Continuing from here

Which is the better investment?

Thing with apartments is that the flat owners don’t really control the land; at least not in their individual capacity. The land disposal lies with the society of the housing complex. Typically, no new development activity is undertaken within the premises of the housing complex for several decades because of the various pulls and pressures present in the society.

Some very old chawls in Mumbai are going in for reconstruction of their area after nearly 100 years of existence! The buildings are nearly crumbling now, and I guess only that threat persuaded them to go in for the revamp. In such a scenario, the chosen builder will buy the residence at a rate higher than what it would fetch in the market and then allots similar (slightly larger) apartments in the newly constructed buildings for the old owners. But they also constuct many more apartments, which they sell to new tenants as their profit for the undertaking. This is being made possible because Mumbai has started raising their FSI for these projects on case-to-case basis.

This problem never exists for the individual house owner. S/he can dispose of the land as they deem fit at whatever time they want to.

Now the core of the problem for an apartment owner in Chennai, Bangalore etc. is this. What happens if the FSI is raised substantially by the government 4-5 years from now? It will immediately translate into more supply of apartments in the area and will result in a downward pressure on the price per sq. ft. of all flats in the area.  Even though the newer flats have a lower price because of their lower share of ownership in land, it will reduce the price of even the older flats in the area that were constructed when the FSI limit was stricter. Only way to get the true value of their land holdings would be to reconstruct the buildings of the complex; but that will prove impossible because of emotional attachments of the residents. It is a debatable question whether a new buyer of an old flat would pay more for the slighlty higher ‘imaginary ownership’ of land they get with it. I would say not.

Thus, in future I see apartments getting rigidly slotted into the ‘price per sq. ft.’ category and independent houses being sold by the more correct metric - ‘land cost + constuction cost’.  

Am not sure whether I put my arguments in a cogent enough fashion. Let me know what you guys think…