My earlier column on the joint development concept received quite a few queries from readers who wanted to know if an outright sale was more or less advantageous than a joint development contract.
The first point is that about joint development is more a convenience-based arrangement than one that offers outright financial advantages or disadvantages. Rather than look for a straight comparison with an outright sale, the question to be asked is, does joint development offer any unique benefits to you that an outright sale will not give? Thus, if you don’t have another home to move into after selling your family home, then a joint development makes sense.
Let’s say a landowner owns 5000 sq. ft of land, which he sells for Rs. 2 crore in an outright sale. If the long-term capital gains from such a sale are Rs. 1.5 crore, the money has to either be reinvested in another readymade house within two years; or the owner has to construct a new house within three years from the date of the sale deed; or must invest the proceeds in a capital gains bond, which has a mandatory lock-in period of three years and the interest earned on it is taxed.
Depending on where and how the money is invested, an outright purchase might yield higher final cash income than a joint development arrangement. The latter, however, is based on the premise that the landowners are interested in owning a couple of flats in the plot, and that they would like to either distribute some of the earnings from the sale as flats to other family members; or earn some rental income for themselves from the flats.
Apart from the advantage of getting a ready-built flat to live in, owners also get to choose what they want to do with the remaining flats allotted to them. They can rent it out and earn a monthly income, or sell it at a premium, or sell it later when the appreciation is higher.
In an outright purchase, it is important to choose the avenues of investment carefully. The interest from a fixed deposit is low and might not beat inflation. Also, interest rates tend to fall over time, thus affecting earnings.
However, rental returns need not necessarily be spectacular. For example, if Rs. 20 lakh is invested in a house and the annual rental income is Rs. 1.2 lakh at Rs. 10,000 per month, then the returns earned are just 6 per cent per annum, which is less than a fixed deposit, which could yield at least 9 per cent. However, rental charges differ based on locality and amenities, and this too must be considered before signing a joint development deal.
The advantage is that bank interest rates may slide over time, but rental income will go up consistently, which is the power of real estate ownership. Even a 5-10 per cent increase in rental income year-on-year could offer far superior returns compared to fixed deposit rates. Moreover, the flat can be sold in future in case of a large fund requirement.
The chief advantage of a joint development is that the landowner has a capital appreciating asset by way of apartment/s (whose value may not drop at all) which is a better option than money whose future value, unless invested in an equally good asset, may not keep up with inflation.
Where the family needs the money or is unhappy with the location of the original home or is leaving the city permanently, or is able to re-invest the sale proceeds in land or other comparable asset that will yield a much higher value over the long term, then an outright sale is a better option. In short, joint development is not the ultimate solution for all landowners, but is feasible when other considerations are favourable.
The writer is a Bangalore-based financial planner. Mail him at hinduhabitat@gmail.com
