Does land equal capital growth?

There’s a common misconception that larger land has inherent value in its potential to develop down the track. Not all land is created equal, and not every investor is suited to a strategy which prioritises land size over potential capital growth, rental yields, tenant vacancy and maintenance requirements.

When we’re chatting to agents about our likely competition at an auction, the presence of developers doesn’t scare us, in fact it’s the owner-occupiers who are often our strongest competition.

Home buyers who have already pictured where they’ll be putting the couch are sometimes restricted by a budget, but they’re also the most likely to get carried away and pay an emotional premium.

Unlike developers and investors, owner-occupiers aren’t governed by yields and profit margins.

Home buyers do place a value on land size, particularly if they have a family, pets or want a big shed, but we’d argue that most would place a higher premium on being in a great location within the suburb, rather than on a big block in the outlying streets further from the shops, station and amenity.

The analogy of having the worst house in the best street is not comparable to being on the worst street in the best suburb.

Most people are familiar with the saying that ‘land appreciates, buildings depreciate’, however a property with a larger land component will generally attract a lower yield (as the tenant rents the dwelling, not the land) and will likely involve higher maintenance, and hence will result in a more sizeable cash flow shortfall per month.

Capital growth prospects are important, but not always the main deciding factor in buying an investment property. The cash flow for a property can be a ‘make or break’ factor in the investment decision.

There are a number of elements which can affect the cash flow over time, including rental increases, interest changes, topping up an offset account and so forth, but an investor needs to ensure the ‘out of pockets’ they’ve committed to are realistic and sustainable longer term.

There is a common assumption that developers will pay a premium for larger blocks and corner sites, but this shouldn’t be a justification for investors to stretch themselves in the hope they’ll be able to land bank and on-sell to a developer in the future.

The recent changes to Victoria’s residential zones, for example, have had a significant impact on potential development sites. For some blocks, the mandatory minimum garden area requirement for general and neighbourhood zones will reduce the viability of a subdivision by restricting the number of dwellings which can fit on the site or by reducing the footprint size of each dwelling.

For owner-occupiers who purchased in a neighbourhood residential zone thinking they’d be safeguarded from higher density townhouse developments, the two-dwelling limit per site no longer applies. The unpredictability of the Victorian planning system (and other states’) highlights a key challenge investors need to be aware of when making decisions that are reliant on regulations.

The old adage of “land is king” needs to be challenged. No longer is ‘the quarter acre block in the suburbs’ our preferred great Australian dream. Capital growth is driven by a combination of factors, but understanding supply and demand is the key.

Demand for quality properties offering maximised local amenity, good schools, a sense of community and a place where employment is within easy commute is what every investor needs to keep in mind when searching for capital growth.