% foreign equity, tax incentives, duty-free import, duty-free indigenous procurement, CST reimbursement, DTA entitlement, deemed export etc.the tax benefits under the Income Tax Act Section 10A applicable to STP units has expired since March A new incentive scheme for IT & ITES companies is under discussion. At times the Local State Govt declares tax benefits for particular industrial development which also attracts the industries and in turn increase the demand of the land which helps in increasing the value of land. 6.2 Minor Factors i) Size: The size of plot also plays an important role in fixation of its value. The rate of a large land cannot be compared to that of a small land. Usually, there will be keen demand for plots of certain sizes in a particular locality. The rate of land with such sizes should be considered as the trend prevailing in that locality for arriving at the value of open lands under consideration. ii) Shape: People prefer to have land having regular shape. It is observed that plots of land with regular shapes will be sold at a higher price than those with irregular shapes. iii) Frontage and Depth: It is quite clear that the most valuable part of a plot of land is its street frontage and the value of rear portion of plot decreases as the distance from street increases. Usually, the plot of land is divided into three belts. The depth of first belt near the road is suitably adjusted. The depth of second belt is kept 50% more than that of first belt and the depth of third belt is kept 50% more than that of second belt. iv) Return Frontage: A corner plot gets an additional return frontage and depending upon the importance of intersecting streets or roads, there will be corresponding increase in the value of such plots. The corner plot has better facility of entrance and egress & gives more light and ventilation. In residential area, a corner plot gives wide scope for better layout of shops or offices with greater space for show-rooms and advertisements. v) Level: If the natural level of land is lower than the road level, considerable amount will have to be spent for filling and there will also be substantial increase in the cost of foundations. On the contrary, if the natural level of land is considerably higher than the road level, there will be difficulty in laying water / drainage lines and hence, the extra earth will have to be excavated to make the plot reasonably level. vi) Nature of soil: For lands with building potentiality, the bearing capacity of soil should also be considered. If the bearing capacity is adequate, the cost of foundation will be reasonable in proportion to the total cost of the building. If, however, the bearing capacity is poor, considerable amount will have be spent to make the structure stable. It is thus clear that the land with good bearing capacity will command more rate as compared to the land with poor bearing capacity. vii) Structure: The valuation of property is dependent on the specifications of materials used, layout, design, durability and life cycle of the building. The quality and cost of materials during construction, size, current rates of labor, were Saving in Travel time frontage and other physical attributes such as roof covering, height of the building, type of foundation, waterproofing and plinth level, also affect the price of a particular property. 142

5 7. Effect of Industrialisation in Terms of Revenue A Case Study of Mumbai-Pune-Nashik Corridor The State Govt first planned the Mumbai Bangalore Expressway in the year 1996 which was initially planned as a four lane corridor and was completed in Further, the State Govt expanded the Mumbai Pune Expressway from 4 lane to 6 lane in the year The major cities which covered this corridor were Navi Mumbai Panvel, Khandala, Lonavla and outskirts of Pune. i) The benefits of the Mumbai Pune Expressway ii) Saving in fuel consumption iii) Fast crossing of Khandala Ghat area iv) Reduction in pollution v) Economic Development through speedy traffic The total length of Mumbai Pune Expressway was 93 Km and the cost of the project was INR1500 Crores. This corridor further connected to the old Pune-Bangalore Highway and was passing through the villages which were at the outskirts of Pune City. The main source of income of these villages was agriculture and animal husbandry. However, with the proximity of new Mumbai Pune expressway these villages were transformed from agricultural lands to commercial and residential hubs. As it is due to the scarcity of rain the farmers were not happy with the agricultural income and therefore preferred to sell their lands. In the year 1990 to 1991 India was suffering from financial crisis because of its conservative policy therefore the then Prime Minister of India for foreign direct investment i.e Liberalisation, Privatisation and Globalisation (LPG). India started getting income not only from agriculture but also from service sector. India also started having the foreign technology and foreign investment helping the economy to rise. It also helped in reduction in price of goods which helped the consumers to buy a better product for e.g electronic goods. And most importantly the major boost for the Information Technology Sector as it was a service sector. It can be seen from the various statistics that during the period from 1991 to 2014 the IT/ITES and service sector had a major share of the FDI in India. It is pertinent to note that Maharashtra got maximum FDI amongst all the states in India. The sector-wise and State-wise FDI can be seen from the graphs below Maha Tmail State-wise Percentage of Foreign Direct Investment Inflow In India from 1991 to 2014 Total FDI in India from 1991 to Total Gujrat West Rajast Kerala UP, 27.2 Others Foreign Direct Investment in % age of Inflow Figure 1 State-Wise Percentage of Foreign Direct Investment Inflow in India from 1991 to 2014 Figure 2 Sector-Wise Foreign Direct Investment in India from 1991 to 2014 Source Figure 1 & Figure 2: (The Department of Industrial Policy & Promotion) 143

6 It can be seen that the maximum FDI is in Maharashtra which was to the tune of 30%. Sectorwise Service, Construction, Computer Software & Hardware & Automobile industry form the major sectors of FDI in India. The Pune district (especially PimpriChinchwad) was known as Automobile Hub of India and major Automobile players like TATA Motors, Ashok Leyland, Bajaj Auto were based in that industrial belt. As the FDI has increased over the years the Govt of India has started declaring Special Economic Zones (SEZs) for the industries. The Govt had declared various tax benefits to the industries based in SEZs. Around the year Hinjewadi a small village located on the NH4 bypass near the Mumbai-Pune expressway was declared as Information Technology Park. Due to this Major Indian and International IT Firms opened offices in Pune. Now known as the Tech city many Multinational corporation companies such as Capgemini, Syntel, Infosys are now operating out of Hinjewade. Pune is also C-DAC headquarters. Hinjewadi is now the seventh largest metropolis in India with a working population of around 5 Lakhs. Due to this development the land rates of the nearby villages has increased and in the year 2007 the villages like Baner, Wakad and Talawade were merged in Pune Corporation which has given the boost to real estate and construction industry. Out of the 30% share of FDI in Maharashtra 26% was in the belt of Pune-Nashik Road. During 2004 the Govt declared the Mumbai-Pune-Nashik as the Golden triangle and expressway connectivity between these cities was completed in the year In the year 2008 seeing the increasing demand of the international players in the automobile industry State Govt. declared Chakan as industrial zone for automobile and other allied industries. Originally Chakan has been a wholesale agricultural produce trading hub, mainly an onion trading center. Chakan is located 34 km from Pune City on the National Highway 50, between Pune and Nashik. Chakan is now home to a Special Economic Zone (SEZ) promoted by the Maharashtra Industrial Development Corporation (MIDC). It has since evolved into a major automobile hub. It hosts automobile production plants for the Volkswagen Group (INR 3000 CR), Daimler-Benz (INR 4000 CR), Mahindra & Mahindra (INR 4000 CR), Sandvik AB (INR 276 CR) and Bajaj Auto (INR 365 CR) etc. Over 750 large and small industries, including a number of automobile component manufacturers are based in the area. The ShiroliChandus village, located 6 km north of Chakan, has been identified as a probable site for the proposed Pune International Airport. The Chakan MIDC has good connectivity i.e Pune domestic airport at 28km, Jawaharlal Nehru Port Trust at 110 Km, Nashik at 180 km & Mumbai at 140 km. 8. Conclusion It can be seen that the sequential development of Mumbai Pune Nashik Corridor was as follows- 1. State Govt constructed the Mumbai Pune Expressway (2002) 2. Govt. of India declares LPG (Liberalisation, Privatisation and Globalisation) allowing Foreign Direct Investment in the industries. 3. Due to the new FDI Policy the Govt of India declared various Special Economic Zones (SEZs). As part of this policy Hinjewadi was declared as SEZ for IT Industry. The IT park of Hinjewadi employs around 5 Lakh persons. 4. Due to this the villages surrounding Hinjewadi such as Baner, Wakad, and Talawade villages were transformed from agricultural to residential and commercial zones. 5. The Pune Municipal Corporation declared the Development Plan including the Baner, Wakad, Hinjewadi and Talawade villages within Pune Corporation limits. 6. Due to Urbanisation of these villages the land prices of these villages has increased. 7. Investors from various parts of India started attracting towards these areas. 8. Due to urbanisation FDI started pouring money in real estate and construction which has increased the demand of land and also increased the land prices. 9. Pune District was an Automobile Hub and Pimpri-Chinchwad had maximum number of automobile industries. 10. State Govt started Nashik Pune expressway which is around 210 Km 11. Due to increase in FDI, SEZ and Urbanisation residential and commercial rates in Pune have gone up therefore the FDI Automobile partners started investing in the Chakan which is within a proximity of Mumbai, Pune and Nashik. Therefore following factors has affected the Industrial land valuation in Mumbai-Pune-Nashik Corridor 1. Infrastructure Development Mumbai-Pune Nashik Expressway 2. Location- Proximity of major cities 3. Amenities- As the villages were taken the city development plan by Pune Municipal Corporation 4. Special Economic Zones and Tax Benefits Hinjewadi and Chakan MIDC 5. Demand and supply- Within a span of 10 years population increase 6. Affordability Due to inclusion of these villages low income housing was possible. The Mumbai-Pune-Nashik triangle has given a northward yield as this belt contains 72 per cent of factories, provides 77 per cent of industrial employment, control 88 per cent of working capital, and yielded 86 per cent of total state industrial output 1. Midc.org 9. References 144

7 2. Statistics data rbi 3. Sectoral and Spatial spillover effects of Infrastructure Inverstment a case study of Bangalore India- A Report for Royal Institute of Chartered Surveyors 4. Case Study of Mumbai-Pune Expressway And Coimbatore Bypass, Harish Diwakar, Ramasamy Maharnav, Patir L.Sridhar, Vinod Kumar R.S, IIM, Ahmedabad August The Golden Quadrilateral Highway Project and Urban/Rural Manufacturing in India- Ejaz Ghani, Arti Grover Goswami, William R. Kerr, The World Bank, Poverty Reduction and Economic Management Network Economic Policy and Debt Department September Financial Viability of Project A Case study on Mumbai Pune Express Highway, Dr. Hiren Maniar 7. Future Financing of Real Estate Development in Cities, A Report for Royal Institute of Chartered Surveyors 8. dipp.nic.in (The Department of Industrial Policy & Promotion) 145