For a long time now, the real estate sector is on a rollercoaster ride. It has been facing one crisis after another in the form of GST, RERA, demonetization, and NBFC. The real estate companies are having a hard time because of unfinished projects and huge inventories. The companies that have made huge investments in real estate are also going through a rough phase.
It is well known that the only tangible asset which does not depreciate is a piece of land. Hence, investors think it to be a safe and lucrative investment option. But it has some flaws too.
The first and most important flaw is the lack of liquidity. Also, it is quite difficult to estimate the value of land as its value depends on several factors like type, location, whether the land is agricultural or not, utility, and so on. It is true that land value appreciates with time. But sometimes it can be quite challenging and may feel like holding cash on the books. The return on equity may also suffer as higher assets tend to increase the net worth.
As we charted down, some companies which have more than 10% of their total assets in land investments. The value of such lands on the books was 25% or even more as compared to their market cap.
Most of these companies have high debt and high promoter pledging as well. Because of these reasons, the companies get compelled to sell their land at a distressed price in order to clear their debts. Investors need to be extra vigilant while making investments in such companies.