Land value -

[DavidMc]

The importance of land value

I've been thinking about how a properties land value relates to it's in investment potential.

As we've always been told, land appreciates, buildings depreciate, so best to look for properties with the highest % land value as you can.

With this in mind I evaluated some properties.

Property 1
I attended the mortgagee auction of 3 near new apartments in Tyrone St North Melbourne recently. Great floorplans, split level, nice fittings, walking distance to the hospital and an eat street. These things were worth around $500k and sold for around $450k mark. A bargain. Rental potential around $440pw. I was considering buying one of these but what turned me off was the SRO / Council land valuations of only $53k (i.e. 10-12% of the purchase price).

Property 2
I was then looking at another property in Kipling St North Melbourne. It was a 70's 1 bedroom unit and was very run down. There were only 4 located on a large block near commission flats. It sold for $350k at auction and the council valued the land component at $163k in Jul 08 (i.e. 46% of the purchase price). Note they also listed the 'Capital Improved Value' at $245k. Currently rented at $280pw. Even though North Melbourne has seen good gains since Jul 08 this is still very conservative.

Property 3
Haines Street North Melbourne. A north facing 50's - 60's top floor unit in a large block of around 20. Lots of green space on the block though, driveways, gardens etc. 2 bedroom, 1 bath, 1 carspace. Sold for $405k. Council lists land value at $93k (i.e. 23% of purchase price) and a CIV of $285k in Jul 08.

Property 4
This then made me wonder what one of my outer suburban properties were. I have one in Carrum Downs, about 35km South East of Melbourne. Property value is around $280k, land value is listed at $113k or ~40%. It's a 600m2 block in an area around 20 years old now. Growth has been great so far, averaging over 10% for the last 8 years. Funny how my pokey little house out in the sticks has more land value than most of those inner city properties.


My questions are
1. How important is the land component? Have people seen their investments with a higher land value figure perform better significantly than those with a lower amount?
2. Do you think the Property 1 will perform significantly worse than the Property 2, 3 and 4?
3. Are the council / SRO valuations 'accurate enough' (or all inconsistently inaccurate enough) to determine this?
4. Has anyone had a property with low land value perform well? (like a massive multistory unit, i.e. Docklands / Southbank type thing)?

 

[JIT]

Hi David,

I was considering buying one of these but what turned me off was the SRO / Council land valuations of only $53k (i.e. 10-12% of the purchase price).

I have an IP that has ''land value'' close to zero according to the council (it's 1 of 4 similarly sized 2X1 villa units... doesn't make any sense to me?!), but has gone up close to 100k in less than 12 months based on recent comparable sales... so I don't place much value on these figures.

My questions are
1. How important is the land component? Have people seen their investments with a higher land value figure perform better significantly than those with a lower amount?

I think it is important.

If I could afford a house in the inner city and my income was large enough to handle the -ve gearing loss, I would, but a well located inner city unit with a better yield is just as good (as you can hold on to more of these with less risk), a bit like the inner vs outer burb argument.

I've invested mainly in inner city apartments or villa units with good results.

3. Are the council / SRO valuations 'accurate enough' (or all inconsistently inaccurate enough) to determine this?

Personally, I place almost no value on these in making my investment decisions.

4. Has anyone had a property with low land value perform well? (like a massive multistory unit, i.e. Docklands / Southbank type thing)?

I think chilliaa specialises in high rise CBD apartments...

 

[Ms Jade]

My questions are
1. How important is the land component? Have people seen their investments with a higher land value figure perform better significantly than those with a lower amount?

I've only bought houses on land so a bit biased. There's a relationship up to a point, but a property in a highly sought after area with less land (i.e. inner city) may be more sought after than a large block in woop-woop. My purchasing decisions have been largely based on maximising land where i can and thanks to the last boom, these larger land holdings have started to attract a premium as sub-dividable blocks become more scarce.
2. Do you think the Property 1 will perform significantly worse than the Property 2, 3 and 4?
Don't know about significantly worse given that you say it's a superior location. Plus, all things being equal, a group of 3 is preferable to a group of 20. My pick is probably property 2 unless the street is really crap. Good land component & you can reno the place to increase rental return. The building of property 1 will just depreciate from here IMO.
3. Are the council / SRO valuations 'accurate enough' (or all inconsistently inaccurate enough) to determine this?
I don't think so. Also, if you are using this as a guide at least it should be fairly consistent for the council in the same suburb. But I would work out the land value % of the CIV, not the sale price.
4. Has anyone had a property with low land value perform well? (like a massive multistory unit, i.e. Docklands / Southbank type thing)?

I'm sure many people have if they've bought well & into a sought-after development in a rare location.

 

[DavidMc]

I have an IP that has ''land value'' close to zero according to the council (it's 1 of 4 similarly sized 2X1 villa units... doesn't make any sense to me?!),

Strange! At that price I'll buy 10x of those blocks thanks.

 

[DavidMc]

But I would work out the land value % of the CIV, not the sale price.

Makes sense to me. Good point.

 

[lizzie]

... so I don't place much value on these figures.

totally agree ... in the last two years, two blocks of land within a few houses of our rented ppor (both with unlivable houses on them to be bulldozed) we sold at auction for around $950k. ratable value on our ppor was around $600k ... big difference in ratable value and market value imo.

i think more important is location, regardless of land size - however if you can get more land component for your dollar in a great location, even better.

that's why our last couple of buys have been unloved, but structurally great, older home in inner ring - and then love them.

 

[DavidMc]

For the purpose of working out land value as a % of property value they're alright aren't they?

 

[jingo]

Great topic for a thread!

Hi David,

Great topic! Very relevant to those of us who invest in a variety of residential types - townhouses, flats, units and houses.

I've been thinking about how a properties land value relates to it's in investment potential.

As we've always been told, land appreciates, buildings depreciate, so best to look for properties with the highest % land value as you can.

Yes, this makes total sense.

With this in mind I evaluated some properties.

Property 1
I attended the mortgagee auction of 3 near new apartments in Tyrone St North Melbourne recently. Great floorplans, split level, nice fittings, walking distance to the hospital and an eat street. These things were worth around $500k and sold for around $450k mark. A bargain. Rental potential around $440pw. I was considering buying one of these but what turned me off was the SRO / Council land valuations of only $53k (i.e. 10-12% of the purchase price)..

David, did the land valuation (site valuation) come from a rate notice or some other source. If from a rate notice, what was the Capital Improved Value on the rate notice? I'd tend to base my ratio of land value calculations from the Capital Improved Value taken from the rate notice rather than the latest purchase price. Otherwise the ratio is well out of kilter. (Ms Jade mentioned this too).

[Property 2
I was then looking at another property in Kipling St North Melbourne. It was a 70's 1 bedroom unit and was very run down. There were only 4 located on a large block near commission flats. It sold for $350k at auction and the council valued the land component at $163k in Jul 08 (i.e. 46% of the purchase price). Note they also listed the 'Capital Improved Value' at $245k. Currently rented at $280pw. Even though North Melbourne has seen good gains since Jul 08 this is still very conservative.)..

Site Value ($163,000)/ Capital Improved Value ($245,000) Could it be that the land value is actually 67%? Very high. (If both Site Vale and Capital Improved Value are taken from the latest rate notice).

[[Property 3
Haines Street North Melbourne. A north facing 50's - 60's top floor unit in a large block of around 20. Lots of green space on the block though, driveways, gardens etc. 2 bedroom, 1 bath, 1 carspace. Sold for $405k. Council lists land value at $93k (i.e. 23% of purchase price) and a CIV of $285k in Jul 08.)..

Site Value (93,000)/Capital Improved Value ($285,000) = Land component of 33%.

[[[Property 4
This then made me wonder what one of my outer suburban properties were. I have one in Carrum Downs, about 35km South East of Melbourne. Property value is around $280k, land value is listed at $113k or ~40%. It's a 600m2 block in an area around 20 years old now. Growth has been great so far, averaging over 10% for the last 8 years. Funny how my pokey little house out in the sticks has more land value than most of those inner city properties.).

10% is a very good growth rate over the time period. The closer one moves to the CBD the more expensive the land value. Many people cannot afford to buy houses in the inner areas, and therefore have settled for flats and townhouses. The demand for these dwellings has exceeded supply - thereby pushing up prices regardless of the ratio of land value to capital improved value. (That doesn't mean you should totally disregard land component when purchasing in the inner areas! Obviously the higher the ratio the better. If looking at a flat unit or townhouse, I aim for a minimum of 30% land component).

[[[[My questions are
1. How important is the land component? .)..

Due to the value of land closer to the CBD, I aim for a minimum of 30% land component when I buy a flat or townhouse. When I buy houses I aim for at least 60%. I have a Terrace house in an inner suburb where the land component (according to the latest rate valuation) is 76%! I have a house in an outersuburb whereby the land component is 63%. Land component is a factor, but location I think is equally important.

Have people seen their investments with a higher land value figure perform better significantly than those with a lower amount?.)..

I think to answer this question you would need to compare properties within the same location. ie. A house and a Townhouse/flat within the same suburb/area. (Either inner, middle or outer suburb).

I have a townhouse in an inner suburb that has returned 36% in capital growth over the past 2 years. I also have a terrace house in the same suburb that has returned 45% over the past 2 years. The House has a land to value ratio of 76% whereas the townhouse has a land to value ratio of 36%.

However, the townhouse in the inner area with the lower land component ratio (36%) has performed better than a house I have in an outer suburb with a land component of 63%. That house has returned 7% p/a over the time that I have held it as opposed to 13% p/a in the time that I have owned the townhouse.

2. Do you think the Property 1 will perform significantly worse than the Property 2, 3 and 4??.)..

I'd be interested to know the CIP value and Site Value as listed on the latest rate certificate for property No. 1. If land value is very low in these properties, then they are unlikely to retain their value over the long term as the building would continue to depreciate in value. Furthermore, if large numbers of similar units were built in the future then that could further affect the value of these townhouses.

Property 2 fetched a good price for a 1 bedroom flat in North Melbourne. $350,000. Especially considering it was run down and was near the large commission flats. It would seem that the higher % of land value played a significant part in the price this flat sold for - and would bode well for future capital growth.

Property 3 also fetched a good price for a flat in this area of North Melbourne. Land value for this property seems about average for a flat in the area. (ie slightly above 30%).

I don't know the area well enough to comment on property Number 4. But it has shown good growth over the past 8 years.

3. Are the council / SRO valuations 'accurate enough' (or all inconsistently inaccurate enough) to determine this???.)..

I use council valuations as a rough guide as they usually lag current market conditions. They are useful for providing a rough indication of land value.

I think bank valuations are better as these are up to date and also include a break down of land value and capital improved value.

4. Has anyone had a property with low land value perform well? (like a massive multistory unit, i.e. Docklands / Southbank type thing)?

I haven't purchased in a multistory unit complex, so am unsure of whether these types of buildings have produced signifcant capital growth.

Regards Jason.

 

[DavidMc]

Thanks for sharing Jason. Great info.

Yes, I can see it's best to compare land value to the CIV.