Developing after considering future demand

[sadpeedus]

The extent to which a particular piece of developed land is likely to appreciate in value depends on many factors. Land appreciated in value mainly due to the sincere efforts of the community living around it to properly develop it.

Development always involves laying down fixed capital and other equipments for a future anticipated demand that is by no means certain. Only in the present can the community signal its demand. Thus one developer may be able to offer a much higher price for a piece of land because he can foresee a more profitable type of development arising from the future demand from the urban community. So a part of ‘returns on investment’ arises from the skill of the developer rather than from the efforts of the community. It is worth mentioning here that capital gains tax would be the most consistent approach to deal with this increase in the value of land.

Is the situation basically different when the increase in land values stems from the provision of infrastructure – schools, communications, water supply, a sewerage system and other public-utility services? In principle, the provision of such services represents investments, which should earn a stipulated return either through the charges levied on the proceeds from taxation or through levying other charges.

Even where the return on an investment consists largely of social benefits, e.g. public parks, they should eventually be manifested in higher house prices, which would give a high net annual value and thus a high rate of yield. There may be extra spillover benefits to the investment in infrastructure, which arises through agglomeration factors, e.g., an increase in job opportunities, which adds value to the land in the vicinity. Thus with respect to development of Properties Kerala is now witnessing a totally different pattern of development.

But it is hardly consistent for the owner of a piece of land to be charged a tax for certain amenities that are in addition to the taxes already paid by other forms of business whose extra profitability arises partly from different types of external economy, e.g. radio weather forecasts for shipping, daily market prices for farmers. Furthermore, gains from agglomeration economies may be accompanied by losses elsewhere through dispersal.