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'Landing'
a
High Return
on property
...
Date:
23/07/2001
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By
Monique Wakelin
The true value of a residential property involves much more than
the size, age and condition of a dwelling. The land value, driven
by supply relative to demand, is as important as any other factor
that determines the worth of your prized asset.
Contrary to popular belief, land values in high capital growth areas
can typically account for between 60% and 70% of the value of a
given property. In rare circumstances, intense demand for entry
into a locality can mean land values account for 100% of a sale
price. In general, areas that are well established and close to
the CBD and popular amenities like schools, shops, entertainment
complexes and playgrounds will have stronger innate land values
than less well serviced neighbourhoods. The attractions of a given
location can override any other consideration, as evidenced by the
number of investor-developers who buy eminently liveable homes and
demolish them to make way for new developments. Their justification
might be, "We bought the block, not the house."
Whilst architecturally appropriate capital improvements to a dwelling
will usually add significantly to the value of a property, overall
values should always be calculated with the land component in mind.
This is especially important if one is aiming for sustained capital
growth of an investment.
Increases in the land value of a well-situated property can add
as much to its value as refurbishments to a property in a less sought-after
area. Indeed, the more highly favoured an area is, the more sense
it makes not to spend an excessive amount of money on expensive
renovations from a pure investment perspective.
These principles apply to residential properties of all kinds-from
houses to units and apartments. Yet land value is often the last
thing investors consider when they inspect a unit. Even though most
units do not have land on title, the ongoing value of land is tied
just as closely to a unit as it is to a house. This occurs because
the land value of a whole apartment block underpins the price of
individual units. For that reason it is preferable to purchase units
that are part of clearly finite low-level complexes, rather than
less imposing units in massive developments.
The following examples show how prices of units can be affected
directly by land values. A two-bedroom unit in Toorak, Melbourne,
sold in October 2000 for $358,000. The unimproved land value of
the entire four-unit block was estimated at about $1.2 million,
meaning the purchaser really bought a quarter share in the land
value. The unit had not undergone any major refurbishments and would
have fetched a much lower value if sited in a less sought after
area where land values were substantially lower.
An almost identical dwelling in a four-unit complex in nearby Hawthorn
East sold for $270,000 in December 1999. It also sold for about
a quarter of the unimproved land value. While both units would have
cost about the same to construct, the purchasers paid different
prices according to the respective land values of each property.
It should also be noted that the purchasers paid for quarter shares
of the land value of each site, with only a small additional component
for the dwellings themselves. In both cases, standard capital
improvements would not have altered the sale prices dramatically.
Matters of design, architecture and even quality of construction
would probably have been less important to the purchasers than land
values.
The greater the land component as a proportion of the overall
value, the safer your investment is from depreciation through household
wear and tear, structural degradation or changing architectural
fashions.
The value of a property in a location with low or unchanging land
values, however, is susceptible to all of these risk factors. In
order to maintain value, continual refurbishments or household upgrades
may be required to offset the negative financial impact of normal
habitation.
Investors should observe stringent guidelines when selecting a property
with good land value growth. Be wary of areas that feature numerous
multi-unit developments. Excessively built-up areas can create long-term
privacy problems and ruin the 'scarcity value' of properties in
a particular network of streets. Parcels of land near industrial
estates are also prone to disfavour due to fears about current or
potential pollution, noise and safety and a general lack of residential
appeal and amenity.
Investment Criteria
An ideal investment property should feature:
- Demonstrably
high and growing land value
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Established streets that are subject to conservative building
codes
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Consistent and timeless architecture
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Proximity to good public transport, leisure facilities, schools
and shops q Fine quality of construction
- A
good 'middle of the road' level of renovation that is neither
too basic nor too grand.
| Of
all the above attributes, increasing land value should
be considered the most vital prerequisite for the long-term
success of an investment property. Creating equity through
capital growth will lead to financial independence. |
© Australian Property Investor magazine. Reprinted with permission.
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