What are the factors that builders consider for deciding the market price of land and the weightage they carry in the final pricing of the project?
How does this article help you?
Which factors determine the market price of a land parcel?
How much impact does each of these have on the price of the land?
What is the market price of the land and why is it important to understand the factors affecting it?
The market price of a land parcel is the cost at which it can be bought or sold. Understanding the factors that impact the price of land enables the landowners to price their land efficiently and buyers including developers to determine their budget to retain the feasibility of their project. The land cost is known to fall anywhere between 15-30% of the entire project cost. Overall, the knowledge of these factors and their impact on pricing will help all the stakeholders in bringing efficiency to land transactions.
Which factors affect the pricing of a land parcel?
There is a multitude of factors that impact the prices of a land parcel. These various factors fall under a few main categories –
- Legal Aspects
- Physical Attributes
- Location and Accessibility
- Development Potential
1. Legal Aspects
Availability and clarity of legal documents are the prerequisites of any consideration of the land transaction. All the stakeholders interviewed as a part of data collection have exerted the importance of this factor.
- Depending on the severity of the legal issue, a negative impact of 10-20% may be seen, the absence of which will not impact pricing.
Earthfields is actively working towards preparing a feature wherein access to legal documents uploaded by the landowners or agents will be provided to premium real estate developers to equip them with ample information at the preliminary stage itself.
The physical attributes of the land parcel constitute the site topography, site conditions, shape of the plot, and the adjacent road width.
2. Physical Attributes
Physical attributes of the lands play a vital role in selling and buying land.
Site Topography
The site topography is the level or slope of the land. Any variations in the level usually need to be addressed before construction begins. In addition to this, the soil condition needs to be favorable for construction and the presence of hard rock near the surface would require separate equipment. These factors directly impact the cost of construction.
- In case of unfavorable conditions, the land pricing may be negatively impacted by up to 5-10%, depending on the extremity of the conditions and the typology of the project envisioned.
Site Conditions
Any pre-existing structures on the site would require demolition and clearance of the debris before construction can begin. There might also be a presence of water bodies or clusters of trees on the site. These factors may not only add to the complication and cost during construction but also delay further phases of the project.
- Depending on the proportion of demolition or the treatment required, the impact on the land pricing may be 5-10%.
Shape of the Plot
The shape of the plot is another important aspect that might affect the pricing of the land. It is however noted that it has a smaller impact as the structure footprint is usually adopted keeping in mind the plot shape.
- A regular square or rectangle shape may, however, hike the price of the plot by 5-7% as it becomes easier to work with.
Adjacent Road Width
The road abutting a plot is an extremely important factor. It affects any land parcel in two ways. It decides the accessibility to the site, the feasibility of commercial developments and the traffic. However, more importantly, it determines the FSI and height of the structures that are permissible within the land parcel. As this affects the development potential of the site, it has a very important role to play in determining the price of any plot.
- Depending on whether the plot has scope for commercial development or increased development potential, the impact of this factor ranges between 10-15% on the price of the land parcel.
Among all the above factors, adjacent road width is the most important one. The physical attributes, inclusive of all factors, usually affect the pricing of a plot by up to 20-25% of the total price.
Earthfields helps in understanding the physical attributes of the site by providing an option to upload site images and other features such as drone site surveys.
3. Location and Accessibility
Location and accessibility have been identified as the most significant aspects that affect the pricing of a land parcel as they are directly linked with project saleability.
Proximity to Economic Centres
Areas close to economic, or work centres usually witness huge demand and hence are valued much higher. Generally, as one goes further away from these centres, the land prices keep on reducing.
- The variation in pricing can be from about 10-40%, depending on the distance from the economic centres and the typology of development that is envisioned.
Availability of Transport Linkages
Land parcels located close to public transport nodes are priced higher due to enhanced connectivity. Such parcels may be developed for commercial use owing to the higher foot traffic that is common in such locations. Similarly, reduced travel times may benefit residential developments with the only drawback of traffic and pollution.
- Gaining from the proximity to transport nodes, the land price may hike by 7-12%.
Availability of Services and Infrastructure
Through the discussions with developers, it has been noted that an often-overlooked factor in the pricing of land is the availability of services and infrastructure. Especially for regions on the outskirts of the cities, main utilities may not be available even though demand-driven development is present.
- Unavailability of services and infrastructure may negatively impact land prices by 5-10%.
Social Infrastructure or Neighbourhood Amenities
Land parcels that are surrounded by parks, educational institutions, healthcare facilities, recreational areas, etc. tend to draw more demand and are priced higher, especially for future residential development as it proves as an important selling point.
- The increase in land price when surrounded by better social infrastructure and amenities ranges from 7-12%.
Proximity to Unfavourable Surroundings
In a situation where a land parcel is located adjacent to a landfill or lies within the proximity of an industrial area, or such, the pricing is negatively affected.
- The presence of unfavorable surroundings may drop the land price by 10-15%.
All factors falling under this category have been identified as essential by the interviewed stakeholders and hence, they impact about 25-45% of the land price.
Earthfields helps its customers in identifying the details regarding all these factors including locating the land parcel on a satellite map, further understanding the surroundings through the option of uploading images, identifying future proposals in the surrounding through master plans, etc. It also plans to include land boundaries and social infrastructure within its database in the future.
4. Development Potential
Development Potential indicates the quantity of built-up area that can be constructed within the site and consequently, the sales and profit margins the land parcel can generate. Hence, after location, this is the second most important aspect that governs the pricing of a land parcel.
Land Use
The permissible land use indicated in the Development Plan determines the typology of development for all land parcels, be it residential, commercial, agricultural, etc.
- A land parcel that requires minimum conversions is generally preferred. However, in the case of conversion, the difference in the price is not to a large extent, at about 5-7%.
Development Regulations
Development Regulations specify the various rules that need to be followed in designing and constructing the structures on the land parcel. This factor affects the land price only when a certain development factor is permissible or restricted. For example, high permissible structure heights or requirement of buffer due to the presence of a water body may have a positive and negative impact on the pricing respectively. Additionally, if a land parcel is falling under certain restricted zones such as Coastal Regulation Zone or Airport Funnel, it will reduce the pricing of the land parcel since the development on such a land parcel is limited.
- The variation in prices for this factor is largely subjective and depends on the regulation, typology of development proposed, etc. but may usually fall between 10-15%.
Floor Space Index (FSI) or Floor Area Ration (FAR)
Permissible FSI defines the amount of area that can be constructed and is the primary factor that defines the development potential. Typically, increasing FSI directly converts to a more saleable area and higher profits which also hikes the land price.
- Depending on the amount of built-up area and saleable area, the hike in land price may vary in the range of 10-25%.
All these factors come together to give a certain amount of built-up area that can be generated and hence, are important, the only difference being that the applicability of factors might differ for each land parcel. The development potential factor, as a whole, affects the land pricing to about 25-30%.
The resources available at Earthfields include zoning regulations for various zones that give a comprehensive idea regarding the permissions required, development bylaws, etc. which help our customers to easily calculate the development potential of the site and understand the details.
These four factors are also considered for the actual land valuations.
Other than the above-mentioned factors, there are a few more aspects that may influence the pricing of a land parcel. Under any given circumstances, higher demand or lesser supply drives the prices of the land higher. Valuation of the surrounding plots may also alter the pricing of a land parcel positively or negatively. A specific characteristic of a land parcel such as a water frontage or a favorable view might increase the land price by 5 to 10%. Proximity to a future development proposal may also raise the prices of the land parcel by a similar range. Additionally, a disaster-prone region may have a lesser land price.
All the factors and their impact on the land pricing in percentages, which are mentioned in this article are for indicative purposes. Oftentimes, 1-2 aspects may outweigh others and have an immense impact by themselves. Hence, these are subjective and tend to depend on individual land parcels, typology of development envisioned, negotiations in the transaction procedure, and other such factors.
Not knowing these factors can lead to a roadblock to a successful land transaction.
Earthfields aims in simplifying the land transaction process for the buyers, sellers, and agents by providing multiple layers of information regarding individual land parcels in a single place. Additionally, the ideal land market price range (ILMPR) feature assists in decision-making by the landowners and agents. A test mode feature of the legal health index also attempts to match the risk appetite wherein landowners or agents can input perspective percentages of legal documents, which will be then assessed by the developers.