The Question of Land Content Value of an Apartment
We know the grind- land can only appreciate in value because “they are not making any more of it”. This makes the detached houses the traditional favourites (still going strong) of the property investors; after all, they have a redoubtable underlying land value. This said, how does the situation play out in the case of apartments?
The importance of land content value
There is a theory- arguable but consistent- that the capital growth of an apartment is driven by the value of the land estimated in its price. Let me illustrate my point with an example. Let us suppose 10 units sitting on a land which is conservatively valued at $5 million. This gives a price of $500,000 to each unit. If now, we hypothesise that each unit sells for $700,000, we can safely assume that the land content value is 40%.
40% land content value is a must….says who?
In fact, a school of thinking in the real estate world emphasises on a 40% land content value (at least) before you take a plunge in the apartment units. If however, your local council insists that the property you own has a land content value of 10%, should you feel alarmed about its possibility of capital growth? “Not necessarily” is my answer.
“Demand and supply” should be factored in for capital growth
A factor worth considering is the rate at which buyers aim to elbow out their competitors for “available space”. If demand outstrips supply, even units with low land content value can register terrific capital growth. Is it not what’s happening in the really hot markets of Paris, New York and Sydney?
Do you think the strata by laws changes will affect growth of units?