IT IS THE LAND THAT ACTUALLY GROWS, THE BUILDING DEPRECIATES OVER TIME.
During inflationary periods, the replacement cost of a building increases, which gives the perception of growth. This is not true growth. An asset needs to achieve growth above the inflation rate.
It is for this reason that a property should have a minimum of 20% land content. The type of property is not as relevant, i.e. units, townhouses, villas or a freestanding home – as long as the value of the land is at least 20% of the purchase price.
To illustrate the point, a breakdown of the building value versus the land value should be sought. This can be ascertained using the latest rates notice, a quantity surveyors report and an independent valuation. Note – this is not an exact science, these documents will simply assist in providing a guide. The building value will increase by inflation as this reflects the approximate replacement cost. The land value, which reflects the demand for a location, averages approximately 15% per year growth in the major cities.
(Reference: Valuer General Report)
In the example below, we compare a unit with 6% land content to a house with 35% land content. The purchase price is identical at $500,000 – the only difference is the percentage land value of each purchase.
The house, because of the higher land content accrues more than double the equity growth of the unit, which has the lower land content.
Example: Purchase Price = $500,000
UNIT – LAND CONTENT 6% OF THE PURCHASE PRICE
VALUE OF UNIT AFTER 5 YEARS
HOUSE – LAND CONTENT 35% OF THE PURCHASE PRICE
VALUE OF HOUSE AFTER 5 YEARS
PROPERTIES WILL BE IN HIGHER DEMAND THE CLOSER THEY ARE TO AMENITIES.
Amenities generally include: transport, shopping centres, social activities, infrastructure, and most importantly, schools, which best serve this purpose.