India Inc expansion plans hit as land prices soar

The Government’s plans of boosting manufacturing have been hit by soaring land prices.

With the capital required to buy large tracts of land shooting up, acquiring land for a factory or warehouse is turning out to be a real challenge for Indian manufacturers. Experts say that unless a solution is found, India may lose out to global peers such as China and Vietnam.

The cost of land now accounts for 20-25 per cent of the project cost, say experts. An acre of land in States such as Maharashtra and Gujarat costs between ₹60 lakh and ₹1.5 crore.

Equipment, building and other facilities may cost ₹4 crore per acre. Going by the rule of thumb, companies expect revenues of ₹20 crore per year from such an investment.

If that cannot be generated, they may choose to shelve the expansion.

Availability of land is an issue, too. “There are large delays and a lot of uncertainty in acquiring sizeable parcels of land,” says Manish Agarwal, who as an Executive Director at PricewaterhouseCoopers, advises large infrastructure companies.

Data for the top 200 manufacturing companies show that land accounts for a much larger share of corporate assets now compared to a decade ago.

For example, the ratio of land value (at cost) to total assets for Titan has jumped from just 0.3 per cent in 2003-04 to 8.6 per cent in 2013-14. Investments in land have vaulted 94 times while overall assets have risen only three times.

Companies are not holding land as an investment. “Companies do not want their money locked up in unproductive assets and only buy when they see a use for it in the next five years or so,” says Kumar Kandaswami, Senior Director for Deloitte Touche Tohmatsu India, who specialises in the manufacturing vertical.

Factories, of course, can be put up in areas where land is cheap. But this is easier said than done as lack of infrastructure can be an issue. Lack of schools and housing for employees may force companies to develop these, adding to the cost. It is also difficult to attract talent for a remotely located factory.

If the uptrend in land prices continues, many products may become economically unviable to manufacture domestically, says Kandaswami. Already, it is cheaper to import brown goods such as fans and kitchen appliances.

Another option for companies is to lease land from the Government. This model is already being followed in most infrastructure projects, such as road construction.

“Typically, sectors such as manufacturing buy land while others such as retail, infrastructure and warehousing tend to go with the leasing option,” says Mayank Saksena, Managing Director, Land Services, Jones Lang LaSalle Property Consultants.

However, rising land prices have been a bonanza for companies with land assets. Recently, companies such as Siemens and Tata Steel made a tidy sum by selling their land to property developers.