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The Sunday Age

How to land on your feet

How many times have you heard it said that location is the key consideration when you're buying investment property? Be wary. Just because this statement is often repeated, doesn't mean it's entirely accurate.

Land appreciates or grows in value, whilst buildings depreciate or lose value. Therefore, the rate of increase in the value of a property's land component is what drives capital growth and determines its success as an investment asset.

As a general rule, the closer a parcel of land to the CBD of a major capital city, the higher its value per square metre. This is because land near the CBD is almost fully developed; a scarce resource that commands big dollars.

It's true therefore, that location is important when buying an investment property. But it's by no means the only consideration. It's perfectly possible-in fact, quite common-for two properties which are the same distance from the CBD (even in the same suburb or street) to experience startlingly different rates of capital growth. The reason lies in differences between the characteristics of each parcel of land.

Several characteristics influence the value and capital growth potential of a given land parcel. The first is the size of the block. If it is large enough to sub-divide into two or more parcels of land, you'll increase the land value per square metre because you're increasing the number of dwellings that can be built there.

Let's take the example of a 1000m2 block worth $600,000. If you subdivide the block into two parcels of 500m2 each, the combined value of both smaller parcels will be more than the original value of the single larger block, because two dwellings can now be built instead of one.

The second characteristic that can influence land value is useability. If the block is on a steep slope or prone to flooding, it may be harder to extend, rebuild or sub-divide and therefore have a lower value per square metre than a property in the same area on a more level or flood-resistant block.

If the block is subject to a single dwelling covenant which prohibits you from sub-dividing, this may keep a lid on the land value. The same may apply to a block zoned for a particular use by the local council (for example, a commercially zoned property in a predominantly residentially zoned area).

A block of land's immediate surroundings can also affect its value and investment performance. If the block is overlooked by a tall apartment building next door, it could compromise the residents' privacy. If the land backs onto a railway line, faces a main road, or is directly opposite a school or other highly-trafficked areas, it could be noisy and deter buyers from wanting to live there.

For most people, their home is their sanctuary. If the property's surroundings make buyers feel uncomfortable, there will be less demand in the marketplace. The lower the strength of demand, the lower the land value and capital growth potential.

In most cases, you can change things like the appearance and size of the building, but you can't change the size, useability or immediate surroundings of the land on which the building stands. So take the time to get the choice of land right before you buy.

If a property you're considering buying falls short on one of the characteristics that influence land value, that doesn't necessarily mean you should walk away from it altogether. It does, however, give you a bargaining tool to negotiate a purchase price that reflects the property's shortcomings.

Keep in mind, though, that the shortcomings the property had when you bought it will still be there when the time comes to sell. The amount you save during the purchasing stage, you could lose again during the sale process. You may get a 'bargain' when you buy, but someone else could get a bargain at your expense when you sell.


TIP BOX

• Land value drives capital growth and investment performance
• If the block can be sub-divided, this will boost the land value
• If the property is on a steep slope, flood-prone or has noise or privacy issues, the land value could suffer.


Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au