Is high land content always required for high capital growth?

[House_Keeper]

Many real estate books state the capital growth comes from the land value, meaning that if you want to have high capital growth, you must have a high land content.

This means that investors looking for capital growth should preferably get a free-standing house on a large block of land than a unit. While it is true that such properties tend to have higher capital growth, they can also incur a large land tax bill, especially in NSW.

I'm aware of the much greater opportunities for renovation and development in a free-standing house, but I'm looking at it in the perspective of a passive buy & hold investment.

I have been wondering whether you can get good capital growth without having to incur land tax in NSW. What I have observed is that some properties seem to have good capital growth despite a low land content. It seems to be the properties that are rather unique and well located. For example, a waterfront unit or a well-located townhouse.

When people look for a place to live, most of them don't look at it in terms of land value. They look at it in terms of how it suits their lifestyle preferences. In the eyes of many home buyers, it is the location, the size of the property and the furnishing that seems to matter most. So if you have a property that is desirable and relatively unique, it should deliver good capital growth despite low land content.

Has anybody else observed areas where units seem to do just as well as houses in terms of capital growth? What characteristics did these units have?

Cheers,

 

[Propertunity]

I think some RP Data data came out last week showing that in the last 10 years, CG for units had actually exceeded that of houses - averagely speaking.

 

[steveadl]

It's a broad generalisation, and there will be times when one out performs the other - but over the long term in a given suburb, you will probably find the growth is pretty similar. Otherwise 30yrs down the track you'll end up with an unrealistic figure like every house over $5M but units next door only $600k.

 

[Jonathon]

But you could argue that the average land size for houses, particularly inner and middle suburbs, has got smaller in the past 10-15 years, hence if you factor that in, perhaps houses really have outperformed units.

 

[Peter Parker]

Many real estate books state the capital growth comes from the land value, meaning that if you want to have high capital growth, you must have a high land content.

This means that investors looking for capital growth should preferably get a free-standing house on a large block of land than a unit. While it is true that such properties tend to have higher capital growth, they can also incur a large land tax bill, especially in NSW.

House = high land value content may not always follow.

For example a new $200k project home built on a $100k block in an outer suburb (total cost $300k) has a land value ratio of 33%.

According to the council rates notice my PPOR (a small unit in a moderate value suburb) has a land value ratio of about 45%.

If we believe in the land content theory of appreciation we need to be specific as to where they highest land value ratios are to be found, and it's not necessarily any house on any block.

These appear to be the following:

* An older smaller established house (worth $200k) on a larger block in the same area as the above project home ('battler' outer suburb) might have a land value content of 50 or 60%.
*An old house (that probably needs work) in a posh inner suburb or bayside block might sell for 90% or even 100% of land value.
* A large older-style unit in a small group in a prime leafy inner suburb

To answer the question, two properties known to me are both half-duplexes or units and have achieved excellent growth.

The half duplex was in a 'good' coastal suburb of a regional city. At the time of purchase it was a similar price (or maybe slightly dearer) than fibro houses in the commission area. Capital gain performance has been no worse, I suspect that it has attracted better tenants and the land size (380m2) is still large enough for most forms of value adding except demolition.

Another is a small unit in a mining town. It is located in one of the handiest possible locations and has always been popular with tenants. Despite the very tiny courtyard its convenience and lack of maintenance required (compared to an older fibro & tin hut) was a good fit with the tenant demand. Again this has performed as well as a house. But note that this is a low land value area, and both houses and units there would have had low land value components. In such an area is an old house with a 20% land value component twice as good as a unit with only 10% land value component? My observations are that it isn't.

The characteristic of both these properties is that they were 15 - 30 years old when purchased - new stuff might not have done so well, although one of the places was in the 'sweet spot' with regards to 2.5% depreciation.

I have been wondering whether you can get good capital growth without having to incur land tax in NSW. What I have observed is that some properties seem to have good capital growth despite a low land content. It seems to be the properties that are rather unique and well located. For example, a waterfront unit or a well-located townhouse.

When people look for a place to live, most of them don't look at it in terms of land value. They look at it in terms of how it suits their lifestyle preferences. In the eyes of many home buyers, it is the location, the size of the property and the furnishing that seems to matter most. So if you have a property that is desirable and relatively unique, it should deliver good capital growth despite low land content.

I disagree with parts of the first paragraph but agree with the second.

Would you rather pay 30% tax on a $80k gain or 0% tax on a $40k gain? On no account should trying to reduce tax lead one to aim for a worse than attainable outcome. But if the tax presents cashflow issues then yes that is part of holding costs and needs to be allowed for.

Note though that a waterfront unit or well located townhouse could well have a reasonably high land value component if the location is genuinely good. Or it might be fairly low if new. You gain through the depreciation benefits but they may suffer lower growth. If a new townhouse is only slightly cheaper than a house next door on its own block then I'd be querying the former's value for money.

 

[Property Meister]

the above comments are very intersting, esepcially a house vs an apartment next door to eachother being worth $600k vs $1m in 20 years time...

that being said, with high rise tower apartments, there aer just so many of them...

so in summary, I don't know which is bettter, but I wouldn't be surpirsed in the very long term, it is similar or average,

so does this mean that since apartments/units are usually cheaper, we should focus on the cheaper ones instead of the larger more expensive houses???

assuming unit/apartment vs house growth goes in cycles, what cycle are we in now??

 

[troyhunt]

There are many examples fulfilling the prophecies of each approach. IMHO, balance the portfolio and spread risk across the two.

 

[tubs]

Land appreciates.

Bricks and mortar depreciate. (That's why you depreciate them on your tax).

Land in a certain area will always be limited to what's in that are. So as demand for that area increases, the value of the land increases.

Imagine a brand new house next to a 10 year old one. Both basically the same house, except for the age. Right now the new one would be much more expensive than the 10 year old one, right?

But in 10 years time the difference will be less.

In 20 years time, there won't be much difference at all.

So land content is king. For capital growth, its far better to get a bigger block with a cheaper house than a smaller block with a better house.

 

[Bon]

So land content is king. For capital growth, its far better to get a bigger block with a cheaper house than a smaller block with a better house.

True, but it's about finding the right balance between land and having a building to service the loan for you.

 

[Aaron Sice]

land - they ain't making any more of it.

why not a villa or a townhouse....?

why is it always "house vs apartment"...?

 

[sash]

The trick on land content is to get a high a percentage as possible regardless of the suburb. Obviously, certain suburbs there is more demand for houses than units and vice versa. But as a broad generalisation look for a greater percentage of land value incorporated in the purchase price.

For example in some of my purchases this is the analysis I did:

1. Dulwich Hill NSW 1 brm unit bought in 1999 for 95K. I bought it because the land value back then was about 55K. So land content was over 57% of the purchase price. It is now worth about 250K.....but land content is now only 75K

2. Hopper Crossing VIC 3 brm house bought for 170K in 2006. I bought it because the land value back then was about 120k. So land content was about 70%. The house is now worth about 240-250K.....but land value now is aobut 140K.

Hope this helps....

 

[steveadl]

The trick on land content is to get a high a percentage as possible regardless of the suburb ....

Sash, have re-read your posts a few times and I'll have to admit I don't get it. Whilst I agree with your theory about buying for high land value, don't your examples illustrate relatively poor land value growth compared to the overall property price growth?

Maybe my brains just switched off for the day?

 

[sash]

Steve,

Yes...it is a bit confusing....whilst the land value growth does not seem a lot...the overall land content as a percentage of price is VERY HIGH. Once you have land content over say 65%....the house is almost free particularly at the low end of the malrket. Once CG flows through the land content reduces dramatically and thus the suburbs looks less attactive....when this happens the suburbs is fully priced. The examples I used are pretty conservative and have taken the Valuer General's values...you could probably add another 15-25K on top if you just sold the land.

To illustrate the point lets look at fully priced suburb and a suburbs primed for growth. I will use the Sydney market as it is something I know much better...

Fully Priced Suburbs - Hornsby NSW
I median house here would cost about 620K....but the land value is about 360K. So the land content is about so the land is about 58.5% of the total value which leaves about 260K to build a house. For 260K you would still build a nice house! So for argument sake if you just bought the land for say 380K plus stamps & cost of 20K...you spent 400K and spent 210K for a house...you are at 610K. So it is full priced.

Suburbs with Potentail - Quakers Hill NSW
I median house here would cost about 340K....the land value is about 275K. So the land content is about so the land is about 79% of the total value. The house value is about 65K....there is no way you could build a basic fully complete house in Sydney for that....even a basic house would cost $165K! So if you picked up some land for 275K plus 15K for stamps & costs you have spend 290K for the land. Build a house for say 180K and your total costs ar about $470K.

So the older property has more potential because the replacement costs are higher than Hornsby....assuming they are houses of about 20-25 years old.

Steve....hope this clarifies what I talking about...

Sash, have re-read your posts a few times and I'll have to admit I don't get it. Whilst I agree with your theory about buying for high land value, don't your examples illustrate relatively poor land value growth compared to the overall property price growth?

Maybe my brains just switched off for the day?

 

[topcropper]

I have been wondering whether you can get good capital growth without having to incur land tax in NSW. What I have observed is that some properties seem to have good capital growth despite a low land content. It seems to be the properties that are rather unique and well located. For example, a waterfront unit or a well-located townhouse.

,

But surely a well located unit or townhouse would have a lot of land content wouldn't it? It's all a massive generalisation about houses and units.

I could look at an older block of units say 30 years old, in say Burleigh Heads, right on the beach, 50 units. Average cost per unit, 600 k. So the entire building is worth 50 times 600 k equals 30 million. Say it's half a hectare, comparing what other land right on the beach has sold for, you could argue that the dirt could be worth almost 30 million, so those 600 k units have a hell of a lot of land content.

I'd reckon you could find heaps of older units in desirable places with stacks of land content.

Then look at Tamworth. A brand new house and land, 350k. The house probably cost 250 k to build, so there's bugger all land content in that new rural house.

See ya's.

 

[steveadl]

Steve,

Yes...it is a bit confusing....whilst the land value growth does not seem a lot...the overall land content as a percentage of price is VERY HIGH. Once you have land content over say 65%....the house is almost free particularly at the low end of the malrket. Once CG flows through the land content reduces dramatically and thus the suburbs looks less attactive....when this happens the suburbs is fully priced.

The examples I used are pretty conservative and have taken the Valuer General's values...you could probably add another 15-25K on top if you just sold the land.

To illustrate the point lets look at fully priced suburb and a suburbs primed for growth. I will use the Sydney market as it is something I know much better...

Fully Priced Suburbs - Hornsby NSW
I median house here would cost about 620K....but the land value is about 360K. So the land content is about so the land is about 58.5% of the total value which leaves about 260K to build a house. For 260K you would still build a nice house! So for argument sake if you just bought the land for say 380K plus stamps & cost of 20K...you spent 400K and spent 210K for a house...you are at 610K. So it is full priced.

Suburbs with Potentail - Quakers Hill NSW
I median house here would cost about 340K....the land value is about 275K. So the land content is about so the land is about 79% of the total value. The house value is about 65K....there is no way you could build a basic fully complete house in Sydney for that....even a basic house would cost $165K! So if you picked up some land for 275K plus 15K for stamps & costs you have spend 290K for the land. Build a house for say 180K and your total costs ar about $470K.

So the older property has more potential because the replacement costs are higher than Hornsby....assuming they are houses of about 20-25 years old.

This is where I lose you - in the example above, wouldn't it mean the older house at Quakers is fully priced already because you can't knock it down a

Steve....hope this clarifies what I talking about...

OMG!! I must be really zonked out today, it took me another 10 minutes of re-reading this post until it finally clicked in my head!

So the house in Quakers has a lot more room to move up before it will get to a new land and house price, as opposed to the first suburb where the house is already selling for close to a new land and build price. Sheesh!

I think the trouble I was having is with my own experience in buying the blocks that are subdividable and selling for at/below land value, it's a different scenario to the one's above. In the examples above we're only talking one block of land (even with the old house), ignoring development scenario's etc.

Thanks for elaborating Sash.

 

[House_Keeper]

The trick on land content is to get a high a percentage as possible regardless of the suburb. Obviously, certain suburbs there is more demand for houses than units and vice versa. But as a broad generalisation look for a greater percentage of land value incorporated in the purchase price.

For example in some of my purchases this is the analysis I did:

1. Dulwich Hill NSW 1 brm unit bought in 1999 for 95K. I bought it because the land value back then was about 55K. So land content was over 57% of the purchase price. It is now worth about 250K.....but land content is now only 75K

2. Hopper Crossing VIC 3 brm house bought for 170K in 2006. I bought it because the land value back then was about 120k. So land content was about 70%. The house is now worth about 240-250K.....but land value now is aobut 140K.

Hope this helps....

Thanks for the examples.

It seems that what you are doing is purchasing buildings below replacement values, expecting the value to catch up over time.

In your example it is not so much the land value that has gone up, but the full property value that is more aligned with replacement costs.

It's interesting to see that this can be achieved with either houses or units. Essentially, the building type doesn't matter much, as long as it is significantly undervalued.

Seems like s great strategy though, although not one relying purely on land capital growth.

Cheers,

 

[sash]

Ditto!!!....I like to keep it simple.

Where i can I try to buy at close to land value as possible. If it has a structure you are simply renting the land!

Whilst development is great if requires effort....something for a lazy person like me is too much work. If I simply have to lodge the DA/BA then fine....but anything more is too much work for me.

OMG!! I must be really zonked out today, it took me another 10 minutes of re-reading this post until it finally clicked in my head!

So the house in Quakers has a lot more room to move up before it will get to a new land and house price, as opposed to the first suburb where the house is already selling for close to a new land and build price. Sheesh!

I think the trouble I was having is with my own experience in buying the blocks that are subdividable and selling for at/below land value, it's a different scenario to the one's above. In the examples above we're only talking one block of land (even with the old house), ignoring development scenario's etc.

Thanks for elaborating Sash.

 

[tubs]

2. Hopper Crossing VIC 3 brm house bought for 170K in 2006. I bought it because the land value back then was about 120k. So land content was about 70%. The house is now worth about 240-250K.....but land value now is aobut 140K.

Sorry Sash, but this doesn't add up.
In 2006 the physical, bricks and mortar house was worth $50k.

3 years later you're saying it's $100k.

The physical house can't go up in value. It depreciates, wear and tear, getting older etc.

In this case I'd suggest the original value of the land is too high, or the land value is higher than you're suggesting now. Or that improvements have been made to the house. I can't imagine a house in a new area like Hoppers Crossing being only worth $50k 3 years ago.

The original question was about whether more land gives more capital growth. And the answer is yes, because land has a fixed supply, and buildings depreciate.

 

[sash]

Tubs....you are correct land appreciates and building depreciates as a broad generalisation.

What I was trying to say in 2006 I bought the property for $170K and the land content was around 120-125K. Today the place is worth about 250K and the land content is about 150-160K. Three years ago the properrty was ripe for buying as the house was thrown in for 45-50k. There is still an instrinsic value in the house because if you bulldozed and built a new property fro 180K you would overcapitalise for the area.

What I am trying to say is to look at replacement costs in the buying decision. Even today I still believe Hoppers X offers good buying...but not as good as three years ago when land content was about 70% of the cost whereas today it is 65%.

Hope that clarifies things.....this is not a easy topics to explain....but a philosophy which I have used successfully over the years.

Sorry Sash, but this doesn't add up.
In 2006 the physical, bricks and mortar house was worth $50k.

3 years later you're saying it's $100k.

The physical house can't go up in value. It depreciates, wear and tear, getting older etc.

In this case I'd suggest the original value of the land is too high, or the land value is higher than you're suggesting now. Or that improvements have been made to the house. I can't imagine a house in a new area like Hoppers Crossing being only worth $50k 3 years ago.

The original question was about whether more land gives more capital growth. And the answer is yes, because land has a fixed supply, and buildings depreciate.

 

[Dazz]

The original question was whether more land gives more capital growth. And the answer is yes, because land has a fixed supply, and buildings depreciate.

Indeed - on the whole, I'd agree with this, simply because "more land" really means you've paid less for the improvements and a higher percentage for the dirt initially. Effectively you've got it cheaper, which always auguers well for future gains.


As with most things in life, there are exceptions to "the rule". We purchased something two years ago that had no land whatsoever and subsequently had a small jump in rent. That in turn caused the value of the property to go up a bit. I imagine that will continue.


Land based stuff but forms the bulk of ours. We try and aim for three criteria, in order ;

1. Land value must be higher than 85% of purchase price.
2. Must be cashflow +ve.
3. Must be less than 10km from CBD.


Dead easy to find 1 out of 3.
A bit harder to find 2 out of 3 (although a vacant block 9km out would do).
Immensely difficult to get 3 out of 3 but not impossible.