Why Are Rents Low In Illegal Colonies Even As Property Prices Go Through The Roof?

In 1995, Poland's Krakow had many identical parcels of land sitting very close to each other with varying prices. For example, a parcel of land was worth ten times as much as an identical parcel that stood across the road. This seems bizarre, but this is common in many parts of the world. Prices of two identical properties may widely vary when it is difficult to trace the title of one of them.

Illegal colonies in Delhi are a good case example. Rents are very high in areas close to many illegal colonies in the national capital. However, rents are abysmally low in these ghettos. It is true that buildings in illegal colonies are poorly managed and constructed with lack of basic amenities but if this is true, there is a strong incentive for property owners in illegal colonies to renovate their properties. Why are they sitting on such valuable assets in places likes Sangam Vihar in Delhi?

Buildings in illegal colonies in Delhi violate master plans and zoning regulations. In illegal colonies, people do not have secure property titles. For example, decades ago, the Delhi Development Authority had acquired land in New Ashok Nagar by compensating farmers.  But, as DDA never claimed ownership of these properties, these farmers sold these plots at throwaway prices. The government did not evict them, because it is politically unpalatable, and difficult. The threat of eviction is always present. So, property owners are not willing to redevelop their otherwise valuable assets. In Sangam Vihar, residents even decided to build their own roads because the government does not seem to be keen on building infrastructure in areas where property rights are not clear.

Although the government is in the process of regularising such colonies, property in many illegal colonies is expensive because real estate prices will rise when property titles becomes secure.  Illegal colonies will also get better water supply, sanitation, sewer lines, and more reliable power supply. This leads to much speculation. People also find property in illegal colonies an easy way to invest their black money. It is apparent that it is the lack of security of tenure that keeps such illegal colonies impoverished.

For regular updates on real estate, click here