SUCCESSFUL PROPERTY INVESTMENT THE MYTH: LAND APPRECIATES & BUILDINGS DEPRECIATE
How many of you have made this statement?
How many professionals have you heard make this statement?
You will always find that nonsensical and simplistic commentary such as the statement above is typically either derived from vested interest or ignorance; and frankly should not be tolerated.
When it comes to property, there are so many other equally ridiculous statements that get thrown around, for example; “every residential property must have a car park on title” or “positive gearing is a good investment strategy” or “location is the most important word in property;” These statements go on, and on, and on.
The statement of “land appreciates and buildings depreciate” has been promoted most often by individuals and corporations developing land or selling house and land packages. It is also sometimes promoted by property advocates who predominantly recommend the purchase of houses. They use this statement to convince would-be investors not to invest in small houses, townhouses or apartments, and instead to invest in their house, or house and land package.
There are a number of issues to consider when addressing this statement.
Firstly, let’s use the example of two quality blocks of 100 apartments being developed; one located in St Kilda Road, Melbourne and the other in William Street, Darlinghurst in Sydney. We’re using St Kilda Road and William Street as examples because they are appropriate locations for apartment buildings to exist. And let’s assume both buildings were “good quality,” in terms of external and internal design, function, finishes and fixtures, landscaping and ongoing management, which will ensure they have longevity in regard to demand of both tenancy and sale (because remember, buildings of poor quality lose value much more rapidly).
Now, let’s assume these developments on St Kilda Road and William Street cost $1 million each, in addition to land cost, to develop. Then, twenty years later, let’s say another property was developed right next door to each location, which was identical to first but refined to take advantage of current day technology and innovative design. These new properties cost $10 million each to develop. The question is; does the fact that these second developments cost ten times as much to develop twenty years later have an impact on the value of apartments in the original developments?
Of course, the obvious answer is that yes, it does; it has a huge impact on present value of similar property. The increased cost in developing the apartments built twenty years later dictates each individual apartment would sell at increased prices. The value of the apartments in the first building would increase in line with the sales of the new development. Therefore, the increased cost of developing those apartments twenty years later has a substantial impact on increased property values.
So, to suggest land content is the only part of a property that causes increases in value is absolutely and categorically flawed. Increased development and construction costs also cause growth in value.
As I mentioned above, this unfounded adage is used to convince people to purchase investments with more land.
Another relevant issue has to do with the underlying demand of land. Now, If you had the option to be given a quarter of a hectare of land in George Street, Sydney or Collins Street, Melbourne, or four hundred hectares of land four hundred kilometres west of Alice Springs, which would you prefer? Of course those quarter hectares in Sydney and Melbourne are easily more valuable and have much more potential in regard to value, future value and security than that land in the middle of nowhere. So, it’s not more land that’s the answer. What’s more important is the continuing underlying demand for the use of that land by both owners and occupiers.
Another consideration when addressing the appreciation and depreciation of land and buildings is the actual way in which land can be used.
If I asked if you would like to own the Botanic Gardens in Melbourne or Centennial Park in Sydney, you, and most individuals, would most likely say yes. However, if I said you had to provide all the same services to those parklands that are currently being provided to the general public, you would very rapidly change your mind. To explain; land without the right to develop it, in relation to appropriate demand of tenancy and sale, will be unlikely to appreciate in value. Land itself without a permitted use and market demand for that particular use, will not have value.
To explain further, let’s say you had two areas of land in two different locations, both approximately 2,000 square metres in size (about half an acre). Let’s assume the first area of land is located in an area such as Harcourt Street, Hawthorn in Melbourne or The Point Road, Woolwich in Sydney; both of which are locations with sizeable house allotment allowances. Planning restrictions in these areas would dictate there could only be one dwelling per each individual allotment. Now, let’s assume the second area of land is located in St Kilda Road, Melbourne or William Street, Darlinghurst, which, as I discussed earlier, would allow for the development of 100 apartments.
The point here is that the true value of an area of land relates to the number of dwellings that are permitted to be built on it, and is relative to whether it’s one dwelling or 100 dwellings. So to say more land is better in terms of future value without discussing permitted use and demand is ridiculous.
Another issue to consider is that the value of each apartment in those 100 apartment buildings in St Kilda Road or William Street, even if the apartment is four stories above the ground, will have an inherent part of its value relating directly to the value of the land that the whole apartment building is built on. This proves again that to suggest land or more land is the only or most important issue, in regard to appreciation, is wrong.
So, I urge you; don’t fall into that trap of believing all those simplistic statements that get thrown around so flippantly.
Have trust in the basics, and your success in property investment will follow.